There are a few options for a recruitment agency with respect to how it applies AWR to LCCs:
(a) Treat all LCC as out of scope of AWR
(b) Treat all LCC in scope for AWR
(c) Make a determination whether a LCC is in or outside of the scope of AWR (whether using internal test or external test arrangement)
(d) Let the LCC determine their status for AWR
(a) The more aggressive position that a recruitment agency can take bearing in mind that it is not a foregone conclusion that providing services through a LCC will meet the requirements of Reg 3(2). On the basis that the recruitment agency will not be undertaking any compliance under AWR the risk of failing to comply with AWR will fall squarely on the recruitment agency.
(b) The safest position from a recruitment agency perspective, although it may not be the most commercial or the most popular amongst LCCs if LCCs consider themselves as genuinely self-employed and have structured their business on the basis they believe they are outside of IR35. Treatment inside of scope of AWR may be viewed by some LCCs as a potential threat to their IR35 status and to force this position onto LCCs may make the recruitment agency less competitive in the market place.
(c) A balanced position although it may not be a commercially viable position to maintain. The administration of attempting to develop and administer a test internally is likely to be costly as would utilising an external provider to undertake such a process. If the recruitment agency assesses the AWR status incorrectly the potential exposure of failing to comply with AWR rests with the recruitment agency.
(d) A balanced position if you share the view that a LCC is a business in its own right and is responsible for making decisions as to how it wishes to operate and therefore should be entitled to determine its own status from an AWR perspective without any decision being imposed on it from a third party. If a LCC confirmed it was outside of scope for AWR purposes the recruitment agency would still be at risk of liability for failing to comply with AWR if the individual decided later on to go against its earlier declaration as to its LCC status and the individual made an AWR claim.
My personal view
(d) is really the most sensible and balanced position to take for agencies (with the exception of high street/general staffing agencies who may be supplying low level workers through LCC’s currently). It makes sense to allow an LCC to make the determination itself, given they control and run their own business. I do not believe it is the recruitment agency’s responsibility to tell a LCC how to run their business or to try and force their own view of AWR or IR35 onto the LCC. Agencies certainly didn’t impose views on IR35 prior to AWR (but perhaps would have given basic guidance on IR35 indicators) and should not really be lured into doing this simply due to the introduction of AWR.
What are other agencies doing?
Whilst it is difficult to generalise general administrative/low level agency supplies tend to treat LCCs in scope of AWR on the basis that they believe it is fairly clear looking at the assignments at face value that the assignments do not comply with Reg 3(2). With respect to mid – high end assignments, most agencies have formed a view with respect to a position that is consistent with (d) albeit some agencies have taken the decision to still ask clients for information on AWR to make a basic background risk assessment as to any potential exposure in terms of relevant terms and conditions so only partially benefiting from a reduction in administration process.
Assessing and mitigating risks
When dealing with LCCs, arguably the potential risk of an AWR claim is akin to a risk of an employment status claim.
It is still unusual to see individuals who have spent time and effort in establishing their own business through an LCC and bear costs in maintaining that LCC to seek to make employment status claims at a subsequent date and equally unusual for courts to seek to imply a contract of employment where there is a perfectly adequate contract between the agency and the LCC (unless there are exceptional circumstances to the case).
Possibly the risk of a claim may be greater if the LCC has supplied the individual for some period of time (extreme example 10 years+) to the same client, perhaps a termination is not handled correctly or the LCC has been the subject of a formal review by HMRC and has been found to be within IR35.
Provided your contract with the LCC creates a business to business relationship and provided your client does not treat the individual in a manner which contradicts this position (and which could then affect an LCC’s IR35 argument), in theory the risk should remain low.
It is also important to remember that the standard time period during which an individual can bring an AWR claim to an employment tribunal is set out in Reg 18. Yes, rather convoluted but you can take a broad brush approach and take the position that an individual will have 3 months from the end of an assignment to bring a claim that there has been an infringement of AWR. Reg 18(5) does give the tribunal discretion to consider a complaint outside of the statutory period if it thinks it just and equitable so this has to be borne in mind.
There are potential ways to mitigate this risk as there are with respect to employment status claims, which invariably come down to ensuring that the LCC contract has indemnities with respect to AWR claims included and a fall-back position in the contract i.e. that notwithstanding any status declaration by the LCC any contract rate will be deemed to include AWR entitlements. The devil as always is in the detail of these terms.