The recruitment industry in Great Britain is regulated by two main pieces of legislation, meaning that there are certain standards and restrictions to which the recruitment industry must adhere. The first piece of legislation is the Employment Agencies Act 1973 (“EAA 1973”). The second is the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (as amended), commonly known as the “Conduct Regulations”.
All temporary workers, employment businesses, agencies, end-user clients and umbrella companies need to be familiar with their rights and responsibilities under the Conduct Regulations.
In this article, we go back to basics and consider who the Conduct Regulations apply to, what protection they afford to the various parties in the supply chain, and the circumstances in which someone can (and cannot) opt out of the Regulations.
Who do the Conduct Regulations apply to?
The Conduct Regulations are designed to provide protection to work-seekers, that is to say, people looking for permanent and/or temporary work. A work-seeker includes not only a human person but also a company, such as personal service companies (PSCs) and umbrella companies.
The Conduct Regulations also provide a level of protection to end-user clients (hirers), for example by restricting the circumstances in which a hirer can be charged a transfer fee.
The protection afforded to work-seekers and hirers under the Conduct Regulations is achieved by imposing requirements and restrictions on employment agencies and employment businesses.
Essentially, the EEA 1973 defines an employment agency as a business which introduces candidates to clients for employment by the client directly (often referred to as “permanent recruitment”).
Employment businesses, on the other hand, find and supply work-seekers for temporary assignments with clients. Specifically, an employment business is legally defined as being involved in “supplying persons in the employment of the person carrying on the business, to act for, and under the control of, other persons in any capacity”.
What about self-employed work-seekers?
The references to “employment” and “control” in the Conduct Regulations have led to some confusion over whether the Conduct Regulations apply to the supply of self-employed contractors.
As for the definition of “employment”, the EEA 1973 clarifies that this includes engagement “by way of a professional engagement or…under a contract for services”.
But what about “control”? Unfortunately, this is not defined so the meaning of control in the context of the Conduct Regulations is not entirely clear. As you will probably be aware, control (or a lack of control) exercised over an individual is one of the important factors in determining employment status. Someone who is genuinely self-employed will not normally be subject to significant control by a client. That said, it may be possible for a client to exercise a certain degree of control over a contractor which is sufficient to fall within scope of the Conduct Regulations without necessarily exercising so much control to call into question whether the individual is genuinely self-employed. There is no specific case law on the definition of “control” in these circumstances.
However, umbrella companies, employment businesses, agencies and clients need to be aware of the recent High Court case of Simply Learning Tutor Agency Ltd v Secretary of State for Business, Energy and Industrial Strategy  which considered the definition of “employment” for the purposes of the Conduct Regulations. In that case, several “tutor-introducing companies” introduced private tutors to parents in exchange for an introduction fee. The tutors then provided their services directly to the parents under a self-employed contract for services arrangement. The tutor-introducing companies believed that, as the tutors were self-employed as independent contractors, they did not fall within the scope of the EAA 1973 and the Conduct Regulations and as such, that the prohibition on charging a work-seeker a fee for work-finding services did not apply to them. However, the High Court declared that the definition of “employment” for these purposes includes people who provide their services on a self-employed basis as an independent contractor. Therefore, the tutor-introducing companies were caught by the Conduct Regulations and the EEA 1973.
The FCSA’s position is that employees employed by an umbrella company under an overarching contract of employment, as well as individuals engaged under a self-employed or CIS contract for services, who are supplied to a client via an employment business will fall within the scope of the Conduct Regulations. This is, of course, unless they opt out, which is considered further below.
What do the Conduct Regulations do?
As explained above, the main aim of the Conduct Regulations is to protect work-seekers. However, the Conduct Regulations also provide an element of protection to clients/hirers, and they aim to ensure that all the parties in the supply chain have sufficient information about the assignment/role and the skills and experiences of the work-seeker to be satisfied that the worker will be an appropriate fit for the job on offer.
Some of the key principles of the Conduct Regulations are summarised below.
Protections for the work-seeker
- All employment businesses are required to provide work-seekers (and any person to be supplied by the work-seeker to do the work) with a key information document before entering into a contract with the work-seeker. This includes PAYE agency workers, workers who provide their services through a PSC and workers who are employed by an umbrella company. The key information document must contain specified information such as the rate of pay for the assignment, holiday entitlement and the type of contract which the worker will be engaged under.
- Employment businesses and employment agencies are prohibited from charging work-seekers for finding them work (there is an exception for employment agencies providing certain work-finding services in the modelling and entertainment industry).
- Employment businesses are prohibited from withholding or threatening to withhold payment due to a worker on the grounds that:
- The employment business has not yet received payment from the client;
- The worker has not produced a signed timesheet (although payment can be delayed briefly whilst the employment business investigates how many hours have been worked); or
- The worker has failed to work for a stated minimum number of hours. So, for example, if a worker had agreed to a week-long assignment but left after 3 days, they would still be entitled to payment for those 3 days.
- Employment businesses and employment agencies must not subject a worker to a detriment (or threaten to subject them to a detriment) on the grounds that:
- the worker has terminated or given notice to terminate their contract with the agency or employment business; or
- in the case of an employment business, the worker has taken up or proposes to take up employment with any other person (including the client/hirer). Note that agencies and employment businesses are also prohibited from requiring work-seekers to disclose the identity of any future employer. This means that workers are not required to tell their employment business if they are offered a contract of employment with the client directly.
Protections for the client/hirer
The main protection for clients provided by the Conduct Regulations is in respect of transfer fees. The Conduct Regulations significantly restrict the circumstances in which an employment business can charge a transfer fee to a client. A transfer fee is only chargeable in circumstances where the worker supplied by the employment business becomes employed by the client directly (temp-to-perm), where the worker is introduced to a different employment business who supplies them back to the client (temp-to-temp) or where the worker is introduced by the client to a different employer (temp-to-third-party).
In the case of temp-to-perm and temp-to-temp fees, an employment business can only lawfully charge a transfer fee if they give the client the alternative option of “extending” the period of supply, at the end of which the worker can transfer without a fee being charged (known as an extended hire period). Additionally, where the worker has actually been supplied to the client by the employment business (not merely introduced), then a transfer fee can only be charged if the transfer takes place within either 14 weeks of the start of the first assignment or eight weeks of the end of any assignment, whichever period ends later. This time limit also applies in relation to temp-to-third-party fees, although there is no requirement to offer an extended hire period in that case.
When the Conduct Regulations were first proposed, some professional contractors objected to them on the basis that they were experienced, self-employed professionals who didn’t require the protection of the legislation (which some perceived as adding a layer of administration and restriction to their working relationships which they did not want or need). In recognition of this, an opt-out provision was inserted into the Conduct Regulations which allows corporate work-seekers (i.e those supplying their services through a limited company) to opt out of the Conduct Regulations in their entirety. It is important to note that a contractor cannot cherry pick which elements of the Conduct Regulations to opt of; if they opt out then none of the provisions of the Conduct Regulations will apply (with the exception that the employment business will still have a duty to provide a key information document and to keep records that show they have complied with the Conduct Regulations and the EAA 1973). This means that none of the protections set out above would apply, such as the right for the worker to receive payment for their services despite the fact that the client may not have paid the employment business.
It was envisaged that the opt-out would apply to Personal Service Companies where, generally speaking, the director and controlling mind of the company, and the worker who is actually carrying out the services for the client, are one and the same. As explained above, the opt-out was designed to apply to professional contractors in business on their own account, who have the knowledge and experience to conduct their business affairs without the need for special legal protection. Additionally, some self-employed contractors are concerned that remaining within the protection of the Conduct Regulations could jeopardise their self-employed, or “outside IR35” status. Whilst conceivably this is a factor which HMRC could take into account when assessing whether someone is genuinely self-employed, it is unlikely to be decisive, not least because there are certain circumstances where a corporate work-seeker is prohibited from opting out of the Conduct Regulations even if they wanted to (see below).
However, the reference in the legislation to “a work-seeker which is a company” has meant that umbrella companies, and the individuals employed/engaged by them, are also deemed to be entitled to opt of the Conduct Regulations. Arguably this was never really the intention of the corporate opt-out, since many umbrella employees are not, in reality, experienced professional contractors in business on their own account. Rather, there is often little difference between umbrella employees and those other agency workers whom the Conduct Regulations were introduced to protect. Nonetheless, unless and until there is a specific prohibition on umbrella companies (and the workers which they engage) opting out of the Conduct Regulations, then our view is that they are entitled to do so if they wish.
Importantly, however, no limited company contractor (whether a PSC or an umbrella company) may opt out of the Conduct Regulations if their assignment would involve them working with vulnerable people, who are defined as those under the age of eighteen or who “by reason of age, infirmity, illness, disability or any other circumstance is in need of care or attention”. For example, teachers and nurses supplying their services through a PSC or umbrella company would not be allowed to opt out of the Conduct Regulations even if they wanted to.
Crucially, umbrella companies, employment businesses, agencies and end-user clients should be aware that the decision of whether or not to opt out of the Conduct Regulations is entirely in the hands of the corporate work-seeker. This means that an employment business is prohibited from making an assignment conditional on the work-seeker opting out of the Conduct Regulations. End-user clients should be aware of this and not seek to put pressure on employment businesses only to supply workers who have opted out. We would recommend that employment businesses and umbrella companies have template contracts which cover circumstances where a worker has decided to remain within the Conduct Regulations, as well as where they have decided to opt out. Otherwise, the Employment Agencies Standards Inspectorate or “EASI” (which enforces compliance with the Conduct Regulations) may take the view that workers are not being given the right to remain within the Conduct Regulations.
Furthermore, despite regular references in the recruitment industry to “opting in” to the Conduct Regulations, it’s important to be aware that the default position is that all relevant work-seekers are automatically afforded the protection of the Conduct Regulations unless they have validly opted out.
A valid opt-out can only be achieved by both the limited company (umbrella or PSC) and the individual who will be doing the work, giving notice to their employment business or agency before they are introduced or supplied to the client. The employment business or agency must then inform the end-user client of the opt-out.
Opt-out notices will not be effective until the worker has finished their current assignment and so cannot be given part-way through an assignment.
We hope that this article will allow agency workers, umbrella companies, employment businesses, agencies and end-user clients to refresh their memories as to their respective rights and obligations under the Conduct Regulations, to help ensure a compliant and transparent supply chain.
This article. was written by Brabners LLP.