The recruitment industry in the UK is at a critical juncture as the government opens consultations to address non-compliance issues and regulate umbrella companies. This initiative presents a valuable opportunity to reassess existing models and move towards an Employer of Record (EOR)/Agent of Record (AOR) structure, which is prevalent in the global staffing industry.
The Pitfalls of the Umbrella Company Market
A fundamental issue with the umbrella company market is that the worker shoulders the cost through a margin for payroll services. This model inadvertently pushes workers to seek “cheaper” options, driven by take-home pay enhancements, thereby fueling an environment where poor practices can thrive.
Umbrella companies often resort to creating a perception of better take-home pay to attract these cost-conscious workers. However, this perceived advantage often masks the underlying non-compliant practices, potentially exposing workers and the companies that utilize these umbrella firms to significant risks. Such practices are detailed in recently released evidence provided to the government’s November 2021 consultation on the umbrella market.
A Look Abroad: The EOR/AOR Model
The UK recruitment sector could find its solution in the established practice of the international staffing industry – the Employer of Record/Agent of Record model.
In this setup, the organization seeking to outsource its employment and payroll responsibilities directly pays for the service. The cost breakdown typically includes compliance checks, onboarding, payroll and funding. There is no special calculation or different ways of processing PAYE, thereby offering a transparent and straightforward approach.
The EOR/AOR model eliminates the need for workers to bear the costs, as the outsourcing organization covers the service fees. It ensures a cleaner, more transparent payroll process, minimizing room for non-compliance and deceptive practices.
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Transferring Risk: An Added Layer of Compliance
Incorporating an element of risk transfer, similar to the IR35 regulation, can further enhance the robustness of the EOR/AOR model. The outsourcing business would be liable if they engage an EOR/AOR found to be non-compliant, thereby creating a strong incentive to work with reputable and compliant providers.
This flowback of liability reinforces the responsibility of the engaging business to ensure due diligence in their choice of EOR/AOR. It helps to build a compliant, transparent and more equitable recruitment ecosystem.
To Regulate Umbrellas or Recruiters?
The current consultation by the UK government, on options for regulation, offers a unique window to remedy the flaws of the umbrella company market. However, there is no allowance for an employer of record or an agent of record model in the proposals. This is a missed opportunity, at odds with international best practice.
The EOR/AOR model, tested and proven in the global staffing industry, presents a comprehensive and effective solution. By enhancing the existing regulation of recruiters, it removes the need to regulate a second industry from scratch. It can naturally drive enhanced due diligence by recruiters and deal with liability.
A Plea for Transformation
It’s high time for the UK to move away from the problematic umbrella company market and align with international best practices.
By adopting the EOR/AOR structure, the UK can create a transparent, compliant and efficient recruitment sector that protects the interests of all stakeholders — businesses, workers and recruitment firms alike. This transformation would position the UK staffing industry at the forefront of compliance, innovation and worker welfare.
We look forward to further consultations addressing other areas of distress for the sector, such as holiday entitlement. Although we note that the current umbrella consultation does not go so far as to address the expected levels of compliance required, or a much-needed government “kite mark” or accreditation for the sector.