1. Legal and tax developments affecting MSP/RPO Kevin Barrow – 27 June 2012

2. osborneclarke.com Introduction: a changing world for MSP/RPO? How has the world changed? – Economic backdrop: cash squeeze, market consolidation and globalisation PWP debate Disputes – Legal and tax issues AWR Pensions Act Reed case on travel expenses – implications for umbrellas VAT efficient temp banks: what is happening? Jimmy Carr is evil, MSC activity, GAAR, controlling persons tax and new IR35 "tests" 1

3. osborneclarke.com Agenda What major hirers seem to be worrying about now Key tax and legal risks and how MSP arrangements may adapt Common disputes Pay when paid and supply chain abuse? Temp banks: what is happening? "MSP" means what? 2

4. osborneclarke.com What major hirers seem to be worrying about now Access to talent? – Some Cost – Of course Supply chain risk 3

5. osborneclarke.com What major hirers seem to be worrying about now Supply chain risk concerns of global hirers – Supply chain risk if supplier fails e.g. Chimes – Chain tax liability esp following globalisation of staffing Tax and social security liability passes up to hirer – e.g. worker misclassification Class actions - employment status and equal pay (AWR) claims against hirer – Reputational issues/loss of contracts E.g. Virginia measures re worker misclassification? UK response to recent events – loss of public sector contracts – SAO/Sarbanes Oxley Personal liability of CFO etc. for tax risk in supply chain? 4

6. osborneclarke.com What major hirers seem to be worrying about now Simple solution? – Appoint global MSP to manage supply chain risk (and find cost reductions and offer standard service levels)? So, what are the risks? 5

7. osborneclarke.com Key tax and legal risks and how MSP/RPO arrangements may adapt Old stuff – Suitability (incl right to work) – Discrimination (n.b. big in US companies) AWR Pensions – Encourage opt-out under Pensions Act from October? 6

8. osborneclarke.com Key tax and legal risks and how MSP/RPO arrangements may adapt TAX, TAX, TAX – Reputational risk – Times/US developments – Reed style umbrella risk in an MSP context – Tax debt transfer to hirers Jimmy Carr style offshore schemes MSC Controlling persons GAAR 7

9. osborneclarke.com 8 AWR – some risk areas Increasing awareness of possible defects in some arrangements: – Pay between assignments/Swedish Derogation ("pba") models which do not really pay enough at the right time? If pba is invalid then worker has equal pay rights and can claim against Temporary Work Agency ("TWA"), – Reed tax case Jan 2012 (covered later) suggests that umbrellas and staffing companies with "employed temps" may not now argue that expenses count towards pay for AWR purposes = many umbrella workers may cease to be "paid" as much as comparator – Tribunal will assess whose fault (hirer/MSP/staffing co/umbrella) and award compensation according to what is just and equitable (and who can pay?) – Hirers will expect MSPs to root this out and indemnify Especially after first class actions

10. osborneclarke.com 9 AWR – some MSP responses Some temp desk interest – direct engagement means AWR does not apply Many MSPs/hirers are accepting the need to co-operate

11. osborneclarke.com 10 AWR: worker right to information AWR Reg 16 – Failure to provide information: Tribunal can "draw inference" - i.e. presumption of breach + TWA/hirer are up against it in proceedings – Not clear if comparable employee needs to be named at this stage – where perms are banded that will not be necessary, but where there are specialists? [Nb privacy law issues]

12. osborneclarke.com 11 AWR: worker right to information Key point: how a hirer or TWA (MSP or staffing co or umbrella) responds to an information request: – Will be key evidence in any subsequent claim (maybe multiple claim) – May turn the burden of proof against the TWA (e.g. where failure to provide full/correct information) MSP must be prepared with relevant data and standard responses!

13. osborneclarke.com 12 AWR: worker right to information Step 1 – MSP needs to make sure suppliers all apply same tests: is the worker entitled to request information? – Test 1: Is the worker an "agency worker" Supplied to work under supervision and direction of hirer? NB factual test probably, not what contract says Contract with TWA for personal service? NB recent Autoclenz case law Not "profession" or in business ? [NB "Profession" narrowly defined?] Does include PAYE workers, employed temps and umbrella workers Does NOT exclude PSCs – Higher paid/longer term PSCs will want to stay outside IR35 and will not want to threaten that status? Take care when making this point to PSC workers: Tribunals and Courts on look out for games - sham risk for tax purposes? Take advice

14. osborneclarke.com 13 AWR: worker right to information Step 1 – is the worker entitled to request information? – Test 2: are you the relevant TWA to whom the request should be made? – What about where more than one TWA in supply chain (e.g. MSP-staffing co–umbrella)? who will worker ask for information from? [Staffing co – "my TWA"?] who is really obliged to provide that information? [Reg 16 unclear – assumes only one TWA. Possibly whoever pays i.e. umbrella?] who actually has the information? [Hirer/MSP?]. n.b. in assessing how much each TWA is liable for breach, Reg 14 (4) states that Tribunal will have regard to the extent of the respective TWAs responsibility for determination etc of worker's equal pay/comparator ID etc.. In other words just leaving it to the umbrella may bounce back on a staffing co/MSP/hirer? Assume common sense approach by Tribunals MSP must get everyone to agree in advance (in agreements with supply chain) who should deal and how? Express terms – take advice

15. osborneclarke.com 14 AWR: worker right to information Step 1 – is the worker entitled to request information? – Key factor? Danger signs dictate different levels of care in gathering info and preparing response? MSP should monitor this? unionised environment or workforce grievances or area of union interest? similar enquiries from many workers? Esp where many just terminated? similar workers from you or other TWAs at same hirer? pba workers - clearly (if they ask for pay information) must feel that their pba contract is invalid umbrella workers – are expenses "pay"? - enquiry must be handled with care incl tax consequences (recent Reed case) workers "encouraged" into PSC working? - enquiry must be handled with care incl tax consequences (MSC) signs of lawyer involvement? facebook activity? Agency worker community?

16. osborneclarke.com 15 AWR: worker right to information Step 4 – MSP must liaise with rest of supply chain – Have they had requests from same worker or similar? (Worker is allowed to ask more than one TWA the same question? Catch TWAs out?) – Confirm basic condition information and co-ordinate response – Record carefully in writing any failure by other TWAs/hirer to co-operate. – Email confirmation of discussions? Be careful about what you say in writing especially in riskier situations – emails disclosable in proceedings unless via solicitors

17. osborneclarke.com 16 Issues which make AWR claims difficult Kitchen sink tactics by applicant – likely to throw in claims for: – discrimination (equal pay under the Equality Act ) – holiday pay and incorrect application of WTR/unlawful deduction of holiday pay from wages – unfair dismissal – TUPE eg where pba models apply – …and will win sympathy of Tribunal by arguing that umbrella/PSC arrangements were forced on them/a sham These points may all be rubbish but all need to be dealt with i.e. not a 1 page defence Applications for costs against applicants in person are frowned on by Tribunals so hard to intimidate

18. osborneclarke.com 17 Issues which make AWR claims difficult Multiple respondents (unlike in most employment claims where there is usually only one respondent) – Hirer – MSP – Staffing co – Umbrella – [PSC] What one respondent says in a defence or settlement discussion will potentially implicate another: – need for multiple communication – review of indemnity cover will delay co-operation – review of legal exposure will delay co-operation

19. osborneclarke.com 18 Issues which make AWR claims difficult …and delay will mean that time will run out for negotiating a settlement even in what might otherwise be a relatively simple matter …which means you will need to file a defence anyway, perhaps without co- operation of others in supply chain from whom you need information but who are not providing it because: – they just can't get their heads round all the unfamiliar complexity relating to detail of AWR = NATURAL CAUTION LEADS TO INFORMATION CLOSE DOWN or – they cozily think they can rely on an indemnity from you! NO SUBSTITUTE FOR MSP HAVING CONTRACT TERMS IN PLACE FROM OUTSET SETTING OUT REQUIREMENT OF ALL PARTIES TO CO- OPERATE - OTHERWISE CLAIMS WILL BE A COSTLY TO DEFEND AND EARLY SETTLEMENT WILL BE VERY DIFFICULT

20. osborneclarke.com 19 Pensions and MSPs OC is covering Pensions Act at other events for staffing co's and MSPs Key pension issues in MSP arrangements: – Reputational issues for hirers if suppliers are not complying? Crim offence for wilful breach – what about aiding and abetting that? – Supply chain risk – if suppliers are not dealing properly will suppliers become insolvent and/or will liability bounce up to hirer/MSP? – Encouraging opt-outs – if hiring traits encourage opt-out will that liability lie with the hirer? E.g.unequal charge rates MSP will need to: – Set the tone with hirer and suppliers – Check compliance at least to root out supply chain risk

21. osborneclarke.com 20 Tax and MSPs MSPs job to gate-keep – [Reputational risk – Times/US developments] – Reed style umbrella risk in an MSP context – Tax debt transfer to hirers Jimmy Carr style offshore schemes MSC Controlling persons GAAR - False self-employment via PSCs? False umbrella arrangements?

22. osborneclarke.com 21 Tax - Reed case on travel expenses Umbrella and employed temp arrangements exploiting ss338-9 ITEPA involve: – Umbrella co or staffing co employing the worker and paying him under PAYE (rather than engaging him on a contract for services in the traditional manner of PAYE temps paid under ss 43-47 ITEPA) – That employment being under one overarching contract of employment subsisting between assignments – …with each assignment being at a different place of work which in other words is a "temporary workplace" – Travel, subsistence and accommodation expenses relating to a permanent workplace are ordinary commuting expenses – taxable – Travel, subsistence and accommodation expenses relating to a temporary workplace can be paid tax free

23. osborneclarke.com 22 Tax - Reed case on travel expenses Umbrella and employed temp arrangements exploiting ss338-9 ITEPA involve: – Staffing co's and umbrella co's "employing" the workers in a variety of ways many of which often [not always] do not look like normal overarching employment continuing between assignments? – "Zero hours"? – "Pay when paid"? [Some umbrellas] – Only one assignment ever? NB place is not regarded as a temporary workplace if employee works there for "all or almost all of the period for which the employee is likely to hold the employment", or "it is reasonable to assume that it will be". [Do all staffing cos and umbrellas have good enough return rates?] – No work by worker between assignments? – No payment or other benefit to the worker between assignments? ARE THESE MODELS OK?

24. osborneclarke.com 23 Tax - Reed case on travel expenses HMRC have been looking at overarching contracts for some time – March 2011 budget announcement – Fictitious expenses has been attacked by HMRC for some time – Dispensations harder to come by now? – Min [336 pa?] hours guarantee = overarching agreement? – Each assignment is a separate employment at a permanent workplace? – OC briefing April 2011 set out key risk issues and OC briefings of January and June 2012 updated – http://www.osborneclarke.com/~/media/Files/publications/sectors/recruitment/update-on-recruitment-sector- issues-april-2011.ashx; – http://www.osborneclarke.com/publications/sectors/recruitment/update/2012/time-to-check-travel-xpenses-and- update-umbrella-arrangements-reed-face-158m-tax; liability.aspxhttp://www.osborneclarke.com/publications/sectors/recruitment/alert/2012/times-highlights-tax- avoidance.aspx

25. osborneclarke.com 24 Tax - Reed case on travel expenses So what happened in the Reed expenses case? Facts – Reed "employed" many of its temps from 1995 (PRP scheme was driver initially)– no PAYE temps at Reed since 2001 – Travel expenses to place of assignment paid tax free from 1998 as if each was a temporary workplace within overarching contract of employment – Series of schemes and dispensations relating to c 500,000 workers set up with help of accountancy firm – Salary sacrifice arrangements – HMRC misgivings from 2004 – revoked final dispensation 2006 – HMRC assessments in 2007: effectively £158M in dispute

26. osborneclarke.com 25 Tax - Reed case on travel expenses So what happened in the Reed expenses case? Overarching contract problem – Contract terms in place between assignments were not sufficient for the relationship between assignments to be an employment relationship – Therefore each assignment was under a separate employment contract at a permanent place of work for that employment

27. osborneclarke.com 26 Tax - Reed case on travel expenses So what happened in the Reed expenses case? Overarching contract problem (1) Mutuality of obligation after/between assignments? – Part 1 of Nethermere test was not satisfied : "In consideration of …remuneration …[worker]… will work …for master" – No pay between assignments – No enforceable obligation on Reed to find work – No obligation on worker to be available for/co-operate in finding work/accept work – "Expectation" arguments?

28. osborneclarke.com 27 Tax - Reed case on travel expenses So what happened in the Reed expenses case? Overarching contract problem (2) No control after/between assignments – could and did work for others between assignments (3) Contract between assignments was not consistent with employment contract Duration – until end of assignment? Satisfies s 339 ITEPA?

29. osborneclarke.com 28 Tax - Reed case on travel expenses Implications of the Reed expenses case? Reports suggest that Reed will appeal Many umbrella etc. expenses schemes are NOT similar to schemes operated by Reed – Some have gone to greater lengths that Reed in relation to overarching nature of contract to make sure there is mutuality of obligation between assignments MSPs will need to check or hirer faces supply chain risk – who will out of pocket workers claim against? – If MSP/hirer forces workers into a particular umbrella who will HMRC claim against?

30. osborneclarke.com 29 Tax – tax debt transfer to hirer MSP gatekeeper role to prevent transfer of tax debt to hirers: – Jimmy Carr style offshore schemes – s689 ITEPA: hirer liable for worker tax – MSC – "encourager" of PSC arrangements liable for PSC tax (are workers being shovelled into PSCs at behest of hirer/MSP following AWR and Pensions Act?) – Controlling persons legislation: hirer liable for PAYE and NICs where PSC controls major activities of hirer or has managerial control of a significant proportion of workforce or has control over a significant proportion of an organisation's budget – GAAR – bans abusive arrangements i.e. main purpose of arrangement is tax savings and the arrangement is not otherwise reasonable. False self- employment via PSCs? False umbrella arrangements?

31. osborneclarke.com 30 Legal and tax risk – MSP changing role? MSP gatekeeper role to prevent transfer of AWR/pension/tax debt to hirers: – May become very assertive in standards required of supplier? – Charge audit fees to preferred suppliers? – Further reduction in preferred supplier opportunities? – Insist on preferred suppliers only using a vetted umbrella arrangement (linked to MSP?) – Opportunity for MSP to fill greater proportion of vacancies?

32. osborneclarke.com 31 Common MSP disputes MSP disputes at the moment: – Retrospective claims re calculation of margin WTR Fixed NICs % What about PSCs? On/off framework

33. osborneclarke.com 32 Common MSP disputes MSP disputes at the moment: – Forced migration Compromises candidate privacy? Compromises candidate tax status? – Competition Act – abuse of position – Allegations of secret profits: charges to preferred suppliers and umbrellas: Payroll assistance "Marketing" charges Referral fees

34. osborneclarke.com 33 Pay When Paid in MSP contracts APSCo initiative – Raised an important point – Seems to have gained traction in public sector? But will other hirers care? – Recent MSP deals suggest not – hirers far more concerned about other things Will MSPs do anything? – MSP margins are small – why take credit risk? – MSPs are on the record as saying that you should not be in staffing if you cannot fund your own payroll their primary duty is to shareholders – do they care if smaller suppliers cannot supply?

35. osborneclarke.com 34 Pay When Paid in MSP contracts Other solutions: – Right of recourse e.g.60 day rule: Most clauses we have seen don't work! Mixing of assets/impossibility of tracing what has been paid to whom for what/hirer discomfort with potential double payment risk/not backed off in hirer contract! – MSP operates as agent for hirer – preferred suppliers have direct contract with hirer Best and well-established solution – MSP operates as payment agent for preferred supplier – pays workers on behalf of preferred suppliers Easypay and others

36. osborneclarke.com 35 Pay When Paid in MSP contracts Other solutions: – Temp desk – hirer hires direct and supplier (managed by MSP) is margin only – Legislation e.g. in construction sector

37. osborneclarke.com 36 Temp banks: what is happening? Direct engagement – Linked to hirers' perception that they can reduce usage of recruiters – perhaps combined with use of direct attraction mechanisms – Largely driven by need to minimise VAT – Partly encouraged by AWR cost reduction – Managed by MSPs who arrange payroll and manage any external recruitment and on/off-boarding

38. osborneclarke.com 37 Conclusions PWP debate may not stop PWP MSP dominance will grow where skills shortages are not the key issue for a hirer – Manage cost – Manage risk and implementation of new contracting models AWR risk Pensions risk Reed expenses case – supply chain risk MSC/GAAR/offshore tax debt transfer MSPs will set up directly engaged temp banks = 2012-14 MSP-led evolution in contracting models for agency workers?

39. osborneclarke.com 38 New contracting models? RISK/ COST PSCPSC: SOW 'Old' umbr 'New' umbr U12 wks Temp bank Amend ccts now? Check supply chain? Impact asses sment AWR cost/claims ?x? (pba)Yes!Yes[Yes!] Pension cost ?xxxYesSoonYes Tax schemes/ GAAR xxxn.a.x?Yes MSCx?? n.a.Yes VATxx? (unless exempt) x?xn.a.If applic Yes Admin etc cost to supplier xxx? audit fee? x? Yes Cost to hirerxx Yes

40. osborneclarke.com 39 Team profiles Kevin Barrow Partner Recruitment Sector T+44 (0) 207 105 7030 M+44 (0) 207 105 7031 kevin.barrow@osborneclarke.com