Employment and immigration | UK Regulatory Outlook January 2023

Growing use of employers of record: regulatory aspects to consider

Businesses are increasingly utilising so-called employers of record (EOR) to support their international growth plans, to facilitate remote working and to access talent in a wider range of countries. EOR services offer a quick and apparently compliant solution to the complex challenge of how to employ and pay talent in countries where the user has no HR presence or knowledge of local employment, tax and social security laws. As a result, EOR services have experienced huge growth and attracted a lot of investment, something that is likely to continue in the face of growing global workforce shortages.

The legal landscape surrounding EORs is complex and goes beyond compliance with employment law. EORs are subject to in-country tax and social security laws and recruitment or labour leasing regulatory regimes. EORs often "sell" full compliance with local laws but it can be unclear how compliant these models are. Not all EORs are the same – EORS can operate a range of payroll "solutions" in different countries, some of which may not be "employment" at all. Carrying out due diligence on EORs before using them is key to user organisations understanding the risks they are taking on. In some cases the EOR's terms of service are weighted heavily in favour of the EOR and provide little contractual protection for the user.
In certain European countries, EOR services may breach local regulations by conducting employee leasing without a licence. Some serve as a front for tax avoidance/evasion with so-called split payment arrangements. In the UK this would pose a risk of criminal liability (with unlimited fines) for a user under the Criminal Finances Act 2017, which requires organisations to put in place reasonable procedures to ensure that they are not failing to prevent the facilitation of tax evasion by their suppliers.

Users of EORs also need to remember they do not employ EOR workers and therefore need to ensure that ownership of intellectual property, confidentiality and data protection are all addressed in the contract with the EOR. In practice, enforcement of confidentiality and non-compete clauses can be difficult. Issuing of stock options and/or other employment-related incentives can also be difficult when using a EOR.

Perhaps most importantly, use of the EORs can, even where operated compliantly, create a permanent establishment risk for user organisations leading to a requirement to file for corporation tax and VAT in countries where the user is not registered for tax purposes.

Businesses should carry out commercial and legal due diligence before using an EOR and to negotiate favourable terms where possible. Use of EORs should be kept under review especially where permanent establishment risk is an issue.

Labour supply chain risk: regulatory updates to expect

There has been a lot of publicity recently about staffing supply chain risk. Growth in the use of contingent workers is now a feature of many workforces and looks set to continue with the increased use of gig workers and contractors. Wherever contractors are used, there will usually be a supply chain consisting of at least two or three parties – possibly more where a managed service provider agency is involved, and this will likely include an umbrella company (which are employment intermediaries, similar to US professional employer organisations/employers of record).

Umbrella companies should employ workers ensuring that the appropriate employment taxes and social security deductions are made in the jurisdiction in which the umbrella worker resides. However, compliance is not universal and some umbrella companies are involved in schemes that could amount to unlawful tax avoidance or evasion. In a call for evidence issued last year, the government noted that umbrella companies seemed to be the main conduit for disguised remuneration schemes, mini umbrella company fraud (involving NICs evasion and flat rate VAT fraud), payroll fraud (that is, just not paying tax), VAT exemption misuse and joint employment schemes. The intention set out in this call for evidence is to bring umbrella companies under a regulatory regime, which may potentially be the regime currently administered by the Employment Agencies Inspectorate (with associated criminal sanctions).

We are expecting an update on what those regulations will include this year, and we imagine these will cover non-payment of workers, skimming of payroll and non-payment of holiday pay. This may also include a licencing regime for umbrella companies (to help the organisations who rely on umbrella companies to pay their temp workers and contractors to be more assured of compliance in their supply chains), potentially with penalties for staffing companies and end users who do not use licensed umbrellas. This should mean that reputable staffing companies do not face unfair competition from less reputable ones who use "dodgy" umbrellas to undercut them on price. Any new regulation of umbrella companies is likely also to capture employer of record companies operating in the UK.

UK government consults on calculating holiday entitlement for part-year and irregular hours workers

Last year's Supreme Court decision in Harpur Trust v Brazel left staffing companies and their clients and users of part year workers potentially having to pay more holiday pay for "part-year" and "irregular hours" workers than for normal employees working the same aggregate number of hours. Following this decision, some now face the possibility of retrospective liability even where they followed Acas guidance on the topic.
The government has published a consultation on proposed changes to the statutory regime for calculating holiday entitlement for part-year and irregular hours workers to ensure that "holiday pay and entitlement received by workers is proportionate to the time they spend working". If implemented as proposed, this would effectively reverse the effects of Harpur Trust v Brazel. The consultation closes on 9 March 2023. See our Insight for more.

Looking ahead to 2023

As is already evident, 2023 is seeing more disruption to public services with continued industrial action across a number of sectors and which will inevitably have a knock-on impact on the wider workforce. The government introduced some reforms to existing strike laws in 2022, and the government has announced further legislative reform on industrial action and strike law, to enforce "minimum service levels" in vital public sectors.

Wellbeing in employment remains an important focus for both government, employers and employees. There are currently a number of proposed legislative reforms progressing through Parliament aimed at supporting employee wellbeing throughout employment, including extending the statutory right to request flexible working to all employees from day one of employment, a new right for carers to take a week's unpaid leave in a 12 month period, a right to a week's leave where a child receives neo-natal care, as well as an extension to the existing rules providing protection on redundancy for those on maternity leave, adoption and/or shared parental leave and to those who are pregnant or have returned to work from such family leave in the last 18 months. The government has also committed to the Department of Work and Pensions "thoroughly" reviewing "workforce participation" to understand the rise in economically inactive individuals which has been "seen particularly acutely within those aged over 50".

With the difficult economic climate looking set to continue and potentially worsen over the coming year, it is anticipated that redundancies will be a prevalent theme as companies restructure or put a hold on pay rises and additional perks previously introduced to attract talent in a competitive market (we are still awaiting the government's promised statutory code on fire and re-hire). Employers can expect to see more individual and collective grievances and we are anticipating new ways of working impacting on the issues arising in Employment Tribunal claims in this context; including disputes as to where an employee's place of work is on a redundancy, the reasonableness of the exercise of mobility clauses, compliance with consultation requirements and discrimination claims around the limitations on flexible working.

We are also expecting an important decision from the Supreme Court on the ongoing holiday pay litigation which could have significant repercussions for many employers. The government response to the consultation on non-compete provisions remains outstanding; but we anticipate business protection challenges remaining a pressure point for employers in the current market conditions, particularly with higher levels of remote working making monitoring and identifying potential risks arguably more difficult.

You can read more about the employment legislative reforms that are already proceeding through Parliament or that may be on the cards this year in our earlier Coffee Break.

Spotlight on mental health

Please see Health and safety. 

Changing ways of working: what next?

Please see Health and safety.