Précis - Since the Agency Workers Regulations ("Regulations") were initially mooted, Eversheds have been tracking their development and also our clients' reactions and concerns, which are now explored in this article six months on.

What? The Regulations cause concern in relation to increased labour costs and increased administrative burden. What is even more interesting is that feedback suggests few organisations have sought to change pay and reward structures as a result of the Regulations but are relying instead on exclusions to the Regulations to avoid much of the impact.

So What? Despite the inevitable rise in costs born out by the results of our survey, it is interesting that very many employers appear to be avoiding the worst of the impact currently by relying on exclusions from the Regulations. Organisations will need to be sure that the relevant workers genuinely fall into an excluded category and their working arrangements bear this out. This is likely to prove an interesting area going forwards and one where case law is likely to emerge.

Costs remain a concern

Four years ago and looking ahead, a very large proportion of respondents to an Eversheds survey (80%) told us that they feared a hike in costs once the Regulations took effect. In anticipation, even the Government was predicting the cost of the Regulations to be £1.7 to £1.9 billion per year.

According to our most recent survey, just over half of respondents have encountered a rise in their overall UK labour costs, considerably less than earlier predictions suggested. Some of the impact of this will have been absorbed - or avoided - in other ways. In terms of the extent of increase, the results show this varies considerably: nearly one half of respondents have seen a rise in costs of up to 5% and a further third, a rise of between 6 and 15%. Less than 3% have experienced a dramatic rise in costs of between 25 and 50%. Over a quarter of respondents specifically commented that administration and monitoring of agency engagements is proving a real challenge.  

Estimated increase in UK Labour costs

Where have the increased costs arisen?

Certain effects of the Regulations were able to be anticipated, such as an additional administrative burden for agencies and hirers and the monitoring of periods of engagement to ensure compliance. The impact of addressing pay differentials is something organisations appeared slower to acknowledge, just a third of organisations last year believing their agency workers were paid less, on average.

This month, nearly one half of all respondents (a sizeable 88% of those confirming an increase in expenditure) claim additional expense has resulted from increased pay rates and the right to equal treatment. A recurring issue for these organisations is holiday entitlement and holiday pay, agency workers now being entitled to the same contractual holiday as comparable employees (i.e. over and above statutory minimum holiday).  In addition, an upfront expense many organisations did not foresee has proved the re-negotiation of business relations and contracts with agencies.

Despite these findings, 90% of respondents appear to have accepted many of the additional costs, having taken no steps to reconfigure their pay structures or bonus schemes to limit access to employees in light of the Regulations. That so many have opted for compliance in this way, rather than trying to construct a means of circumventing the equal pay requirements of the  Regulations, is very much at odds with the picture portrayed in the press of employers attempting to avoid the impact of the Regulations through changes to pay structures.  

Where have increased costs arisen?

Wider use of Pay Between Assignment Contracts (also known as Swedish Derogation contracts)

Interestingly, use of Pay Between Assignment Contracts appears wider than was anticipated, possibly as awareness of such contracts has increased. This is a form of contractual arrangement whereby agency workers are engaged on permanent contracts of employment which guarantee them minimum levels of pay between agency assignments.

Last year, just 12% of employers told us they would be adopting Pay Between Assignment Contracts. Our latest survey results suggest take up of this option is in excess of 17%. The responses also indicate that those who adopt this approach tend to use it extensively, in our experience exclusively in certain locations. However, even amongst those who have exercised this option under the Regulations, many are nonetheless nervous over the adverse publicity these types of contracts have generated.

Do the Regulations apply?

Nearly a quarter of survey respondents engage agency workers on short term assignments of less than 12 weeks. As a result, the right to equality of pay under the Regulations does not apply to those workers as they will not satisfy the qualifying period of service. Significantly, a further 63% of respondents claim to rely on the fact that agency workers fall within an excluded category of workers under the Regulations, such as self-employed professionals.  

Do the Regulations apply?

Comment

Despite the inevitable rise in costs born out by the results of our survey, it is interesting that very many employers appear to be avoiding the worst of the impact currently by relying on exclusions from the Regulations.

Short term assignments (of less than 12 weeks) or the engagement of excluded categories of worker are clearly legitimate circumstances to which the Regulations may not apply. In practice, it has always been the case that the majority of agency workers were recruited for very short periods and, providing the 12 week period is carefully monitored, the Regulations have very little impact on these workers. However, employers will need to ensure agency workers are not engaged on repeated short term assignments (which might be perceived as an unlawful avoidance tactic). This will increase considerably the administrative burden and need for monitoring which our results already indicate are proving onerous.

Organisations will also need to be sure that the relevant workers genuinely fall into an excluded category and their working arrangements bear this out. This is likely to prove an interesting area going forwards and one where case law is likely to emerge. A particular example is the reliance upon the exclusion of self-employed professionals.  Whilst it is common for specialist contractors to receive a higher basic rate of pay, they will not typically receive bonuses or holidays and, given that the right to equal pay is on a term by term basis, there remains a risk of a challenge.

Amidst current uncertainty as to how some of the exclusions contained in the Regulations will be applied in practice, it is interesting to note that a sizeable percentage of respondents has opted to put in place Pay Between Assignment Contracts. The Regulations are not drafted as clearly as they might have been in this regard but, ironically, once established and adhered to, this mechanism appears to offer a degree of certainty lacking elsewhere in the Regulations.

As with any new legislation, over the coming months and years it appears likely that case law will develop our understanding of the Regulations, in particular in relation to the use of Pay Between Assignment Contracts, given that a number of employee representatives have signalled their intent to try and challenge their use. It will be interesting to see how the use of agency workers will evolve over time,and what trends in the market place will develop.