The Impact of the new Agency Regulations – A step forward?
An overhaul of the law regulating the recruitment industry was long overdue, particularly as the original regulations were almost 30 years old. The Conduct of Employment Agencies and Employment Business Regulations 2003 are the eventual result of a lengthy consultation and drafting process. They represent a move to impose tighter controls on the conduct of the recruitment sector and to stamp out practices that the Government considers undesirable.
The growth and development of the recruitment industry over recent years has resulted in the need for a more effective regulatory framework, which is exactly what the new Regulations hope to achieve – simpler, clearer rules providing greater protection to those seeking their services.
The Regulations came into force on 6 April 2004 and there is a short transitional period ending on 5 July 2004.
Terminology
It is important to get to grips with the terminology, which is confusing but central to understanding the Regulations. A distinction is drawn between employment agencies (who supply hirers with permanent employees) and employment businesses (who provide temporary workers to hirers). Individuals looking for, or being provided with temporary or permanent work are described as “work-seekers” and the organisations to who they are introduced are described as “hirers”.
Key features of the Regulations are:
- Regulation of introduction and transfer fees.
- Requirement to select suitable work-seekers.
- Contracts to be put in place with hirers and work-seekers.
- Assumption that an employment business engages temporary workers directly, not the hirer.
- Application to work-seekers who operate through limited companies.
How is the charging of fees affected?
One of the most controversial areas dealt with by the Regulations is the payment of introduction or transfer fees when a temporary work-seeker supplied by an employment business is engaged directly by the hirer.
The Regulations set no limit on the amount of transfer fee payable but do provide that no transfer fee is payable:
- unless the employment business includes the alternative option of an extended hire period in its contract with the hirer; or
- after eight weeks from the end of the assignment, or 14 weeks from the beginning of the first assignment (“the Relevant Period”), whichever ends later.
This gives hirers the choice of managing without the work-seeker until the Relevant Period expires, opting for the extended hire period or paying whatever transfer fee is demanded. The Regulations set no limit on the duration of the extended hire period, but the employment business must continue to supply the work-seeker throughout the whole of that period, unless it cannot do so through no-fault of its own.
If the contract between the employment business and hirer fails to include the extended hire option, any term imposing a transfer fee will be unenforceable, so the hirer can simply recruit the work-seeker immediately without incurring a transfer fee.
The first practical effect of the Regulations, therefore, is likely to be the revision of standard terms of contract produced by employment businesses to ensure that an extended hire period is included as an option. The Regulations allow employment businesses unilaterally to amend existing contracts during the transitional period to ensure that this option can be included.
Selecting a suitable work-seeker
Another major focus of the Regulations is the requirement on both employment agencies and employment businesses to obtain “sufficient information” to select a “suitable” work-seeker for their hirers. This includes obtaining details of the type of work, the experience, training, qualifications needed, expenses payable and (when acting as an agency) the pay, benefits and notice period. The employment agency or employment business must then obtain confirmation from the work-seeker of his/her suitability. Where the work-seeker needs qualifications, or will be working with vulnerable people, references must be obtained.
Employment agencies and employment businesses must check that the work-seeker and hirer are “aware of any legal or professional-body requirements” and must make enquiries to ensure that working with each other would not be “detrimental to either party’s interest”.
It remains to be seen if these requirements make a practical difference to the suitability of work-seekers put forward by employment agencies and employment businesses. Hirers might be sceptical about this, although the responsibility to obtain references and confirmation of qualifications may help screen out plainly unsuitable work-seekers at an early stage. In any event, hirers can expect more bureaucracy when looking for work-seekers. They should also have the required details to hand before giving instructions.
Employment businesses and agencies have ongoing duties under the Regulations to pass on information which emerges later about the work-seeker and which suggests that he/she is unsuitable, for example, information that comes to light that the work-seeker was dismissed from his/her previous employment. If an employment business has information that gives it reasonable grounds to believe a work-seeker it is supplying to a hirer is unsuitable for the position, it must tell the hirer and end the supply without delay. If the information indicates that the work-seeker may be unsuitable, but does not give the employment business reasonable grounds to believe this, it must tell the hirer and make further enquires. Employment agencies are in a different position because there is no ongoing supply once the agency has introduced a work-seeker and the hirer has engaged that work-seeker directly. However, even employment agencies have similar obligations for the three-month period following introduction.
Putting in place contracts
Employment agencies and employment businesses must put in place written contracts with both hirers and work-seekers. The contract with the hirer must give details of when refunds or rebates are payable and the procedure to be followed if the work-seeker “proves unsatisfactory” (although the Regulations do not say what that procedure might be). The contract between an employment business and work-seeker must give details of any entitlement to holidays and state whether the work-seeker is to be engaged under a contract of service or for services. So employment businesses will have to be clear and up front about how they deal with tricky issues such as holiday and employment status.
Employment status
Whilst the Regulations require employment businesses to state the basis on which the temporary worker is to be engaged, they remain neutral about which basis is chosen. Furthermore, any agreement between an employment business and a work-seeker cannot be conclusive on this issue. This is an area that has been plagued by uncertainty and conflicting case law for years. Most recently, two Court of Appeal decisions have indicated that an implied contract of employment may arise between a work-seeker and hirer in some circumstances, despite the fact that the direct contractual relationship is between the work-seeker and the employment business (Franks v Reuters Ltd [2003] IRLR 433 and Brook Street Bureau (UK) Ltd v Dacas [2004] EWCA civ 2171).
The definition of employment business requires that the work-seekers are engaged by the employment business, not the hirer. If an employment business tries to ensure that the hirer engages the work-seeker, it will no longer be acting as an employment business and it will instead by acting as an employment agency. Since nothing stops an organisation from acting in different capacities, this is not unlawful by itself. However, the Regulations make it unlawful for an employment agency to pay any workseeker who is directly engaged by the hirer. This particular provision was introduced to stamp out VAT reduction schemes whereby hirers were persuaded to engage work-seekers directly, with the recruitment business providing payroll services. The effect of the Regulations is to stop this practice and ensure that whichever organisation is paying the work-seeker is also the one engaging them.
This ought to help hirers argue that a direct contract cannot exist between them and a temporary work-seeker because the employment business is paying the work-seeker and such a payment arrangement would be unlawful under the Regulations if the hirer were the employer.
Furthermore, although the Regulations do not stipulate the basis on which employment businesses should engage the work-seekers, they do require employment businesses to notify this basis to the hirers. This allows hirers to see which employment businesses are treating their work-seekers as employees and which are not. Hirers who are particularly concerned about being regarded as the employer might wish to choose employment businesses stating that they employ the work-seeker.
Application to limited companies
The Regulations extend the definition of work-seekers to include limited companies as well as individuals. Certain Regulations are modified to make this meaningful. However, companies can opt out of the Regulations by giving notice. In such circumstances, none of the Regulations will apply to the Company apart from the Regulation requiring references to be obtained before work with vulnerable people is undertaken. Presumably, this will be attractive for employment agencies and employment businesses, as they will be released from a series of responsibilities. Employment agencies and employment businesses cannot make their services conditional on a work-seeker acting through a limited company but there is nothing in the Regulations to stop them offering incentives (such as a higher rate of pay) for work-seekers who do so. Hirers should, therefore, watch out to see if more temporary work-seekers are pushed into operating through personal service companies.
Penalties for non-compliance
If an employment agency/business fails to comply with the Regulations, which then causes any loss or damage to another person, then that person may sue the employment agency/business for the breach. “Damage” in this regard includes injury (including disease and impairment of any physical or mental condition) to that person.
A breach of the Regulations is also actionable by the DTI as a criminal offence and employment agencies/businesses may face prosecution through the criminal courts.
And finally, do they help or hinder?
There is much in the Regulations to help hirers who deal with the recruitment industry. The practice of imposing transfer fees has been regulated. Employment agencies and employment businesses must agree written contracts with their hirers and work-seekers dealing with key issues. They must also take responsibility for identifying suitable work-seekers. Even the status of temporary work-seekers has been clarified to some extent. However, it may be that these new stringent Regulations do not actually provide any real benefit to those workers that they set out to protect. The prohibitions placed on agencies and businesses may mean that the current advantages in using temporary workers are lost and hirers will ultimately be discouraged from using them. It seems that further clarification of the rights of temporary workers and the obligations of those who engage them will have to await the DTI’s review of employment status generally, or the draft EU Directive on Temporary Agency Work. These are unlikely to be published for some time.
If you would like any further information on this topic or advice on the Regulations please contact:
Cobbetts' Employment Team
Ship Canal House,
King Street, Manchester M2 4WB
Telephone: 0161 833 3333 Fax: 0161 833 3030
Email: judith.watson@cobbetts.co.uk
The content of this newsletter is merely informative and should not be relied upon as a substitute for legal advice.
Copyright 2004 Cobbetts - All Rights Reserved – April 2004 | 
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