Who do employment businesses employ under a contract of service and why does this matter

30 June 2021

Provision of temporary labour - who do employment businesses employ under a contract of service and why does this matter?

Employment businesses use many models for the provision of temporary labour. Those who supply agency workers are among the more heavily regulated, in terms of their people engagement and pay arrangements.

Employment status background

Regulators currently use disclosure-based regulation as an information tool. The Companies Act requirements for company accounts to disclose workforce numbers and cost, plus the different accounting, auditing and corporate governance reporting requirements depend on workforce size as well as financial metrics. This is a challenge for employment businesses, because their own workforce numbers may be low, but when their labour supply workforce is added they hit the metrics. This results in a higher level of reporting than their in-house staff numbers alone would require. 

However, there is a distinct lack of clarity for suppliers of temporary labour in terms of which categories those who are on their payroll, but working for their clients, should be counted as.  Both the Companies Act 2006 Section 411 and the regulations for the differing types of reporting use the term: “employed under contracts of service by the company” in the criteria to determine which employees are in scope. 

Government guidance on Corporate Governance requires a statement in the directors’ Report about the corporate governance arrangements applied by the company which fits the Wates principles. It doesn’t confirm how headcount of UK employees should be calculated, so it makes sense to apply the guidance for regulation 17 consistently with regulation 14. This specifies:

'Q5. Do agency staff, contractors and staff on zero hours contracts count towards the total? All persons who have a contract of service with the company should be included, regardless of the hours they are contracted to work, other than persons employed to work wholly or mainly outside of the UK. This is unlikely to include persons employed under contract by another organisation, such as an agency or a contractor.

Q6. What about individual contractors or consultants who have a personal contract with the company? Persons working as contractors or consultants for the company (whether in a self-employed capacity or not), who may also contract for services to other companies, would not typically be identified as employees under contract of service with that company.'

Support from other employment business regulation

As the agency worker sector is highly regulated, those employed under a contract of service may well have already fulfilled the necessary assessment for accounting purposes, because they have had to do so under other regulations.

Since 6 April 2020, all employment businesses are required to provide agency work-seekers (and in some circumstances any person to be supplied by the work-seeker to do the work) with a key information document (KID), before agreeing the terms by which they will undertake work.

That KID must include whether the worker is employed under a contract of service or apprenticeship, or a contract for services. The employment business must keep records of any finalised key information document given to a work-seeker and, where applicable, to a worker.

Recommended next steps

1. A review of the KID and employment statement process and the Government guidance examples for The Companies (Miscellaneous Reporting) Regulations 2018 should help you ascertain who is employed under a contract of service under the Companies Act, and the number of employees to use when assessing which financial statements reporting model to adopt.

2. We would also recommend your auditors ensure employment businesses are consistent in the treatment of personnel across the two areas of regulation, covering notifications of status to individual personnel and those businesses’ own financial reporting criteria.

If you need help with any of these areas, please contact Carolyn Brown for support.