Supply chain compliance: Certification of recruitment businesses
The competition between agencies to source the best contingent IT workforce is bigger than ever before. Equally, regulators are constantly looking to strengthen their rule book. Despite the great rewards for contingent workers[1], agencies and their clients, the regulatory landscape can be rocky at times.
The renowned law firm Baker Mckenzie has created an insightful heatmap that classifies the risks associated with managing a contingent workforce across the globe [2]. Three ‘high risk’ recruitment hubs on this heatmap are Germany, the Netherlands and the UK. In Germany, recruitment businesses who lease out employees need to be in the possession of an AUG license and there are significant repercussions for those companies who do not comply with the ‘Arbeitnehmerüberlassungsgesetz’.
The Netherlands is now also moving towards a process of certification. The Dutch Parliament has endorsed the proposal and it is now awaiting permission from the Senate. It is expected that intermediaries will need to apply for a certificate no later than 1 August 2024.
David Korthals-Clarke, Head of Compliance at Investigo summarises these proposed regulatory reforms and examines if this could inspire future change in the United Kingdom.
The proposed Waadi certification regime
The reforms do not come as a complete surprise. The Dutch already make it compulsory for labour hirers to be Waadi registered; foreign businesses included[3]. Moreover, end users and their managed service providers typically require recruitment businesses to be in possession of a G-account so that any tax and social security risks can be mitigated to the fullest extent. [4] After all, according to the concept of Dutch chain liability, every party in the supply chain can be held liable for unpaid tax and social security contributions [5].
The Dutch Government wants to take it a step further and improve the position of posted workers (especially migrant workers) and it aspires to create a level playing field for all intermediaries and hirers.
Under the proposed framework, the Dutch Government intends to introduce a new certification mechanism under which intermediaries will no longer be permitted to post workers without having (provisional) certification in place. [6] Equally, end users will no longer be allowed to pay workers through non-certified intermediaries. A certification body will be established and the rules will be monitored and enforced by the Dutch Labour Inspectorate (‘Arbeidsinspectie’). Whether the intermediary is located inside or outside the Netherlands is irrelevant. Both scenarios are caught by the proposed legislation. Furthermore, the Government is considering making the use of a G-account mandatory.
The obligation to have a certificate applies to employee labour leasing similar to the German system. However, this regime could stretch to work that has been performed by the self-employed where those workers are assigned to carry out work under the supervision and direction (‘leiding en toezicht’) of the end user. [7] Where the worker is not supervised and directed by the end user, Waadi and therefore the relevant certification regime do not apply. Equally, genuine outsourced services fall outside the scope of this certification requirement.
On a separate but related note, the Dutch Tax Authorities would certainly question how someone could operate as genuinely self-employed if they are subject to supervision and direction by the end client. DBA agreements[8] really make it clear this is not permitted and from a tax reclassification point of view this may open up a whole different can of worms. However, this is a separate conversation which will not be further entertained in this blog. Let us quickly move onto the elements of the certification process.
It is expected that the current requirements of NEN-4400 certification will continue to apply. Other than that recruitment businesses may also be subject to criminal record checks (‘VOG’), integrity (‘Bibob’), company and financial security checks.
As part of the certification process, the intermediary needs to demonstrate compliance with labour, payroll, tax and social security laws. This includes but is not limited to equal payment legislation, accounting for pension contributions and providing appropriate terms and conditions to workers. Health and safety requirements and right to work checks will also need careful consideration under the future certification regime.
Violations can result in an administrative penalty up to € 90.000. Equally, where non-compliance is detected, the Labour Inspectorate may order the intermediary or the hirer to cease its business activities.
If the law is implemented successfully, it could be an interesting case study for potential regulatory change in the UK. There are currently many calls for umbrella companies to become regulated but this is only one piece of the puzzle. Have we forgotten that many recruitment companies operate their own payroll these days?
The UK Conduct Regulations
Without going into too much detail, when one compares the Dutch Waadi legislation to its UK equivalent, the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (the so-called ‘Conduct Regulations’), some similarities can be spotted.
Both regimes apply to candidates who work under the control of the end user (article 1 Waadi versus section 2 Conduct Regulations), typically recruitment businesses cannot charge candidates a fee for their services (Article 3.1 Waadi versus Regulation 26 Conduct Regulations) and temp to perm fee restrictions (Article 9a Waadi versus Regulation 10 of the Conduct Regs) apply under both frameworks. So many things in common so why not inspire each other, one could argue.
The Conduct Regulations are enforced by the Employment Agency Standards Inspectorate. However, in its current shape, the UK Conduct Regulations are complaint-led, in principle no prior certification is required. [9]
Due to a high number of players and a relatively low level of enforcement, some businesses operate more compliantly than others. Important elements of recruitment compliance like the Agency Worker Regulations 2010 typically require input from the end user. However, compliance is often seen as a trade barrier and especially where competition is fierce things may be swept under the carpet.
Moreover end users may turn a blind eye to the implications of the revised 2021 UK Off-Payroll legislation (‘IR35’) by either not exercising reasonable care when making a status determination or not making a determination at all on the self-employed status of the worker. Recruitment businesses can be put in a difficult position, will they lose out on a great opportunity if they challenge the approach taken by their client? As they are the fee payer they typically carry the biggest risk as most end users would insist that the recruitment business provides an indemnity to the client in case HMRC comes knocking on their doors.
Certification, a way forward?
Certification can certainly overcome some of the issues. It will give recruitment businesses a valid excuse to remind themselves and their clients to follow the rules. After all, if they don’t then recruitment businesses would put themselves at risk of losing their certification. On the other hand, implementing and enforcing an effective licensing scheme will no doubt be a costly, time-consuming exercise. It will probably not be possible to monitor compliance with all the relevant rules. Choices will have to be made.
According to REC, the vast majority of the UK recruitment enterprises are micro-businesses with fewer than 10 employees, with 82% having less than £1m in turnover. Therefore any future certification regime would need to take into account that certification needs to be accessible and affordable. Small recruitment business need to have the resources, money and tools in place in order to obtain and maintain certification without undue disruption to their business operations. [10]
Nonetheless, the certification has the potential to create a level playing field for all recruitment businesses because end users should only be able to trade with compliant recruitment businesses.
Aside from certification, the implementation of the Dutch concept of ‘absolute chain liability’ could be another inducement for all parties in the supply chain to uphold supply chain compliance. How can any risks be mitigated? Ask the Dutch, they’ll tell you more about their beloved G-account.
For more information on the proposed legal reform in the Netherlands, please read:
[1] The word ‘contingent’ is used as a catch-all phrase for any worker who is not on the company’s permanent payroll. Contingent workers go by all sorts of names: freelancer, agency workers, limited company contractors, subcontractors etc.
