The Taylor Report - What Agencies and Contractors Need to Know

Matthew Taylor’s long awaited review of modern working practices, entitled “Good Work”, was released on 11/07/2017. The report provides a fairly comprehensive and detailed picture of the UK labour market but at 116 pages, reading and digesting it all is quite a task. Below we’ve picked out and discussed the points that we believe affect our contractors and agency partners. The more intrepid may want to read the full document which can be found here.

Overview

Throughout the report, the overriding themes are:

  • Flexibility is key and should remain.
  • Vulnerable workers must be protected.
  • The quantity of work available in the UK is good, but in some areas the quality of that work should be addressed (hence the title, “Good Work”).

There’s a lot to be positive about, not least a resounding acknowledgement that the flexibility of the UK workforce is a key strength, and that any threat to that flexibility should be actively avoided. We were particularly pleased that Mr. Taylor has listened to evidence provided by FCSA, and recognises that umbrella companies are a valuable part of the supply chain.

As well as stressing the importance of flexibility, the report calls for vulnerable workers to be protected. Particular reference is made to “one way flexibility” where hirers benefit from a flexible workforce without allowing workers the corresponding autonomy, for example failing to guarantee minimum hours but not allowing workers to choose when they work.

We welcome the importance the report puts on compliance and transparency, both of which are at the core of our business as a compliant contractor management company and accredited member of FCSA.

Employment status

Contrary to what some commentators have said, Taylor has not suggested the creation of a fourth employment status. There are currently three categories – “employee”, “self-employed” and “worker”. The “worker” category also includes employees, so all employees are workers, but not all workers are employees.

Taylor has suggested using three distinct statuses – “employee”, “self-employed” and “dependent contractor”. This third category would cover those who are not employees or genuinely self-employed and are currently described as “workers”. Presumably Mr. Taylor and his team believe it will be easier to address the protection, rights and taxation of this group once they have a distinct legal status.  

The report suggests that “control” should be given more prominence in determining employment status, and the right to substitution should not automatically mean the worker is not employed as they believe this has been used to deny basic employment rights to workers who would otherwise have been classed as employed.

It’s worth noting that compliant umbrella companies, like Orange Genie Umbrella, already offer full employment to their contractors, including the rights and benefits that the report seeks to protect.

 

Taxation

In its consultations the Review frequently heard that the lack of alignment between worker and the self-employed in employment law and employed and self-employed in tax law is a source of confusion for organisations, individuals and the wider public.” – Page 38

The remit for the report did not include an examination of the tax system, so its comments on the subject are necessarily general and brief. It does state that the disparity between tax status and employment status causes unnecessary complexity and confusion, and it suggests that the two systems be aligned where possible. In the interests of fairness and clarity it’s difficult to argue with the principle – for example it suggests that someone who is “employed” for tax purposes should also receive the legal rights and protections afforded to an employee.

In addition to this “aligning of frameworks” the report states that the current system includes incentives for both businesses and individuals to claim self-employment. For example, the hirer doesn’t have to pay employer’s national insurance if the worker is self-employed.

As a possible solution, the report quotes the Mirrlees Review, which suggests that labour income should be taxed according to the substance of the activity, not the legal form in which it’s organised. This would mean that employees and the self-employed would be taxed the same for similar work.

However, the Mirlees Review suggests that the tax system should be used to incentivise desirable activity – such as running one’s own business – so it seems to us that the report has neatly avoided making any clear recommendations on this front. This is perhaps not surprising, given the limits of the remit.

We are surprised that IR35 is not mentioned in this report, given the powerful effect it has on the labour market and the widely reported issues, particularly surrounding the recent Public sector reforms.

Transparency

“Government should amend the legislation to improve the transparency of information which must be provided to agency workers both in terms of rates of pay and those responsible for paying them.” – Page 46.

It seems obvious that a worker should know what they’ll be paid and by who before they accept work. The report does state that most employment businesses provide information about pay rates and methods, but believes it’s not always as clear as it should be for some agency workers.

As the report points out, recruitment agencies are already required by law to make clear who will pay the worker and how much, and we are aware that on some occasions this doesn’t happen. For example, many umbrella employees believe they are paying Employers National Insurance, because umbrella pay has not been correctly explained to them.

The report uses the example of workers moving from false self-employment to umbrella employment in the construction industry. The report mentions that workers saw their pay drop as a result of legitimate deductions made by umbrella companies, but it doesn’t adequately address the reasons for this, - that end clients and recruitment agencies were unwilling to accept the cost of Employers National Insurance or the cost, risk and responsibilities of employing people. It also fails to provide an accurate explanation of the compliant umbrella model.

Even so, Orange Genie have worked for many years to ensure transparency and clarity for our contractors and we welcome this call for industry-wide transparency.

Enforcement

“The new Director of Labour Market Enforcement should consider whether the remit of EAS should be extended to cover policing umbrella companies and other intermediaries in the supply chain.” – Page 58

Currently, EAS inspectors can only take enforcement action against recruitment agencies and the report states that this is an increasing issue as recruitment agencies outsource to intermediaries such as umbrella companies. Once again the language used betrays a lack of understanding about compliant umbrella companies – most notably employment is outsourced, not “payroll and other services”. Despite this misunderstanding the report concludes that removing umbrella companies from the supply chain is not the answer, and we very much welcome this, especially given the level of ill-informed criticism umbrella companies have received in recent months.

The report recognises that umbrella companies have a legitimate role in the high-skilled, high-paid end of the market but questions their role in the lower paid end.

This is difficult to understand, given that low-paid workers are most in need of protection, and compliant umbrella companies provide full employment, including all associated rights, protections and benefits.

The report also states that “agency workers are generally charged between £15-35 per week in admin fees when paid through an umbrella company” – which is simply not correct.

Compliant umbrella companies take a margin from the assignment rate paid to them by the agency. This rate is not the worker’s pay (so the worker is not “charged”), and is usually uplifted to take account of the umbrella’s margin and costs. That Mr. Taylor and his team have not understood this is a cause for concern, but it does support their point that greater clarity and transparency are required across the industry – a point which we enthusiastically support.    

We agree that the industry would benefit from more consistent and effective enforcement. We’ve joined FCSA in calling for this many times and we welcome any measure that improves compliance and protects workers.

“HMRC should take responsibility for enforcing the basic set of core pay rights that apply to all workers – NMW, sick pay and holiday pay for the lowest paid workers.” – Page 59

HMRC are already responsible for enforcing NMW and SSP. The change here is that holiday pay regulations are currently enforced by individual workers, who must take their complaints to employment tribunal. In theory, this measure would provide workers with additional protection and as such it has our support, but experience suggests that HMRC will need considerably more resource to accompany any extension of their enforcement responsibilities.

Employees of a compliant umbrella company like Orange Genie Umbrella already receive all 84 rights and benefits of employment, including national minimum wage, holiday pay and statutory payments.

The Swedish Derogation

The Government should repeal the legislation that allows agency workers to opt out of equal pay entitlements. In addition, the Government should consider extending the remit of the EAS Inspectorate to include compliance with the AWR” –Page 59

Pay between assignments, or “Swedish derogation” contracts allow the worker to give up their right to equal pay in return for pay between assignments. The report underlines various concerns surrounding abuse of the Swedish Derogation to avoid giving equal pay to agency workers, and says it’s far too easy for agencies and umbrella companies to avoid paying between assignments anyway.

If this abuse is happening, it’s easy to understand why the report would seek to remove the ability of workers to opt out of equal pay. In our experience, demand for Swedish Derogation contracts is low and we don’t expect its removal to cause many issues.

We have considerable experience in helping our agency partners to comply with AWR and we would encourage anyone who has questions about it to contact our team.

Holiday pay

“Government should do more to promote awareness of holiday pay entitlements, increasing the pay reference period to 52 weeks to take account of seasonal variations and give dependent contractors the opportunity to receive rolled-up holiday pay.” – Page 47

The report expresses concern that a significant number of workers are either unaware of their entitlement to paid holiday or are afraid to take it. It also suggests that some seasonal workers are disadvantaged by the 12 week reference period for holiday pay, as they naturally take leave during quiet periods when they will have been working fewer hours.

There is a suggestion that workers should be given the choice between “accrued” holiday pay, which is paid when they take time off and “rolled-up” holiday pay which is paid with their wage.   

 Holiday pay is often an issue for temporary workers but employees of a compliant umbrella company can expect the correct provision to be made. Orange Genie Umbrella employees already have the choice that the report suggests – as they can opt to have holiday accrued or paid in each weekly/monthly payment.

Providing Stability

“The Government should introduce a right to request a direct contract of employment for agency workers who have been placed with the same hirer for 12 months, and an obligation on the hirer to consider the request in a reasonable manner.” – Page 48

The report acknowledges that agency work and the flexible workforce have an important part to play in the UK labour market, but expresses concern that some companies are relying on agency workers to fill long term positions.

Temporary work is often defended on the grounds that workers value the flexibility and autonomy it allows them. The report acknowledges that agency work suits some people but seeks to ensure that workers genuinely have a choice by giving them the right to request a direct contract of employment if they’ve worked for the same end-hirer for 12 months.

In our experience it’s rare for a contractor to work for the same end-hirer for a full year, and where it does happen it’s often career-contractors who have no use for permanent employment with their client. If adopted, we don’t expect this to have a significant effect on the industry, but as a measure to reduce opportunity for exploitation we think it should be welcomed.

Apprenticeship Levy

“As the new apprenticeship system beds in, Government should examine how it could be made to work better for those working atypically, including through agencies.” – Page 85

The report estimates that less than 2% of employers will meet the pay bill threshold to pay Apprenticeship levy. However, recruitment agencies and umbrella companies often have thousands of temporary employees on their payroll, meaning they will almost certainly meet the threshold and have to pay the levy.

At the same time, as the report acknowledges, atypical workers like contractors are unlikely to have access to apprenticeships. While not specifically saying that recruitment agencies and intermediaries should be exempt, the report does acknowledge the issue and suggests “reform”. We applaud this as a step in the right direction.

In conclusion

We’ve pointed out some areas where the report appears to misunderstand the complexities of our particular industry, but in general we feel it has understood the Flexible Workforce and the contribution made by recruitment agencies, umbrella companies and the self-employed. We are delighted that the segmentation within our industry has been acknowledged, and we enthusiastically support the report’s suggestions on enforcement.

This report has been described by many commentators as “a damp squib” and other similar expressions of disappointment. By contrast, we find it to be a thoughtful and thorough examination of the labour market that genuinely seeks to understand and improve the working lives of people in the UK. Like many others, we’ll be watching with interest how Government reacts to these findings.

 

If you have any questions about the report or if Orange Genie can help in any way, please contact us on 01296 468483 or email info@orangegenie.com

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