Guarding against the go-between – make sure your terms with staffing intermediaries are suitable

Since the IR35 reforms were introduced to the private sector in April 2021, there has been an expansion in the use of staffing intermediaries as an alternative to engaging freelancers and contingent staff directly. These include temporary work agencies, staffing agencies, professional employer organisations (PEOs), and in some cases – when offering services directly to an end-user organisation – umbrella companies.

Some end-user organisations (that is, the organisation for which the worker is carrying out their assignment) are using a staffing intermediary to engage with existing personal service company (PSC) contractors, with the intermediary taking on payroll admin - including any IR35 payroll issues and risks. Other end-users have insisted on contractors engaging without a PSC and becoming a direct worker or employee of the staffing intermediary, thereby removing IR35 compliance obligations altogether.

Pushed for time back in April 2021, many end-user organisations will have signed up to the staffing intermediary’s standards terms without being able to properly interrogate the fine print. Yet, in seeking to escape one headache, end-users should be careful not to cause themselves further ones by signing up to inappropriate terms. It is crucial to ensure that the terms reflect the agreed service, align with the relevant legislation, provide adequate protection for the end-user, and do not contain overly onerous provisions or ones that are biased in favour of the intermediary.

Now the dust has settled on the IR35 reform panic and the new arrangements have been in place for a few months, end-users may want to consider carrying out some “housekeeping” on their agreements to determine whether any should be renegotiated at the next available opportunity. We set out below the common issues we have seen when working with end-user organisations to review such agreements.

Terms that do not reflect the agreed service

A contract between two parties should reflect the intention of the arrangement but, in our experience, staffing intermediary terms do not always do so. Some examples of inappropriate terms we have come across include:

• Terms that do not specify the type of staff the parties intend be provided – for example, an agreement purports to address supply of PSC contractor but does not contain any such references.

• Terms which state or imply that the end-user organisation and the individual will be entering into a direct contractual relationship – e.g. suggesting an “introduction” by the staffing intermediary rather than a “supply” arrangement.

• Terms that are for the provision of outsourced services rather than staff supply (and so do not properly set out the requirements of the service or align with the relevant legislation – see further below).

Organisations need to ensure that terms reflect what is really happening (or intended to happen) in practice. Where there are fundamental flaws in the drafting, it may be more efficient for the end-user organisation to draw up its own standard terms as a starting point for negotiation.

Terms which do not align with legislation

Staffing intermediaries are subject to a statutory compliance regime which is mainly set out in the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (the Conduct Regulations). These provide that staffing intermediaries are regulated as “employment businesses” and are designed to protect both workers and the end-user organisations. For further information, please see our Inbrief guide Staffing solutions and the supply of labour.

While there is no longer a statutory obligation on staffing intermediaries to agree commercial terms with organisations before introducing workers, we strongly recommend this course of action to help avoid later disputes. Areas covered by the Conduct Regulations which we recommend are covered in the commercial agreement include:

• the requirements around the provision of information between the parties regarding the assignment and the worker

• suitability checks on the worker

• the type of engagement between the staffing intermediary and the worker

• provisions which apply if the staffing intermediary has reason to believe that the worker is no longer suitable.

If the staffing intermediary wishes to charge transfer fees, these must be addressed in the agreement and comply with certain requirements (see further below).

Where the staffing intermediary is supplying non-PSC contractors, the Agency Worker Regulations 2010 (AWR) will apply in addition to the Conduct Regulations. We would expect to see terms in the agreement requiring exchanges of relevant information, in order to enable both parties to comply with their obligations under the AWR. These might include clauses relating to:

• information about a worker’s previous assignments, to assist in establishing whether the 12-week threshold has been met for the purposes of AWR

• information about the end user’s “relevant terms and conditions”, i.e. those which may need to be “matched” for the agency worker after 12 weeks.

For further information about rights and obligations under the AWR, see our Inbrief guide Agency workers.

Where there is a supply of PSC contractors, IR35 will need to be considered and we would expect the agreement to contain adequate provisions reflecting those obligations (see below for more on this).

For further discussion on these topics, see our articles Engaging contractors through an agency - what are the legal issues, Agency workers and how to engage them and our Inbrief guide IR35 reforms from April 2021.

Insufficient protection for the end-user

Some standard terms provide inadequate protection – or none – for the end-user in respect of IR35 and other tax-related obligations, potential employment status issues, and confidentiality, IP and data.

IR35 (PSC contractors)

One of the headline benefits to an end-user of using a staffing intermediary is that it can remove some of the IR35 risks associated with engaging PSC contractors. The intermediary becomes the “fee payer” for IR35 purposes and so has the primary responsibility for operating and deducting PAYE and NICs correctly.

The end-user will nonetheless still be responsible for issuing a Status Determination Statement (SDS) to the staffing intermediary and the PSC contractor. Subject to any appeal, the staffing intermediary must act in accordance with the SDS when making payments to the contractor.

The SDS process and the responsibility for paying the contractor correctly should be reflected in the agreement, and the end-user should be protected from the intermediary’s failure to comply with its obligations. This should ideally be done via warranties and indemnities in favour of the end-user.

PAYE and NICs (agency workers)

Where individuals (i.e. agency workers) are being supplied to the end-user, the staffing intermediary should take full responsibility for operating PAYE and NICs in respect of those agency workers and this should be reflected in the agreement.

Employment status

The agreement should be clear that there is no contractual relationship between the end-user and the worker. Where the worker is an employee or worker of the staffing intermediary (rather than a PSC contractor), the intermediary should be responsible for any applicable “management” issues such as dealing with grievance, disciplinary or performance matters, termination of the assignment and so on.

We recommend ensuring that the agreement contains protection for the end user in relation to allegations and claims that the worker is an employee or worker of the end-user.

Intellectual property, confidentiality and data protection

The agreement should seek to protect the business information of both parties. In addition, we recommend that any obligations on the staffing intermediary in respect of the end user’s IP, confidentiality and data protection are replicated in the intermediary’s own agreement with the worker (along with any other clauses with which the worker is also required to comply). Wording that requires this can be included in the agreement with the intermediary.

Onerous transfer-fee provisions

Under the Conduct Regulations, staffing intermediaries are prohibited from restricting a worker from taking up employment with the end-user or working via another staffing agency. In order to protect their business interests, intermediaries therefore often charge “transfer fees” to compensate for the loss of the individual from their roster of available workers. Sometimes referred to as ”temp-to-perm fees” or “temp-to-temp fees”, these are subject to strict rules under the Conduct Regulations.

Fees cannot be charged if there is no transfer-fee clause. Where there is such a clause in a staffing intermediary’s terms of business with end-users, it may only charge transfer fees if it complies with the provisions of the Conduct Regulations. Any attempt by a staffing intermediary to request payment of a transfer fee which does not meet the relevant criteria is a breach of the Regulations. See our Inbrief guide Staffing solutions and the supply of labour for more information.

Within those parameters, the staffing intermediary is free to determine the fees to be charged. End-users should therefore be careful of onerous transfer-fee provisions where these have not been negotiated, and we recommend reviewing any transfer-fee clauses carefully before signing up to them. End-users may prefer to use their own agreement template, potentially including their preferred transfer-fee proposals as a starting point for negotiation.

How we can help further

Organisations should not be afraid to challenge or seek to renegotiate staffing intermediaries’ standard terms if they feel they are problematic. Lewis Silkin’s team of experts is happy to assist with any queries that end-user organisations may have about entering a contractual relationship with an intermediary.

• We can audit and update terms of business with staffing intermediaries.

• We have a range of end-user/staffing intermediary templates that can be tailored for the needs of your organisation.

• While our own standard agreements include appropriate IR35 wording, we can also provide such wording for inserting into existing terms of business between staffing intermediaries and end-users.

• We can advise and provide training to managers and HR on how to negotiate with staffing intermediaries to ensure end-users are getting the right services and that this is reflected in the agreement.