Recruiters who operate in the Rtemporary/contractor market are finding themselves buffeted by a variety of forces as they work to help the market understand the benefits of the flexible/expendable workforce.

A particular complication is continuing uneasiness over the legally correct, triangular relationship between recruitment agencies, umbrella companies and the workers under the nearly two-year-old Managed Service Companies Legislation (MSCL).

As a result of the legislation, recruitment agencies have stepped back from recommending a payment solution to their contractors because of fears they could be financially liable if their chosen umbrella company fails to pay the correct taxes.

HM Revenue & Customs is said to be stepping up its inspections of recruiters and umbrella companies (recruiter.co.uk, 3 June) to ensure compliance with UK law. And more legislation may be on the horizon that could affect this volatile situation.

To avoid breaking the existing law and high financial penalties, recruiters have been carrying out due diligence into numerous suppliers, aiming to provide contractors with a list of recommendations.

In fact, the concept of vetting service providers, to ensure they are paying the right taxes to the right people and are otherwise compliant, has grown in strength and is allowing agencies to offer a more complete service to their contractors. Adrian Marlowe, director of the Association of Employment Management Companies and managing director of legal recruitment specialist Lawspeed, told Recruiter the number of agencies wanting his firm to vet service providers for compliance is growing.

“There is very significant demand among agencies for auditing service providers to ascertain what level of risk they are posing to the agency,” he says.

Trudy Gordon, managing director of umbrella company Gabem, is seeing a similar trend. She told Recruiter: “They [recruitment agencies] are now doing due diligence and looking at companies like us. They won’t recommend, but they are trying to find out how we work. The reputable agencies are coming up with PSLs (preferred supplier lists) of companies like us, usually numbering five or six.”

The MSCL has forced recruiters, contractors and umbrella companies to take compliance more seriously “but there is still a degree of anarchy in the UK”, reports Martin Glick, founder of workforce management provider the Albany Group.

Glick points to the availability of offshore solutions - which he contends are not compliant - as an example of the prevailing “anarchy”. The offshore offerings promise to help contractors hang on to more of their money, which makes them attractive, if dangerous, options. “What I don’t understand is why HMRC hasn’t closed them down,” Glick adds.

David Mount, director of accountancy firm 1st Option Consulting Services, echoed Glick’s concerns about contractors being attracted to companies which use offshore elements to reduce tax. He told Recruiter: “The rise of offshore schemes has been significant. In terms of clients we lose six times as many to these schemes now, compared to 2006.”

This situation highlights the dangers of contractors researching their own payment scheme, Mount says. “We have found that compliance people within recruitment agencies have pulled up a drawbridge in terms of making recommendations to accountants because they are worried about the debt provisions in the legislation.”

Stuart Neilson, partner at Glasgow law firm McGrigors, says the law-abiding umbrellas may be suffering due to the downturn. “The downturn has exacerbated the problem of umbrella companies that are breaking the law because everyone is focused on cost savings.”
Glick told Recruiter that he believes “the future, if you ask HMRC, is that there will be no umbrella companies. All contractors will be agency employees - that’s the way it’s done in the US”.

However, recruitment agencies could also face an increased administrative burden when engaging temporary workers. The Department of Business Enterprise and Regulatory Reform (BERR) is considering removing an ‘opt-out’ clause from the Conduct of Employment Agencies and Employment Business Regulations that requires more background checks for contractors and temporary workers.

Opting in affords contractors increased protection as payment cannot be withheld because it hasn’t been received from the client yet. However, it also means a contractor’s qualifications, work experience and training must be verified, increasing the administrative burden and slowing down the recruitment process.

A recent consultation by BERR revealed that the opt-out was causing concern because “if the model [of asking low-skilled temps to use an umbrella service and opt-out] is increasingly used it will leave a large number of agency workers vulnerable”.

Derek Kelly, umbrella company Parasol Group’s technical director, told Recruiter that the opt-out provides a mutual benefit because qualification and experience checks can’t be by-passed, saving time and hassle.

Kelly suggested the abuses could be avoided if the opt-out was retained for the “higher end” of the contract market, perhaps using a pay scale to decide whether it applied.

Worries over the legislation which governs recruitment agencies and their suppliers could be dwarfed by the Agency Workers Directive, which will give equal right to temporary staff after 12 weeks of working in the same job and may create further difficulties when engaging temporary staff.

Jason Perry, director of multi-sector recruiter ASL Recruitment, told Recruiter the government’s stance is threatening the industry.

“The news stories [about redundancies] have created a situation where MPs want to give them the protection now. Even if I don’t agree with how they are treated, it could be devastating for the sector.

“The implications are quite alarming and whether the business will be viable in a downturn [if the legislation is brought in] if that happens is unclear.”

Legislation aside, recruiters and their contractors are experiencing other concerns as the recession wears on. A big issue is money. Jim Goddard, divisional manager of umbrella company Oriel Contractors, says the biggest challenge is the pressure on fees: “The recession has led to severe pressure on profit margins, and a lot of churn in the market with short term contracts and low pay rates.”

Kelly told Recruiter this emphasis on fees has led to contract changes mid-term, and he warned recruiters they need to ensure they are protected.

“All the larger agencies are putting rate reductions through or talking to us about it - it’s not contained in one sector. It is being driven by end clients, and the number of contractors on the market is pushing the prices down,” Kelly said.

John Brazier, managing director of the Professional Contractors’ Group, told Recruiter he was advising the contractors to maintain open dialogue with the recruitment agencies they use: “Sometimes agencies will threaten non-renewal if a contractor refuses to accept a rate cut. It is important to understand where this pressure is coming from - the end client or the agency - and respond accordingly. For example, approaching your end client directly may be of benefit, though any negotiation must be handled with care.”

Whichever methods recruiters decide to use to surmount the legal and economic hurdles of employing flexible workers, what is certain is that all parties in the triangle should expect evolving conduct regulations which is likely to further muddy the waters.