Contractor Management in 2022...

Having seen a lot of the recent "news" around contractor management issues I felt motivated to try and provide some observations or rather, repeat what is known but often misunderstood.

Disclaimer: So I stepped back from operational involvement in the space in 2017 but remain engaged, interested and sometimes work with teams and individuals across the supply chain. I am not a shareholder or retained by any UK business in this space.

Recent events and discussions point to a changing climate for all forms of contract workers (let us just use that at high level to cover everyone) and the supply chain that uses their skills and knowledge. Covid, legislation, cultural change, brexit and even war have all had an impact and we find ourselves in something of a transitional period where good, bad and indifferent are swirling around. So before we try and get into the nitty gritty of some of the current issues, I think some of those macro contexts should be considered.

1. Covid - It could be fair to say that had the pandemic not happened, some of the "bad practice" may have stayed as was but instead it raised a whole plethora of issues, especially in some sectors. It was clear that say in Education and Healthcare, workers had knowingly/unknowingly used personal service companies (PSC) to receive their income. With the advent of furlough for PAYE (initially) this caused a lot of distress when the reality of no furlough pay was forthcoming because of wage and dividend splits. The Umbrella PAYE/Employer Of Record (EOR) workers also faced a similar issue, with how pay is made up (national minimum plus additional typically) and the realisation in this unique environment leading to increased understanding and anger. The reasonable assumption was that the providers had the financial clout to make the additional payments and claim it back later. Without some assurance and detail to support that however, it would be deemed a risky strategy and at that time, nothing was certain and moved weekly. Ultimately some support came through and some (if not all) workers got more fully compensated but this period directly led to a realisation about how their income was handled. For many this came as a surprise and compounded by the shortfalls created by some sector experiences (education for example).
2. Legislation - At the same time as pandemic conditions prevailed the single biggest change to contractor legislation was about to land, the implementation of ir35 v2 into the private sector. Whilst this received a stay of execution and then a soft landing, the implications became apparent. Many a financial institution decided they would take the talent risk and not allow engagement of independent contractors via a PSC, the affected workers then being pushed into employment models they didn't want or fully understand. Coupled with brexit resource issues, this also impacted some of the sectors that had used PSC's to attract workers via the returns e.g. driving. We perhaps also need to link this to the increase of HMRC activity around Managed Service Company (MSC) legislation, whereby factory style tax advice with involvement in management of PSC's (more prevalent in volume sectors) created a further movement towards employment solutions.

I believe it is reasonable to assert that the above factors (plus others) put more emphasis, interest and concern around EOR - (aka Umbrella/PEO/PAYE) models and how operated. I will now attempt to move onto that topic...

I believe the genesis of the provider industry has two roots, taxation and service. Being an IT contractor myself, I came at the principle from the service perspective. I simply did not like the hassle or inefficiency of running a company and was happy(ish) to pay tax at source for an easier life. Others, preferred the option to maximise earnings and especially in the early days, this was more marked. Neither option was right or wrong, just different and it went to extremes at times, thus causing authorities to look at what was going on. IR35 v1 arrived, then MSC, then expenses, then AWR and so on up until today. So the backdrop of legislation and how to operate is relatively complex and translating all that into digestible formats has always been a challenge. Against this backdrop, it became necessary to try and clean up some of the practice that was going on and FCSA was formed.

Cleaning up and the birth of FCSA

FCSA - Before I go on, I will go and get my tin hat as some of this may well fall on deaf ears and simply not be believed. However, I was there from day one (literally) and much of what follows could be supported by other parties. The first incarnation of FCSA was the Service Providers Association (SPA) and the reason it came about was due to an impending consultation on expenses and the lack of a level playing field. We used to have these things called "dispensations" and dependent on how good/clever you were with HMRC one provider could get better expense claims than another thus creating a different nett wage return for workers. Rather than competing on service and benefits, taxation was again, pushed hard. So, SPA was formed to agree a standardised method of managing workers that was fairer to them and provider. Using aggressive expense claims also created a risk for the worker so it was all about changing ways before HMT did it for us. SPA became FCSA and a wider set of operating standards evolved into codes of conduct/compliance which we see today. This was and is not perfect, however the principles of why it was created were around the following:

• Best practice - I think some parties believe that a cohort sat in a smoke filled room and concocted some sort of club. The reality is way less exciting, the formation came from attacks on the industry and in an attempt to clean it up. Many of the founders found it difficult to adopt some of the requirements initially as these caused financial and operational upheaval but sense prevailed. It quickly became apparent that both conduct and operational codes were needed with independent assessment, this also explains why the barrier to entry also feels (too?) high for some. The codes were never meant to be a box tick exercise over a coffee and a sandwich but needed to cover a very wide range of scenarios whilst imposing a self policed set of standards onto that business, it is not for everyone. So instead of formal licensing, we got a relatively independent body which has had some impact. It exists in my opinion to try and standardise how providers should operate. It is not perfect but more on that later.
• Supply chain compliance - It became logical based on the principle of better practice that the overall supply chain should have more transparency. Let's be candid about some of this, the end-client, agency (and often sub-agencies) have a vested interest in passing risk down the line. Providers and workers have to contend with that in different ways and as consumers, we also want "great deals" so there is always economic pressure on the supply chain. Some times that is exploited in terms of wage levels and rights (under 12 weeks anyone?). Other times it is contractual risk being pushed down by all parties onto the provider. So against this, it made sense to try and get Agencies and end-clients to buy into a higher standard of operation and at least take out some of the potential risk issues they perceived. Couple that with ir35 changes and you can perhaps see why some Agencies have mandated members and why some on the outside believe this to be unfair. Again, FCSA is not perfect but I have yet to see and believe that a more taxing (sic) standard exists which has attempted to make things better for all in the chain.
• Holiday/Gap/IR35/VAT issues - I am not going to attempt to deal with these in an FCSA context other than the code design (then) was based around employment and tax law as advised by external professional advisors, not by the founders/directors of the association. Consensus on how to implement was internal to the membership but again validated externally. The complexity of law has of course created some issues which I may have an attempt at explaining some of it but remember the overall context here as described above.
• Transparency - "Why am I paying Employers NI" will probably still be the most asked question for EOR (Umbrella - I know PEO is different) providers today. The overall issue is one of trying to translate the historic practice, employment/tax law and tax calculations into an understandable format. The FCSA code attempted to do that by a focus on up front communications and a form of standardised illustration and payslip. Now, whether someone chooses to read and understand how the pay rate they are quoted translates down into pay is another matter of course and "we" (the industry) don't make that easy but this an area I believe can be transformed and improved.

So we know we have more scrutiny as a result of macro conditions, we know it's not perfect and we have a belief that there is too much self interest. So why is this and what can be done?

Before we get to the what, I wanted to have a moment on the why, if this is read by a worker then I hope some of the following provides some insight if not sympathy.

What is the rate for that role?

In that simple question we have one of the main causes for all our woes.

Historically, the pay rate (be it hourly or daily) was what I as the worker, focused on. My first contract role in 1998 was for ￡130 a day and the key Agency assumption was that I would use my own company to trade with them. Cue scrabbling around and I first became aware of the "Limited Company rate". The ￡130 a day was largely mine, tax reduced by some expenses and paid mainly as dividends each month. Happy days. My company charged that rate and I got paid most of it back to me personally (ahh the days of 85% returns!). By the advent of Parasol, we still used that principle as the main economic unit of transaction and in the early days, Employer of Record was not really a thing. We did PAYE for you, we didn't employ you. As the umbrella market matured and professionalised, really employing people became the norm but none of us changed the terminology or understanding of the pay rate context. So the worker still got quoted, it's ￡140 a day for the role, we then had to explain upfront and after the payment why ￡140 netted down to something less attractive and clearer. Some fundamental points were missed (I/we tried but common practice, history and behaviour make it a very strong tide to swim against):

• The rate of pay quoted is not "owned" by the worker, in the Umbrella EOR context, this is the payment for the provision of resources by the provider to complete some sort of task. What we should actually say is something along the lines of, "you are our consultant/worker and we think your salary will be around ￡35,000 pro-rata for the period you are on assignment and here are your benefits". The Agency would then be told that we will charge circa ￡45,000 pro-rata for the period of assignment plus expenses. That is all fine if a) the worker is happy with ￡35k and b) the agency has not quoted an equivalent ￡45k day rate. If the Umbrella was operating on much higher margins then the issues around holiday pay etc would be far less prominent but as it stands they are there to provide an employment framework that balances supply chain risk and employment status. Now, a Professional Employment Organisation (PEO) does go some way to resolve this issue but is not a panacea for all scenarios. There are commercial and relationship reasons why a PEO will not fit all those, but for many a sector, this is a good alternative provided the supply chain supports the principles and is prepared to pay for the labour properly.
• The EOR Umbrella actually operates on relatively slim margins given the maths which means that being efficient is important. If we assume a ￡750 weekly pay rate (not that again) then being deducted ￡20 is 2.6%, not perfect perhaps but not ridiculously expensive either. That would be fine if we did not to also reduce the ￡750 to cover off some other costs e.g. Employers National Insurance, Apprenticeship levy and so on. If the Umbrella had much wider margins as per the example above or sold a product then you could rightfully expect it to be able to cover it's costs but if it only retains ￡20, the 13% cost in the ￡750 for Employers NI is not covered in the way many think it is or should be. This goes back to how we think and describe the rate of pay and quite rightly, I am quoted ￡750 for the work, why am I paying these costs. You are not, but it feels and seems that way. If we can explain and get across the consultancy/product principle then it might be clearer but needs wholesale change. So maybe we need two rates, one for the task/role and another for the actual worker, they have some of this in the US so can work (and yes PEO is different). That would work if the whole supply chain was behind the concept and the worker bought into the perceived lesser value (which is also why PEO does not always work in knowledge based roles as well).
• Before you shoot the messenger on this, I am not saying that there has not been some perceived exploitation of the above complexity and maths. Yes, FCSA codes or licensing should address this but we also need a fundamental shift in how we engage workers in the supply chain. More transparency across all aspects of the chain is required not just at provider level.

The additional why's are more debatable (just pre-empting the inevitable here) but again, the historical practice and legislative rhythm has a lot to be "blamed" for. I am not going to attempt to detail the actual legal position on holiday pay for example, but it is one area where employment law remains a challenge to implement. For a worker it should be simpler, and especially in those sectors where working alongside a "full time" employee with better benefits feels unfair. Much of what has been written on these topics feels a little ill-informed as the actual detail is quite complex (when the law does and doesn't allow you do what feels like common sense but you can be penalised if you do type thing) but if I boringly point you back to the pay rate point, the normal worker is right to feel somewhat aggrieved. The whole construct is a bit wrong in my opinion. FCSA and others can do better in explaining this and I am sure will.

What can be done then?

Why are you asking me? I am not here to provide solutions, I just work here :-)

Well for what it is worth, here are my more (these days) objective views:

1. PEO - In the sectors/pay-rates/relationships where it can work, more end-users and Agencies should consider this. It is potentially not as "cheap" to the supply chain as outsourcing the risk (employment) fully to Umbrella arrangements but has an increasing part to pay. Agencies need to understand the pro's and con's more and educate clients too. For workers it looks and feels more transparent and simpler to understand, which is no bad thing!
2. Policing - FCSA and other bodies have played a part and continue to play a part in improving standards or at least providing a semblance of best practice to safeguard all elements of the supply chain. Will licensing come in and improve this, I have my doubts but the overall failure of the industry (myself included but in hindsight and including the whole supply chain) to move on beyond the historical practices is limiting. I fear a Government body will be ill equipped and lack detailed understanding to be powerful in this regard.
3. Transparency - the supply chain remains grey at best, workers need to understand why their income is treated in certain ways, Agencies need to reduce reliance on commercial support from Providers and end-clients need to have more awareness (it has started to some extent via ir35 and other changes). We need to redraw the picture to make it all clearer.

In summary, not all Umbrella companies are bad and exist to make excessive profits at the detriment of the workers. FCSA is not a gentlemen's club designed to keep the ruffians out, it is a lot more collegiate and independent than you might imagine. We all need to be progressive in our thinking to address these issues alongside improving the standards industry wide. I set up an Umbrella because I believed it had a vital role in making peoples lives easier and less complex, I do not think that has changed.