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Contractor Legislation

Agency Worker Regulations (AWR)

Agency worker regulations is an EU directive designed to protect the working and employment conditions of contractors, freelancers and temporary workers.  AWR affects anyone working through a recruitment agency who is under the direct supervision and control of the hirer, and anyone working through their own company deemed to be inside IR35.  The legislation is designed to give workers rights equal to those of permanent employees in comparable positions.

Some rights come into effect from day 1, some from 12 calendar weeks after starting, no matter how many hours have been worked.  Day 1 rights are generally access to the same collective facilities enjoyed by permanent employees such as canteen, childcare, food/drink machines etc.  Additionally, from day 1 agency workers are entitled to information regarding permanent vacancies.

After a qualifying period of 12 weeks, the worker is entitled to the same basic working and employment conditions as if they had been hired directly.  This includes equal pay including holiday, bonuses, commission, and equal working time, rest breaks, annual leave etc.

Background Checks

Among the many points that form the FCSA Compliance Code, the need to verify an employee’s legitimacy is one of the most relevant issues when trying to ensure an umbrella firm is reputable; this is why background checks are vital for the industry.

Legally, every contractor or freelancer who signs up with an umbrella company needs to have their ID and Right to Work verified. Reputable professional employment services pride themselves on ensuring they go above and beyond this requirement whilst keeping overheads low.

What’s essential

Identity Check:

The Identity Check confirms a person’s identity, which is made up of their name, date of birth and address. This can be done manually by requesting forms of identity documentation to be provided, such as a bank statements and utility bills. However, in addition to the process being time consuming, such documents can be quite easily counterfeited – it is estimated that there are 20 million fake documents circulating in the UK. Finally, in an increasingly paper-less world, fewer individuals have updated physical documentation to prove their identity.

The process can be automated and carried out online, cross-referencing the details the candidate has provided with those found on credit databases. This will verify that both name and date of birth are linked to a physical address, which makes it considerably harder to cheat.

Right to Work Check:

Umbrella companies are required to ensure that all of their employees have a Right to Work in the UK. The Right to Work Check consists of validating passport and any Right to Work documentation, such as Visas, in order to confirm whether or not the applicant has the right to work in the UK. However, this requires expertise (e.g. Lithuanian passport must have “European” on the cover because there is an area of Lithuania which is part of Russian territory). Moreover, with over 800,000 illegal migrants, it’s no wonder that 108,500 cases of identity fraud were reported through Cifas in 2013.

An automated process enables applicants to provide a scanned copy of their document and have its legitimacy verified by a software which checks the MRZ on a passport through optical character recognition. This technology will also identify whether the document has been recorded as lost, stolen or compromised, as well as validate Visa documentation to confirm whether or not the applicant has the Right to Work in the UK.
With regards to the legal requirement, a copy of the document provided by the applicant needs to be captured first. In order to ensure that the person starting work is the same person as the one who provided the details, their original passport or identity document needs to be seen when they start, and their face checked against the photo on the document.

With the umbrella company recruitment agency and client all needing to have transparency and accountability on the process, this solution offers instant access with a time-stamped audit trail.

Beyond the essential

All types of background checks are useful, but verifying a candidate’s Right to Work in the country of choice is crucial. Umbrella companies should take full responsibility for the screening process, as employing someone guilty of committing fraud might cause repercussions for them; failure to determine the right to work can result in penalties for the company of up to £10,000. Therefore, umbrella companies are liable to make sure they are hiring the right person.

The challenge umbrella companies face, however, is that they don’t always get to see a candidate during a face-to-face interview. Because of this, proving someone is who they claim to be becomes a lot harder. The ideal background checking process should involve verifying the candidate’s ID, which then makes it possible to assess their Right to Work. Finally, a facial verification contrasting the photograph on the document with the person holding it would confirm that the application is genuine.

Keeping a high level of compliance is a complex matter for umbrella companies, but it is nevertheless crucial that they follow through. The first step for a successful background check process is for the candidate to verify their identity via an ID Check, as any other checks which may come after will rely directly on the original source. Without properly verifying the main ID document, any other screening processes will have been in vain.

Content kindly provide by Irene Alegre from Onfido – irene.alegre@onfido.com


IR35 legislation should be considered by all contractors working through their own company.  It is specifically designed to affect individuals who are deemed to be “disguised employees”, contractors who are treated and act as permanent staff, i.e. not fully self-employed.  The legislation requires these individuals to pay tax and NI on 95% of the assignment income, after the deduction of direct costs.  Individuals deemed to be outside of IR35 (i.e. not disguised employees) have the option to pay a dividend and avoid NI contributions.

IR35 works on a contract by contract basis, so if one assignment fails that does not necessarily mean all future work will also fail.  Numerous factors need to be taken into account when considering IR35 status, such as:

  • Autonomy and control over work methods and processes
  • No mutuality of obligation, i.e. defined project with no future obligation from either party
  • Ability to substitute, sub-contract, or reassign the project
  • Exposure to financial risks
  • Provision of own equipment and being in business in your own right

MSC legislation

A Managed Service Company (MSC) is a company structure that is managed and controlled by a third party that administers and influences payments to the worker.  It developed from attempts to avoid IR35, with external “advisors” controlling a freelancer’s personal service company, and therefore the worker is not necessarily truly self-employed so HMRC perceive that insufficient tax is being paid.

As a result, MSC legislation now requires all income through this structure to be taxed as employment income, subject to PAYE and NI in full rather than the option to pay in dividends.  Any business that manages or promotes the use of an MSC is classed as an MSC provider, and therefore the worker is taxed accordingly.

If an MSC does not pay its taxes in full, HMRC can demand the unpaid tax from other parties, including transferring the debt personally to the other directors of the MSC, the intermediaries who formed the MSC, or those deemed to have encouraged the individuals to use the MSC route.  The underpaid tax can be demanded from these parties either individually or together.

About Myra E.

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