Recruitment industry compliance consultancy Lawspeed and FCSA, the trade association for employment service providers, are at loggerheads about a clause in Lawspeed’s updated umbrella contract. The clause requires directors of umbrella firms to provide recruitment agencies with personal guarantees.

In a press release FCSA says the clause is unnecessary and “wholly unreasonable”, and it “has advised umbrella firms not to sign or accept the updated contracts”. It has also taken the unusual step of issuing a statement to alert non-members to the alleged dangers of “unwittingly signing” such contracts. 

However, in response Lawspeed argues the clause is necessary to protect recruiters against various commercial and financial risks when doing business with umbrella firms.

The contract, setting out suggested terms of business between recruitment agencies and umbrella companies, is provided in Lawspeed’s advisory role to its recruitment agency clients.

Lawspeed says the main risks mitigated by the personal guarantee are:

• the risk of umbrellas companies cutting out agencies and providing services directly to hirers
• the risk that commercial information – for example, client details – is passed by an umbrella firm to others, including to other parts of the umbrella’s group, or to a new company set up by the umbrella, which is not covered by the original umbrella/agency contract
• the risk that the agency could be subject to a costly and time-consuming tax investigation

In a statement sent to Recruiter, Theresa Mimnagh, associate director at Lawspeed, says: “The guarantee does not go any further than what is already a requirement in the contracts.”

Mimnagh also criticises the statement issued by the FCSA for understating the scope of the protection provided by the clause.  

“The FCSA wrongly attributes the guarantee to risks arising only from T&S [travel & subsistence] expenses. However, the issue is broader and the guarantee contains precautions against uncertainty in the market more generally,” says Mimnagh.

In its statement, the FCSA refers to workers’ tax and National Insurance (NI) liability being passed to a recruiter under new T&S legislation introduced in April. It goes on to say that the only circumstances where this can happen is where the agency provides fraudulent information about the SDC [supervision, direction or control] status of a worker to the umbrella firm. Under these circumstances, FCSA says it is unreasonable to expect an umbrella director to give a personal guarantee to cover any tax and NI due, given it was the agency that provided the fraudulent information.

Lawspeed’s Mimnagh disputes FCSA’s position, saying: “On the FCSA’s comment that ‘fraudulent information is outside the control of the umbrella company’, this is plainly incorrect. The opposite is the case. From our experience over the last few months, the request for an SDC statement – whether ultimately fraudulent or otherwise – usually emanates from the umbrella company. It is the umbrella company that controls the PAYE payment to the contractor. The choice whether to apply tax relief or not is entirely that of the umbrella and the umbrella is in total control.”

She went on to say: “We are aware that requests of this kind are being made both to agencies and hirers, so exposing them to risk. We wholly agree that a guarantee would not be appropriate if the agency demands that tax relief be applied based on a SDC statement from the agency, but we have yet to hear of a case where that has happened.” 

Lawspeed also takes issue with comments made by Paul Chamberlain, partner and head of employment and pensions at law firm Brabners contained within the FCSA statement, which suggests that due diligence of umbrellas should be sufficient in most circumstances to address recruiters’ concerns over tax and NI liability.

According to Chamberlain, the new T&S legislation introduced in April makes a personal guarantee “in the majority of cases unnecessary”. “Now that the law has been clarified, the risks are obvious and easier to deal with if the agency does its due diligence properly,” says Chamberlain.

However, Mimnagh says this overlooks the fact that due diligence is not always possible. “Some service providers have been reluctant to undergo appropriate due diligence,” she says.

Julia Kermode, FCSA chief executive, adds: “Umbrella firms with robust legal and compliance processes are unlikely to agree the terms, thus Lawspeed clients that do not amend this contract term will be precluded from the protection of working with the most reputable firms in the sector. This could ultimately put the agency and its supply chain at risk.”

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