Mitigating Risk and Ensuring Compliance: A Guide for Recruitment Agencies and Contractors

As we reach the halfway point of 2024 the employment landscape continues to favour contract recruitment, with individuals enjoying freedom and flexibility, and employers benefiting from access to on demand talent. In fact, this area of the labour market just continues to grow and shows no sign of slowing down.

Contracting provides a unique recruitment model and opportunities for both end-hirers and contractors, but to make it work, everyone must understand how to manage risk and compliance. With the complexities of IR35 legislation, and the need for robust status determinations, as well as HMRC demands (PAYE and NIC liabilities), insurance requirements, holiday pay and other factors, there are plenty of challenges to navigate.

In this article, we provide an overview of some of the key areas of consideration in terms of risks and compliance for recruitment agencies and contractors.

Effective IR35 Compliance

Since the off-payroll reforms of 2021, IR35 legislation has been a sticking point for both hiring organisations and contractors. Recruitment agencies must ensure they have an effective method for helping clients determine IR35 status and mitigating the potential tax liabilities of contractors. As an end hirer, making accurate status assessments is absolutely crucial, failing to get it right can land you with a hefty tax bill, and accrued interest on unpaid tax.

While HMRC offers a tool called CEST (Check Employment Status for Tax), critics don’t recommend it, as it has been found to leave out key areas and fails to provide reasons for its outcome (which is crucial evidence in an appeal). End hirers and agencies should speak to an IR35 specialist if in any doubt at all.

For contractors, tax liability insurance is a good option, as it provides protection in the event of an IR35 investigation.

Umbrella contractors do not need to worry about IR35. Working through an umbrella company means that the umbrella company employs you, so you will always fall outside of IR35.

Don’t get complacent though! If you’ve worked through your own company within the last 4 years, HMRC can still launch an investigation, so insurance might be worth considering.

Insurance for contractors and recruitment agencies

Tax liability insurance provides protection against IR35 investigations, but there are other insurance types to consider.

For recruitment agencies understanding the level of insurance cover needed is the first step. Vicarious liability, the agency’s liability for the actions of the workers they place, can vary depending on the contractual terms. We recommend that agencies have frank discussions with end clients to fully understand the requirements of the role for public liability and professional indemnity insurance. Ensuring that every contractor meets the insurance requirements of the client is crucial to mitigate potential risks.

As an umbrella company contractor, several different types of insurance are usually included with your employment. This might include:

  • Employers liability insurance – protects the employee if they are injured at work or become ill due to the type of work they are doing. It is a legal requirement in the UK for employers to hold a minimum of £5 million of employers liability insurance.
  • Public liability insurance – not required by law but very worthwhile if you are working anywhere near the public or around a team. Public liability insurance covers contractors against any legal proceedings that may occur due to causing injury or loss to the general public or to a member of your team.
  • Professional indemnity insurance – protects the contractor against any claims of compensation for negligence, mistakes or not fulfilling your requirements, which have caused financial loss for the client.

Depending on the umbrella company, and the nature of the work, you might also be provided with Drivers Negligence Insurance.

Umbrella company working helps contractors and agencies stay compliant

A compliant umbrella company provides a reliable payroll service (PAYE) for contractors, freelancers, and temporary workers who might otherwise find themselves inside IR35. Using an umbrella company means you don’t have to worry about IR35 compliance, as your payments are subjected to PAYE, ensuring the correct amount of tax and National Insurance Contributions are paid. This provides peace of mind and reduces the administrative responsibilities often associated with contracting.

By partnering with an umbrella company, agencies can ensure that contractors are paid appropriately, with all statutory rights and benefits, such as holiday pay, sick leave, and pension, being taken care of. This minimises the overheads, employment risk, and administrative burden of managing temporary workers in-house.

MyPeople already help contractors and agencies all over the UK. If you’d like to find out more about how working with an umbrella company can help you mitigate risk, get in touch today.