The Government has released guidance that outlines a new requirement for recruitment agencies to ensure contractors understand the financial implications of a particular working arrangement before terms are agreed.
Following the publication of new guidance aimed at employment businesses, from 6th April 2020 agencies must provide all new workers, including contractors working through a Personal Service Company (PSC) with a ‘key information document’ before contracts are signed. This is to “ensure they have a full idea of what this decision means for their pay.”
This is an important development and one that recruitment agencies must pay close attention to. Reform to the IR35 legislation in the private sector will see the responsibility for administering a contractor’s tax status transfer from the individual to the end-client. These changes will arrive on 6th April 2020 and currently, exist in a similar form in the public sector.
As a result of IR35 reform, end-clients (unless they are deemed to be ‘small’ under HMRC guidelines) must decide if a newly engaged contractor or a currently engaged contractor belongs inside or outside IR35.
Therefore, under the changes, agencies have a responsibility to ensure the contractors they place to understand the financial impact of working inside or outside IR35 or what it means to be engaged on a PAYE basis.
When placing PSC contractors, recruiters are advised to issue the key information document based on any initial role assessment made. Should their status subsequently change following an individual assessment, it is important to reissue the document to reflect any changes in the way the contractor will be paid.
Minimum amount must be shown
While not under instruction to identify the specific figures, in this ‘key information document’, as it’s referred to, agencies need to detail the minimum amount the agency expects the worker to receive as a result of their particular engagement.
Description of deductions
Recruiters will also need to include a description of all deductions to be made to a worker’s pay, including deductions made by an umbrella company where applicable. So, for example, if a contractor is placed inside the IR35 legislation by the end-client, the recruitment agency would need to explain to the individual that they will be paid their invoice minus the tax and National Insurance deductions, which the fee-paying party (often the agency themselves) will settle with HMRC.
Representative example statements
Agencies are required to demonstrate this using ‘representative example statements’ to avoid any confusion. The Government has said in this statement recruiters do not need to include actual figures, allowing for estimated deductions that “demonstrate in a realistic way the deductions made to a proposed rate of pay and how these affect a worker’s take-home pay.”
Standard key facts pages
Assuming an individual working through an agency is paid in multiple ways, whether through PAYE or via an umbrella company, recruiters are advised to publish a ‘standard key facts page’ which outlines the details of each payment method. While this isn’t required by regulation, the Government is encouraging agencies to produce these documents to help individuals understand how different deductions impact their earnings.
By adhering to these changes, recruiters will comply with regulation ‘13A of the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (the ‘Conduct Regulations’).
Find out more regarding your responsibilities as a recruitment agency placing contractors amid reform to the IR35 legislation.