Is new legislation protecting contractors?

Some recruitment agencies are using underhand tactics to get around new legislation that was designed to curb questionable practices in the industry

Historically, the relationship between IT contractors and recruitment agencies can probably be described as at best tense and at worst downright antagonistic. Both sides have been guilty of questionable behaviour but while they needed each other equally, a status quo was established.

During the downturn, it seems agencies have enjoyed unparalleled power over their supposed clients. Contractors claim they have had unfair restrictions imposed on them, including agencies not paying them in certain circumstances and charging large transfer fees to dissuade companies from offering them permanent positions.

However, legislation introduced in April this year appeared to have the potential to tip the scales back in the favour of the contracting community. Termed The Conduct of Employment Agencies and Employment Businesses Regulations 2003, it imparts various benefits to temporary workers, including more flexibility in moving between temp positions and permanent roles, and various payment guarantees.

"In the future, everyone who uses the services provided by agencies and employment businesses can have greater confidence in them - both those companies that use them to supply staff as well as the agency workers themselves," said employment minister Gerry Sutcliffe in a statement at the time. "The vast majority of agencies are well run but we are ensuring that they do not face unfair competition from those who abuse their workers."

But it has emerged that some of the more unscrupulous agencies are putting pressure on contractors to opt out of the regulations or face the consequences. Tactics include reducing the pay rate of contractors who opt in or offering them unreasonable contracts.

One UK contractor contacted by ZDNet UK said he had received an automated email asking him to opt out of the regulations when he sent his CV to an agency. He was concerned that deciding to opt in would probably mean that the agency wouldn't put him forward for jobs. "It's a buyer's market, so agencies have a choice of which candidates to use and are likely to favour candidates that have opted out over those that have opted in," he said.

Ian Durrant, a director at the Professional Contractors Group (PCG), says his members have already encountered recruitment companies paying different rates to contractors according to whether they opt in or out. One agency even provided an unreasonable contract to an opted-in contractor and refused to change it unless he opted out. "There is definitely a problem with agencies coercing contractors," he says.

Martin Lewis, contracts manager at recruitment agency Square One, says that he has seen an email from another agency requesting an administration fee if the contractor didn't opt out. Square One is not charging a fee and is happy to have contractors opt in, although none have chosen to so far, says Lewis.

Agencies prefer contractors to opt out due to the potential loss of transfer fees and the increased administration cost of complying with the legislation. It is a "logistical nightmare -- going through all client contracts and consulting every client to renegotiate the terms," explains Square One's Lewis.

Some agencies see the very existence of the legislation as fundamentally unbalanced. They claim they are unfairly portrayed as the bad guys when in fact contractors are just as guilty of questionable practices. "The reason why we have all these clauses in contracts is because contractors are not reliable -- they'll leave one contract part way through because they've been offered more money somewhere else. Contractors don't need protection -- do you know how much money they're paid?" asks one agency source.

And despite the government's intentions, the legislation is not all good news for contractors. Some are actually choosing to opt out to avoid controversial IR35 tax regulation. IR35 was introduced in 2000 to close a legal loophole which allowed IT contractors to be taxed at lower business rates while effectively, according to the Inland Revenue, working as an employee of a company.

A contractor looking to avoid IR35 needs to prove they are a business not an employee, through contractual substitution clauses and independence from company management, as was shown in the recent Tilbury case. The theory seems to be that opting into the legislation for a contractor is tantamount to admitting to being an individual rather than a business and therefore opens the door to IR35 tax penalties. 

But determining how the new legislation impacts IR35 is still a fuzzy area, according to Bridget Wood, partner at City Solicitors, Tarlo Lyons. "There is a debate about whether opting out affects contractors' tax status," she says. 

Also, it is unlikely that simply opting out will help a contractor avoid IR35. Agencies are unlikely to add additional clauses in the contract to make a contractor seem more like a business, as they could risk criminal charges.

PCG's Durrant says that if contractors fall inside IR35, they should opt in to the legislation, although he warned that to find work through an agency they may need to opt out. Recruitment manager Lewis agrees that contractors should opt in unless they are outside IR35 or have got a job at a company requiring opt-outs (some companies only accept opted-out contractors because otherwise they cannot stop them from working for competitors immediately after finishing a contract).

One UK contractor that ZDNet UK spoke to had a more positive view of the new legislation and the fact that "all agencies are trying to push you to opt out." He said that he would be using the new legislation as a "negotiating ploy when discussing contract terms -- if I don't want the terms that the agency is offering me, as it will damage my IR35 case, I will threaten to opt in."

The benefit of any legislation to protect temporary workers from agencies that allows those same agencies to pressure contractors to opt out is questionable. One way to shore up the legislation would be for the government to allow contractors to keep their opting preferences secret until a job has been offered. But even if these changes are implemented, it's unlikely to dramatically improve a situation that has always been based on mutual distrust.

If you have had any problems with recruitment agencies, you can register a complaint by following this link.

Main changes in legislation

1) Transfer fees
a) Agencies must now offer companies an alternative to temp to temp and temp to perm fees (the fee charged when a contractor is transferred to the book of a different agency or moves to permanent job within the company). In the past, companies had to pay a fixed fee of, for example, 20 percent. Now, agencies must offer an "option to extend" -- if the contract is extended for a certain period of time, the transfer fee will be waived. This allows companies to spread the payment of the transfer fee rather than having a one-off cost.
b) The period during which transfer fees can be charged has been shortened. If a contractor finished working for a company more than eight weeks previously and then returns to the company, the company does not have to pay any transfer fee to the agency. Agencies used to set this period at six or 12 months.

What it means for you: more flexible movement between contracts and between contract and permanent roles.

2) Payment
a) Agencies cannot refuse to pay you if they have not received an authorised timesheet.
b) Agencies cannot withhold payment if the company has not paid them.

What it means for you: you will still be paid if you have lost your timesheet but the agency may delay paying you while they check the hours worked with your line manager. If a company goes bankrupt or refuses to pay, then you will still get paid.

3) Paperwork
Agencies have a higher level of obligation to the company to obtain proof of a contractor's experience, training and qualifications.

What it means for you: agencies may ask you to provide proof of work experience, training and qualifications.

Information provided by Bridget Wood, partner at City Solicitors, Tarlo Lyons