Recruitment agencies are generally conscious of the fact that they are taking on certain commercial risks when placing contractors overseas. It is rarely the case that agencies actually define the nature of those risks and the consequences of breaching any category of compliance in any country in which they are doing business. This is an attempt to document the various risk categories in overseas contract markets and the possible consequences if any of those risks actually crystallise.

It may be helpful to classify the agency risk into the following categories:

1.  Contractor on site with a client without a valid work permit in a scenario where a work permit is required.

2.  Contractor working through an offshore limited company structure incorporated in one of the tax haven countries (e.g. Jersey, Guernsey, IOM, British Virgin Islands, Cayman Islands etc.).

3.  Contractor working through a “one man” limited company incorporated in a country outside the one in which he or she is working.

4.  Low level contractor working as an independent. It is difficult to define a low level contractor who performs his or her duties almost totally under the client’s direction. However, from a practical point of view, it may be helpful to set a monetary cut-off point of €400 per day.

5.  Contractor working through a management or umbrella company that is not authorised by The agency (e.g. a company that operates split income schemes).

6.  Independent contractor on the same client site for too long (typically over two years).

7.  Contractor placed as a self-employed freelancer when he or she has never operated in this manner in the past (i.e. has no track record of independent contracting).

Obviously it not possible to analyse the potential consequences of the crystallisation of any of the above categories of risk considering the vast array of legislation in the many possible countries that contractors can be placed and the many differences in the manner in which legislation is applied. However, depending on the nature of the breach of compliance and the specific country involved, it is possible to identify several possible repercussions. Some of these can be as follows:

·     A total prohibition on carrying on recruitment business in a country for a defined period (in France this can be up to 5 years) which would obviously also affect any permanent recruitment business;

·     Publication in the press of the prohibition notice;

·     Lump sums fines for the client. For example this could be a fine of up to €500,000 in France for illegal labour leasing or the same amount in Germany for having illegal contractors on site without valid work permits. These fines can be passed directly on to the agency via the client contract.

·     Back-dated liabilities imposed on the client either by the tax or social security authorities. These will usually be based on the total contract income (i.e. not just the salary part) and will be topped up by penalties and interest. It is typical for such an amount to come to between 50% and 100% of the contract income.

·     Fines or liabilities imposed on the client where the agency is on its own contract terms. This obviously reduces exposure but even if there is no Chain Law and these liabilities cannot be passed to the agency, the client is very unlikely to be coming back with more requirements in such circumstances.

·     Tax or social security investigations at a client site can cause nervous contractors to leave abruptly often causing havoc to the completion of client projects.

It is for these reasons that agencies should take a planned and proactive approach to contracting in international markets, and seeking advice where appropriagte.  As the above indicates, placing contractors abroad can be risky and should never be undertaken lightly.