Payment services reform poses challenge for Europe's people platforms, MSPs and payroll companies

Proposed changes to European payments legislation will tighten up an exemption relied on by many people platforms, managed service providers (MSPs) and payroll providers that make payments to workers (or intermediaries via which workers are engaged) in the EU.

The European Union is updating its regulatory regime governing payments and electronic money. Change is needed in order to reflect technological and commercial developments since the previous legislation was passed, iron out inconsistencies between payments and e-money legislation and ensure a more consistent application of the rules across all EU Member States.

If the reforms are passed, the changes will make it difficult for these platforms and providers to rely on the commercial agent exemption as their basis for making payments in the EU, unless they make major changes to their business models.

Proposed changes

The existing legislation is to be replaced by three proposed changes. A new Payment Services Directive – to be known as PSD3 – will set out the thresholds that payment and e-money providers need to satisfy to become authorised and continue in business. A new EU Payment Services Regulation (EU PSR) will also govern how payment and e-money providers conduct their businesses, alongside a new regulation setting out a framework for financial data access or FIDA.

The proposals were published in June 2023 and, following negotiation and amendment, they are likely to come into force in late 2024 or 2025 and take effect within the EU in 2026 or 2027. However, these changes will not automatically apply within the UK although they have an indirect impact on UK businesses.

Areas of reform

It is currently and will remain an offence to provide regulated payment services in the EU without being authorised, registered or exempt.

At present, many people platforms and payroll providers that are making payments to workers in the EU are not authorised or registered. Instead, they rely on the commercial agent exemption, arguing that they are acting on behalf of the payer – that is,  the hirer – when making payment to the worker.

Many MSPs also rely on the exemption when clients ask them to facilitate payments to contingent workers, including those in countries where there are chain leasing laws (which prohibit them from being in the contractual supply chain between the hirer and local second-tier staffing company).

Interpretative harmony

Different member states have applied widely divergent interpretations of when the commercial agent exemption applies. EU PSR will impose harmony and, in doing so, may close that exemption to most people platforms, MSPs and payroll providers.

Regulation 2(2)(b) of the EU PSR will limit the exemption to those situations where the following three tests are satisfied:

• The payment is made from the payer – that is, the hirer – to a payee (in this case the worker or, in the case of an MSP, a second-tier staffing supplier) through a "commercial agent", as defined in article 1(2) of the Commercial Agents Directive (86/653/EEC), namely: "a self-employed intermediary who has continuing authority to negotiate the sale or the purchase of goods on behalf of another person, hereinafter called the ‘principal’, or to negotiate and conclude such transactions on behalf of and in the name of that principal".
• The commercial agent is authorised in an agreement to negotiate or conclude the sale or purchase of goods or services on behalf of either the payer or payee (but not both of them), irrespective of whether or not the commercial agent is in possession of the client's funds.
• That agreement gives the payer or the payee a real margin to negotiate with the commercial agent or conclude the sale or purchase of goods or services.

Exemption crackdown

Effectively, the EU PSR will crack down on two scenarios where the EU believes that the commercial agent exemption has been abused.

Firstly, where the agent does not have a true ability to negotiate and conclude contracts on behalf of its principal.

Secondly, where a platform imposes its own standard terms on its users, so that neither the buyer of the services (the hirer) nor the seller (the worker) has a real opportunity to negotiate the sale and purchase agreement (the contract for services) with the other. The preamble to EU PSR expressly calls this out: "Electronic commerce platforms that act as commercial agents on behalf of both individual buyers and sellers without buyers and sellers having any real margin or autonomy to negotiate or to conclude the sale or purchase of goods or services should not be excluded from this Regulation."

Under the EU PSR, the European Banking Authority will issue guidelines establishing the scope of the new commercial agent exemption and provide examples and use cases. This could be useful practical guidance for market participants.

Impact of three-limb reform

In order for the commercial agent exemption to apply, all three limbs of regulation 2(2)(b) of the EU PSR must be satisfied. Few people platforms, MSPs and payroll providers are likely to fulfil all three limbs.

It is difficult to see how most payroll providers could rely on the re-scoped exemption as they are rarely involved in the underlying negotiations for the supply of the worker's services to the hirer (that is, the second limb).

MSPs may not be as exposed to the second limb but will need to ensure their use of the exemption is still valid and, in particular, that they have a true ability to negotiate and conclude contracts on behalf of their principals – there may be situations where they are just a conduit via which hires and payments are made on pre-approved terms issued by the hirer without the MSP actually negotiating any aspect of the contract with the worker (or intermediary via which the worker is engaged).

The third limb means that the exemption will not be available to people platforms, MSPs and payroll providers that impose their standard terms on users – this would make it difficult to demonstrate that the hirer or worker/intermediary (as applicable) has the required "real margin" to negotiate with the people platform, MSP or payroll provider.  

Osborne Clarke comment

Regulators in some Member States (notably Germany, France and the Benelux countries) have applied a stricter interpretation of the commercial agent exemption for many years. People platforms and payroll providers doing business in those countries may not see much impact from this reform, as they are unlikely to have relied upon the exemption in order to operate in those countries.

However, people platforms, MSPs and payroll providers that have previously relied on the exemption in order to facilitate payments for EU-based hirers or to make payments to workers (or to the intermediaries via which workers are engaged) in the EU should seek legal advice and revisit their business models in order to remain compliant with the PSD3 reforms.

Many people platforms and payroll providers that operate in both the UK and across the EU for their clients are likely to adopt a standardised approach for both areas. This means that the PSD3 reforms could indirectly impact UK operations as firms look to mitigate the burden of running different models in different countries.

With payment specialists across the EU and expertise in the challenges faced by people platforms and payroll providers, Osborne Clarke is well placed to advise on the impact of the PSD3 reforms in the sector and to suggest a range of potential solutions. Please contact our experts listed below for further information and discussion about the potential impact of these proposed changes on your business.