We have noticed an unfortunate tendency for recruiters to require contractors to opt-out of the Conduct of Employment Agencies and Employment Business Regulations 2003 (the “Conduct Regulations”) where an engagement is deemed to be inside IR35/off-payroll. Whether or not the client has taken reasonable care about undertaking the status determination statement by procuring independent and specialist legal advice is a matter for another article. It is a shrapnel filled timebomb for any careless client.
Why do recruiters do this? Simply to avoid experiencing cashflow problems caused by the requirement in regulation 12 of the Conduct Regulations:
“An employment business shall not, in respect of a work-seeker whom it supplies to a hirer, withhold or threaten to withhold from the work-seeker (whether by means of the inclusion of a term in a contract with the work-seeker or otherwise) the whole or any part of any payment in respect of any work done by the work-seeker on any of the following grounds–
(a) non-receipt of payment from the hirer in respect of the supply of any service provided by the employment business to the hirer;”
Recruiters also wish to prevent contractors from engaging in a direct or indirect contractual relationship other than with the recruiter who made the introduction. Understandable perhaps if you run a recruitment consultancy, but the Conduct Regulations strictly prohibit subjecting a candidate (contractor) to any detriment for breaching any restrictive covenant (regulation 6 of the Conduct Regulations).
For the avoidance of doubt, a contractor using a company should never opt-out of the Conduct Regulations except where the engagement is outside IR35 as confirmed by independent and specialist legal advice (not an accountant, chatty charlatan, insurer or conveyancer).
A contractor in this position is not helpless.
Suppose a recruiter withdraws an offer of an assignment due to a contractor’s refusal to opt-out. In that case, a contractor can issue a claim for damages in the County or High Court (depending on the amount claimed) founded on a breach of regulation 32(13). The amount claimed would be the value of the income lost but for the recruiter’s breach of the Conduct Regulations, subject always to the duty to mitigate losses by looking for another engagement.
A contractor can revoke an opt-out notice after termination of the engagement and seek damages as above or make an interim application to the court to set aside an opt-out notice where the engagement is inside IR35.
The above applies irrespective of whether an umbrella company has been used.
Clauses intended to disapply or otherwise nullify the Agency Worker Regulations 2010 (“AWR”):
Invariably dishonourable or misguided recruiters who issue opted-out inside IR35 terms to candidates include clauses that require a contractor to indemnify the recruiter and client against any liability from a claim based on the AWR.
The intention is to prevent a contractor from exercising rights in the AWR to the relevant terms and conditions that are ordinarily included in the contracts of employees of the client after completing 12 weeks of an assignment.
We have seen examples where a well-known recruiter has falsely claimed that because the contractor is using a company, the AWR cannot apply. This is utter nonsense; the fact that a company is used is immaterial. Whether or not the AWR applies to an engagement depends on whether the client’s capacity is that of a customer or a client of a business carried on by the individual. If the engagement constitutes deemed employment for tax purposes (IR35/off-payroll applies), then it is axiomatic that a client’s capacity is not that of a customer of a business carried on by the individual.
The reference in the Income Tax (Earnings and Pensions) Act 2003 to being employed for “tax purposes” merely prevents an inside IR35 judgment or status determination statement giving rise to automatic employment rights for the contractor. Whether or not a contractor is an employee is a matter for the employment tribunal and courts applying judgments such as Cable & Wireless plc v Muscat [2006] IRLR 354, CA. Clients insisting on giving blanket status determination statements or otherwise failing to take reasonable care (nothing less than independent and specialist legal advice is reasonable care) are simply laying the ground for future claims for employment rights in the employment tribunal by aggrieved contractors, i.e., a status determination statement that IR35 applies is a detailed confession that the client considers the contractor to be an employee.
Clearly, clients cannot claim that an engagement is inside IR35 then deny that the AWR applies. Not unsurprisingly, this is a frequently asked question for advice and we have successfully represented many contractors facing such appalling treatment.
Requiring a contractor to give a contractual indemnity for damages arising from a claim for damages regarding the AWR is “contracting out”, so is a breach of regulation 15 of the AWR. A similar clause in a contract of employment is unenforceable and void.
We call upon trade bodies such as the Recruitment & Employment Confederation and the Department for Business, Energy & Industrial Strategy to abolish and prohibit opt-outed inside IR35 terms and to amend the AWR to properly protect agency workers.