Temp or Perm?

The term “The Shamrock Organisation” was coined by the management guru (and son of an Irish Pastor) Charles Handy. (http://daithaic.blogspot.com/2007/08/can-management-gurus-lead-us-to-nirvana.html ) This is a form of organisational structure with three bases on which people can be employed and on which organisations can be linked to each other. The three bases or groups are professional managers; contracted specialists such as advertising, computing, or catering personnel; and a flexible labour force discharging part-time, temporary, or seasonal roles. Since Handy outlined the more flexible, responsive alternative to the traditional hierarchical organisational structure the “Shamrock Organisation” has become the norm. In 2002 the Temp Agency Manpower became the biggest single employer in the USA with over 2 M employees.



Over the last decade, the use of temporary agency work has increased markedly. Outsourcing of public services to the private and voluntary sectors has almost doubled to close to £80bn in little more than a decade and makes up a far larger part of the economy than previously thought.” (Financial Times 09.07.08) A third of all public services – far more than previously thought – are now delivered by the private and voluntary sectors, according to this report commissioned by the government. Estimates by the European Confederation of Private Employment Agencies for the UK suggest that in 2005 there were some 6,000 officially designated employment agencies operating through 14,400 branches and sourcing 1.2 million workers a day (5% of the national workforce). And these figures themselves are likely to be an under-estimate of the number of agencies and the size of their GDP. In general it is only the larger, well-established agencies that join the employment agency federations. Small agencies are much less likely to take up membership of bodies like the Recruitment and Employment Confederation (REC), but their presence is increasingly evident in the High Streets of most UK towns. Their growth can also be evidenced by the available VAT data, which shows that over 17,000 bodies operating as employment agencies are VAT registered, suggesting that the number of agencies and consequently the numbers of agency workers is much higher than the official figures demonstrate. This growth in agency work in the UK has depended on a variety of dynamics, ranging from the nature of national regulation to changes in the labour process and industrial structure. In December 2007 the Employment Minister, Pat McFadden was unable to say how many agency workers there are in the UK. The ONS does not record Temporary and Agency workers and many more workers are thought to be working on an “agency” basis in the black economy.

According to the DTI, the UK has the third highest use of temporary agency labour in Europe, just behind France and The Netherlands, but has the highest number in absolute terms. There is mounting concern amongst UK Trade Unions that the trend is part of an increasing casualisation of the UK Labour Force and is being used both to replace permanent employees and that employees are using agency staff to negate their responsibilities to comply with established terms and conditions as workers are squeezed as part of a “race to the bottom.” The truth is probably more complex with many agency workers being “Knowledge Workers” who have taken a conscious decision to control their own careers because their services have a scarcity value. The opposite argument is that most agency workers don’t have a choice and would much prefer to be in more secure employment to allow them to plan their lives and finances better.


The UK is committed to agency working as a key element of a flexible labour force and economy but for individual employers it is no panacea. Often, it can be used to disguise poor management and planning, be wasteful and uneconomic and expose an organisation to significant Reputational and business risk. Managers and decision makers need to be properly informed as the enthusiastic amateurism which has often characterised the use of temporary resource in the past will come unstuck as legal and compliance changes increase the consequences of bad decision making and poor management. Here is some guidance on the issues;

DIFFERENCES BETWEEN A WORKER AND AGENCY STAFF

What is an agency worker?

• An agency worker is somebody supplied by an intermediary (Employment Agency) to perform services on behalf of the user company.

What is a worker?

• A worker is an employee and someone who works under a contract where they are required to provide a personal service.

Holiday Pay and Holidays

• All workers are entitled to holiday pay.
• Agency is responsible for paying holidays for agency workers , Ainsworth & Others v Inland Revenue (2005)
• Holidays should be agreed with the agency and not the end user.

Disciplinary and Grievance

• Statutory disciplinary and grievance procedures only apply to employees but
• A worker has the right to be accompanied and
• A Worker has protection against discrimination
•
This is an anomaly but could, in certain cases, lead to discrimination claims. Note that a failure to follow procedures will result in an uplift (i.e.; An agency worker acquiring the rights of an employee) if it is proved that there is an implied contract of employment.

Sickness Absence

• Employees are entitled to SSP
• Workers are not entitled to SSP
• Agency workers are entitled to SSP but this is paid by the agency

Redundancy and TUPE (Transfer of Undertaking, Protection of Earnings)

• Only employees have the right to be consulted under TUPE and collective redundancy obligations.
• Only employees are entitled to redundancy pay
• Implied contracts could affect the number of employees to be consulted (see implied contracts).

DDA

• Not required to ‘make reasonable adjustments’ for agency workers but they have a right to claim under DDA regulations.

Discrimination

• Protection covers “employment under a contract of service or of apprenticeship or a contract to do any work or labour”.

Applies to those in business on their own account provided they provide personal service. Note; It is unlawful for a principal to discriminate against a contract worker. (Abbey Life Assurance Co. Ltd v Tansell 2000).


Employment Status

“Worker’ or ‘employee”?

Consider if the following apply:

• The Control test
• The integration test
• The economic reality test
• Mutuality of obligation


Latest Case Law relating to Agency Workers

James v London Borough of Greenwich (2008)

The decision of the Court of Appeal in this case was reported on 5th February 2008. The leading judgment was delivered by Lord Justice Mummery, who is a former President of the Employment Appeal Tribunal [EAT]. Whilst many legal commentators were expecting that the Court in this case would arbitrate on the conflicting decisions in earlier cases, Lord Justice Mummery denied that any real conflict exists. In the James case, the Court They held that there was no express contract of employment between James and the Council and there were insufficient grounds for requiring the implication of a contract [an implied contract of employment]. So, no contract = no basis for a claim of unfair dismissal. Provided the Employment Tribunal applies the correct legal test, then that should be the end of the matter said the Court of Appeal.

Lord Justice Mummery added a postscript to his judgment, in which he emphasised that the job of the tribunals and courts is to interpret and deal with the law as it stands. There may well be social and economic arguments in favour of changing the law in relation to the rights of agency workers – but it is for Parliament to effect such change, not the Courts.

How to avoid creating implied contracts

• Aligning HR procedures to deal with grievances, dismissals, misconduct, redundancy, sickness and holiday
• Discussing the treatment of temporary workers in the workplace: The dos and don’ts in exercising best practice
• Understanding the main differences concerning contract workers and the self-employed
• Using indemnity clauses in the employment contract and examining prevention strategies and risk mitigation

• Implications of TUPE and the new service provision rule: In some cases Agency Workers can be transferred. One of the main changes introduced by TUPE 2006 was to widen the definition of a “relevant transfer” to specifically include service provision changes, ie. The relationship between contractors and clients who hire their services. A “service provision change” can take three principal forms:
1. Where a service previously undertaken by the client is awarded to a contractor (a process known as 'contracting out' or 'outsourcing') ( http://daithaic.blogspot.com/2007/10/outsourcing-or-ouch-sourcing.html )
2. Where a contract is assigned to a new contractor on a re-tendering (as per the case of Hunt v Storm (http://www.emplaw.co.uk/researchfree-redirector.aspx?StartPage=data%2f200707041.htm )) above)
3. Where a contract ends with the service being performed 'in-house' by the former client ('contracting in' or 'insourcing')

For a service provision change to take place there must also be an "organised grouping of employees whose 'principal purpose' is carrying on the services for the client".

Issues of continuity of employment.

What are the implications of the Court of Appeal decision in Cornwall County Council v Prater? (2006)

Prater was asking for a statement of her terms and it was considered that there was no mutuality of obligation as they didn’t have to offer her work and she didn’t have to accept it. However, the Court of Appeal found that she was a worker as she had to do the work the County Council gave her and they paid her for it.

There are also pending Legislative developments: The implications of the EU Agency Workers Directive and the Temporary Workers Bill for the UK but there is still no agreement on the contents of this proposed bill.

Avoiding Implied Contracts of Employment – What are the DO’S?

• Distinguish between employees and contractors and agency staff on your email system
• Have a clear contract in place with the agency or worker
• Make sue the terms of the contract are followed
• Be careful when transferring employees on to contracts for services
• Consider a policy on length of engagement
• Ensure holidays, termination of engagement and other admin relating to an agency worker is dealt with by the agency.

Avoiding Implied Contracts of Employment – What are the DON’TS?

• Give agency workers, workers or self-employed people a staff handbook, welcome pack or invite to induction events.
• Treat workers and self-employed personas as if they were employees.
• List workers as employees on group structures, Muscat v Cable & Wireless (2006)
• Give workers a contract of employment

Operational Changes to effect possible solutions

• Change the way in which the contractors operate (i.e. lump sum payments for a piece of work)
• Agree holidays with the agency
• Ensure that contractors do not manage employees
• Bring in a policy of review for length of contract term. Cannot rely on the one year rule anymore.

Move to employment status

• Offer employment contracts to contractors who are managing staff
• Ensure difference in treatment between time as a contractor and employee.
• Use an agency which employs the contractors
• Be aware of discrimination and Fair Employment practices – Open advertising of vacancies (internally and/ or externally), objective assessment and appointment on harmonised terms and conditions

Other options

• Source directly and contract directly with personal service companies
• Recruit temporary resources directly and put through an “agency payroll”.


CONTRACTORS

Can fall into the following categories

• Contractor (worker)
• Contractor (self-employed) - DO NOT ENGAGE - HRMC (IR35) implications
• Contractor (limited company)

• Contractors can be workers but need a right of substitution, to “carry” the risk of work themselves, be appropriately insured and not be “controlled”.

HOW CAN WE “MANAGE” AN AGENCY WORKFORCE

What should an employer expect of the Agency?

• Knowing the importance of briefing their workers
• Do they understand the relationship?
• Do they ‘identify’ with the agency?
• Do they know that the agency will deal with grievances etc?

Reasons for using Agency workers
Numerical flexibility –

• Peaks and troughs in demand
• Projects of limited duration

Short-term ad hoc cover –

• Temporary replacements for permanent staff absence
• Pending recruitment of permanent staff

Strategic

• Outsourcing
• Managed services

AGENCY RESPONSIBILITIES

• End assignments
• Decide disciplinary issues
• Manage grievances
• Career management

Not for prolonged use – think about resource requirements!

CLIENT SUPERVISION – DO’S AND DON’TS

DO
• Refer any disciplinary problems to the agency
• Report any problems promptly
• Inform agency of changes to assignment duration
• Refer worker to agency if pay / benefits are queried
• Understand the relationship and the risks
• Remember the rights of the ‘contract worker’ (SDA, DDA, RRA etc)

DO NOT

• Interview candidates
• Negotiate pay or benefits
• End an individual’s assignment
• Administer disciplinary warnings
• Conduct career management discussions
• Formally agree requests for annual leave

MOVING FORWARD……………………….

Need to consider the following:

AGENCY STAFF

• Tackle long Term use of agency staff.
• Engaging with managers to develop an effective resourcing plan – should those on long term engagement be employees
• Link this to wider resource planning
• Check that contracts are robust

NON EMPLOYEES (incl. SOLE TRADERS)

• Determine what the total resource capability is within the business
• Are sole traders being used and processed directly by your Management Accountants?
• Headcount will be inaccurate
• Check categorisation within your personnel management system – are the current ones correct

TRANSFER TO EMPLOYMENT STATUS

• If so – how do we transfer them – need to develop policy that addresses both HR and revenue implications – especially Fair Employment and Discrimination considerations.



STAKEHOLDERS

• Work with finance function to develop the solution in terms of revenue implications.
• Make sure that procurement teams understand the impact of what they are dealing with, particularly HMRC compliance.
• Resourcing team to develop strategy for engagement of temporary / agency staff. Look at contracts for hire and length of assignment.
• Procurement team to refer issues to correct line Managers / Directors so that all risks are assessed.

BUSINESS RISK

Given the latest case law Employers could ‘carry’ the risk and do nothing but this is unadvisable on several counts:

1. They may not know the real headcount – Often these are wrongly categorised in HR system.
2. HR / Procurement systems often don’t properly track lengths of employment e.g. go back to “Zero” when contracts / assignments are renewed.
3. Managers are confused about the meaning of:
a. Sole traders
b. Contractors
c. Fixed term etc
4. There are various contracts in use for contractors – lack of consistency means an increased risk.
5. The use of Managed Service Companies and Umbrella Companies should be stopped – definitely high risk, especially if fulfilment is by non-residents.
6. Loss of Key Knowledge - What is your Knowledge Management Strategy?

And last, but not least, employers should have appropriate strategies in place that address both legislative requirements and support the needs of their business; rather than relying on the ever changing results from case law.

Outsourcing or Ouch-sourcing?

Outsourcing has been described as company’s giving away their brains and the major consequence of doing this is it is very difficult to get your brains back in the future! However, in the U.K. both Private Enterprise and the Public Sector seem to have acquired a worrying addiction to frontal lobotomy!

The trend towards Outsourcing and Off shoring is driven by the Management Consulting industry who have a vested interest in “Change”. Let’s face it, at their extraordinary fees they are hardly going to come into an enterprise and tell you “It ain’t broke so don’t fix it.” But these same reassuringly expensive Consulting Firms often bring to the table generic solutions and very little emphaty with your business. More worryingly, they are very rarely objective as they are often owned by companies which profit from the downstream activities associated with outsourcing. IBM’s press release when it paid a small fortune for PWC’s consulting arm in 2002 summarises the point.

“These skills (of PWC Consulting) need to be combined with large-scale implementation capabilities such as outsourcing, IT infrastructure skills, key technologies, and financing, where IBM is the market leader. IBM Business Consulting Services is now uniquely positioned to advise and enable clients to fully leverage these new models of business computing, driving greater return on IT investments.” Since the takeover of PWC Consulting by IBM Outsourcing and IT related services account for over half its income.


Change Agents or The Great Unwashed?

As with every other new business trend, from process re-engineering to quality management, the promise of dramatic performance improvement gives way to surveys revealing widespread dissatisfaction with what is actually achieved. Although not many have re-absorbed activities that failed to work in the outside world, many have experienced much smaller cost savings and service gains than they expected. If it’s potentially so advantageous, why does outsourcing go wrong? The main business criticism of outsourcing is that it fails to realize the business value that the outsourcer promised the client. So how should companies approach the issue? The following 6 pointers should provide the framework to keep the delivery of outsourced fulfilment focused on your business’s strategic objectives.


1. Set targets to measure effectiveness.

The temptation to outsource because rivals are doing it, trusting in them to have done the right calculations, should be resisted. The costs and expected savings from large outsourcing deals – in the public or private sectors – are not transparent and are rarely revealed, and it can’t be assumed that all are making a respectable return. Without detailed costing and rate-of-return calculations in advance, it will be impossible to set targets for an outsourcing project, and to know how well it is performing.

2. Assess against future needs to ensure scalability and the ability to add to the project.

Problems often arise when an outsource meets or exceeds the improvement target for the work first assigned to it – at which point the excited client passes more work out to them, only to find that performance has suddenly deteriorated. Suppliers must be chosen with a view to what you might want them to be doing at the end of a 5- or 7-year contract, as well as what they will be doing in the first phase. Problems can also arise if the primary supplier agrees to take on extra work, and then sub-contracts it to other companies to access the capacity or capability it doesn’t have. This leads to a loss of control, and can run into trouble if the primary outsourcing fails to manage its own outsource competently.

3. Avoid becoming a hostage to one supplier.

If an outsourcing relationship succeeds, and widens into new areas of activity, it can become increasingly difficult to consider re-tendering for a contract and changing the service provider. Partners must be given a reasonably long contract if they are to invest in providing specialist services, and be motivated to suggest improvements. If they get to the end without problems, and have delivered identifiable savings or service improvements, there is a tendency to renew the contract with little thought for alternatives.

But unless the present provider is compared with others available, it can be impossible to know whether they are delivering as good a service for as low a cost as possible. Once they become assured that a contract will continue without further contest, once hardworking and pro-active suppliers can be tempted to slacken off, or assign lower-quality resources to a contract. So even if there is periodic review before renewal, outsourcing can lose its edge through loss of convincing benchmarks. The risks of disruption when a sole supplier fails to deliver, or suffers a quality lapse, are a further strong reason for limiting the use of single sourcing, unless reliable alternatives can be summoned from the market at short notice.

This is a difficulty seen in the U.K. where consolidation has meant that, for instance, IT support contracts can only be tendered to a small number of large companies. The example of the 11 year saga for a computer system for Magistrates Courts in the U.K. illustrates the issue.

“A report published today by the National Audit Office (NAO) today makes it clear that although plans to create an IT system for magistrates courts has been under development for more than ten years, such a system has yet to be completed. The report highlights a number of errors including the lack of "competitive tension" surrounding the project after only one formal bidder remained at the end of the procurement process.

In July 1998 the Government chose ICL (now Fujitsu Services) as the preferred bidder with its bid of £146m over 11 years. Six months later when the contract was signed the price had increased to £184m. Since then the contract has been renegotiated twice and in May 2000 the cost of the project rose to £319m.”


4. Protect external sources from internal politics.

Savings and service improvements are noticed when first achieved, but then get rapidly taken for granted – until someone interferes with the outsourced relationship, or something goes wrong with it. The possibility of such disruption arises as soon as the original sponsor of an outsourcing relationship moves upwards or out of the company, leaving no-one to argue its merits when questions are raised about it. The trigger for such disruption tends to be when new managers arrive at a division that has outsourced, and seek to establish their authority by implementing quick changes. Finding that key areas have been passed to an external supplier, and having to work through them, can be a source of frustration that causes the out-of-house work to be viewed unduly harshly.

Even if their original sponsor is still on hand to remind the company of why it outsourced, and how performance improved as a result, the supplier is recommended to make contact with new management to explain the rationale, and to suggest what could now be improved. This way, the new drive for change can be channelled into moving to the next level of outsourcing benefits, rather than swinging the pendulum and taking work back in-house – or changing supplier – only to discover that you can’t beat what was there.

5. Prevent ‘parallel insourcing’.

Keeping some of a division’s work in-house, and outsourcing another part, can be a valuable way of benchmarking the two options and avoiding the all-or-nothing risk of spinning everything out. But the division between what goes out and what stays in must be clearly drawn, and adhered to while the comparisons are being made. And this is often most appropriate in the early stages of outsourcing, when its feasibility and the best people to do it are still being assessed.
A more damaging tendency, which tends to occur when arrangements have been in place for longer, is to allow in-house activity to stray into the same areas that have been handed to an outsource. The U.K. Public Sector again provides an example where Governments (especially after two terms) are often accused of building up a ‘parallel administration’ of special advisers and chiefs-of-staff who start to duplicate, and ultimately override, the activities and decisions of the civil servants they are meant to work through. The same can happen in companies, as managers who resent the loss of operational control to an external supplier start to rebuild the same capacity in-house. This ‘creeping re-insourcing’ leads at best to a waste of resources, at worst to a loss of coherence as confusion grows over who is responsible for which task, and cooperation breaks down.

6. Move on from initial assignment to performance assessment and re-tendering.

While some areas are still going out-of-house for the first time, many long-established outsourcing arrangements are now coming up for renewal, often not for the first time. After the move from initial investigation of the outsourcing market to the award and management of the first contract, the management task evolves again, to the assessment of performance and arrangement for re-tendering. The renewal of a contract gives an opportunity not only to assess whether the outsource has done well enough within the contract parameters, but also to check that the parameters were sensibly set. When reviewing their initial experience.

While IT was initially popular because new computing and communication technology was seen as exotic, requiring handling by specialists, new and more user-friendly machines may allow the basic functions to come back in-house, with outsourced fulfilment needed instead for more complex functions such as software development, database management and analytics. So a contract may need to be re-tendered not just because other suppliers could do the job better, but also because a different job may need to be done.

Generally the U.K. Public Sector and the large grey area of the economy has had a bad record in outsourcing functions, particularly around I.T., and has not achieved an effective risk transfer to the Private Sector because they simply are not commercial and when placed head-to-head with sharp and incentivised negotiators on the other side they will have insufficient knowledge to achieve an optimum result. One area of giving part of your brain away is the issue of “Moral Hazard”.

Moral hazard is exemplified in outsourcing of public sector IT services. In outsourced public sector services, the supplier owns the intellectual property before the system is even delivered. Removing the supplier means, in effect, a total restart of the project. This is a significant, if not the major, risk (and moral hazard) in public sector outsourcing. Where private sector funding is providing the majority (normally 90 per cent) of the investment, it makes no sense in PFI contracts to call a halt to the projects. The most that government or public sector authorities may do is to extract compensation for failures to deliver, but this is normally capped in the outsourcing contract.

PFI contracts make no sense, where the supplier provides the investment, unless the public sector secures a charge over the intellectual property until it is satisfied with the delivery. Indeed, it would make more sense for the public sector to be an equal investor in the intellectual property. Providers would then no longer have the power of ownership over the intellectual property.

Finally, Best practice is key in the success of outsourcing projects, liaising correctly with all involved and working with suppliers to get the best deal. Handled properly, hopefully the public sector can work towards a more efficient, cost effective way of working, and to those departments that would like a helping hand there is always the NOA! Perhaps one of the reasons Public Sector outsourcing had had such a bad press is just that, the results are public and can be examined. If the interlinked Consulting, Outsourcing and Off shoring industries are to regain credibility there will need to be greater transparency in terms of costs and outcomes in the Private and Public sectors to make a proper judgement as to whether Outsourcing is really Ouch-sourcing?