Introduction
Go back a few years, and most recruitment directors would have reacted to the notion of a PSL
with a nonchalant shrug of the shoulders.
Until relatively recently, many staffing businesses were largely oblivious to the financial and
legal risk that operating without a PSL left them open to, and unaware of the power of a PSL to
mitigate that risk. Other agencies realised the need for a PSL, but thought the whole process of
constructing one would be too time consuming.
Fast forward to the present day, however, and legislative changes and market trends mean a
growing number of agencies are embracing PSLs – and finding that doing so can bring genuine
business benefits. Indeed, an agency that doesn’t have a PSL in place may well find it is now the
exception rather than the rule. There is a danger that such an agency will not be working as
The basics of PSLs
At its most fundamental level, a preferred supplier list is a means of protecting a recruitment
agency’s business. Creating a robust, effective PSL will equip an agency with a valuable
understanding of how its supply chain works. Specifically, it enables the agency to ensure that its
providers are:
•
Compliant;
•
Financially robust; and
•
Genuine ‘employers of record’ for flexible workers.
The process of devising and implementing a PSL involves spending valuable time carrying out due
diligence into your current and potential providers. However, when executed properly, a PSL
allows an agency to embed a pro-active rather than reactive approach to supply-chain
management. Taking control of a previously disorganised and even chaotic relationship means the
agency’s finances and reputation can be safeguarded to an extent that was previously
Why are more and more agencies putting PSLs
in place
?
There are several factors at play when it comes to the increasing use of PSLs by recruitment agencies. These include:
1. Legislative changes
• Auto-enrolment – Pension auto-enrolment is arguably the key driver in the growing usage of PSLs at the time of writing. Naturally, agencies do not want to be dealing with 80 or 90 providers with different staging dates, given the ongoing administrative headache this would cause. Even more significantly, auto-enrolment means that, now more than ever, an agency has to be certain that any given provider is the true employer of record for its
contractors in the eyes of the law.
If a provider cannot demonstrate that it is the employer of record for a contractor or flexible worker, the agency or its client could be left to pick up the tab for that worker’s pension. Carrying out due diligence into the true nature of the employment contracts offered by providers – a key element of the PSL implementation process – is therefore arguably more important for agencies than ever before. Auto-enrolment means end clients are taking a greater interest in the pension and contractual arrangements of agencies and their suppliers. An agency therefore needs to be able to demonstrate that it has a solid grasp of its providers’ position and liability with regard to
auto-enrolment.
See page 10 (Do your providers offer contractors a true contract of employment?) for more information.
• AWR – The introduction of the Agency Worker Regulations (AWR) in October 2011 convinced many recruitment
Why are more and more agencies putting PSLs
in place
?
2. New focus on risk mitigation
• Financial – The umbrella and professional employment organisation (PEO) market has come a long way in recent
years. The creation and evolution of the Freelancer and Contractor Services Association (FCSA), for example, has marked a step change in standards and compliance. However, you don’t have to look too far back to find examples of providers who, through poor management and bad financial practices, have gone to the wall, leaving recruiters and their end clients carrying the can. On many such occasions, the recruitment agency has effectively been forced to pay its contractors’ wages twice. Carrying out comprehensive financial audits into providers – a crucial element of creating a robust PSL – significantly reduces the likelihood that an agency will find itself in such a scenario.
• Reputational – At a time of heightened media scrutiny of unethical offshore umbrella companies, agencies that work
with such organisations are themselves at risk of becoming embroiled in controversy. Unfair as it may seem, the perception of guilt through association is a very real danger for agencies working with umbrellas at the less
Why are more and more agencies putting PSLs
in place
?
3. Greater awareness of commercial benefits
• Smoother systems – Drawing up a PSL made up of a limited number of providers can enable an agency to develop
more efficient ways of working, both from an administrative and a procedural perspective. As your providers
become trusted partners, slick and efficient systems and procedures evolve, delivering time-saving benefits for you and your clients. Examples of areas where efficiencies can be achieved include invoicing, timesheets, payments processing and contracts.
• Corporate values – As everyone working in recruitment knows, end clients are increasingly interested in an agency’s
corporate governance policies and corporate social responsibility (CSR) credentials. If you meet the client’s criteria, it naturally follows that they will be keen to find out if your various partners in the supply chain meet the same high standards. A PSL will enable you to monitor the CSR activities and track record of your providers, ensuring that their corporate values match your own.
• Clarity – If you don’t have a PSL in place, who within the agency is currently making decisions on who you work
What should I consider when drawing up a PSL?
So, you’ve decided to draw up and implement a PSL. Here are six questions that we recommend you bear in mind during the process:
1. How financially stable are the providers on your list?
Carrying out in-depth research into a provider before adding it to your PSL should be fairly straightforward, and the time investment is well worth it in the long run. If the organisation has nothing to hide, it should be forthcoming with the information in any case.
What should I consider when drawing up a PSL?
2. Are the providers on your list compliant and ethical?
Although leading industry names such as Parasol are working hard with HMRC to stamp out unethical practices in the flexible workforce management sector, they unfortunately still exist.
The truth is that if your provider is partaking in such practices, your business is at risk. Are your providers making wild claims about expenses dispensations? Do they make unrealistic statements about how much pay your
contractors can take home? Remember: expenses dispensations are administrative tools, not something to be used to mislead contractors and leave your business vulnerable.
Some companies will offer a free service for contractors, perhaps at the same time as offering you a referral incentive. Ask yourself where the money is coming from to fund this.
Some providers will also push your contractors into a ‘one-man umbrella’ model which allows contractors to take advantage of the flat rate VAT scheme. The financial advantages aren’t always passed on to the contractor, however, and the provider may be abusing the scheme for its own financial gain.
What should I consider when drawing up a PSL?
3. How are your providers structured?
It’s no secret that some recruitment agencies run their own umbrella services. Some of these companies will request that you remove any non-solicitation clauses from your contract with them, so they can pass your contractors’
details on to the recruiter parent company – not something you want to see when it’s time to renew your contract with your client and the other agency undercuts you.
It’s also worth looking into whether any of your providers are wholly or partly based overseas. As we have seen recently, the government (and indeed the media) is taking an increasingly hard line on aggressive tax avoidance. The coalition is determined to clamp down on the use of offshore schemes and, in some cases, apply retrospective taxation. An unscrupulous umbrella company could disappear at the click of George Osborne’s fingers, leaving you with a hefty bill for the unpaid tax of your contractors.
What should I consider when drawing up a PSL?
4. Do your providers offer contractors a true contract of employment?
Who takes sole responsibility for your contractors’ employment rights? In other words, who will fight your if there is a contractual dispute or employment tribunal? What actually happens when your contractors or temporary workers require HR support, or when a legal issue needs to be addressed?
This is where professional employment organisations such as Parasol step in with robust, overarching employment contracts that are backed by case law. With this in place, your contractors are legally the employee of your umbrella company. If a dispute does go to tribunal, you and your end client have no liability. There is therefore no danger that your reputation could be tarnished.
The provider is also responsible for ensuring that all relevant insurance policies for the contractor, such as
professional indemnity insurance or public liability insurance, are in place. If there is no overarching contract of employment in place, it becomes extremely difficult to prove that your provider is the contractor’s legal employer. This in turn makes it difficult to legally allow employees to claim tax relief on their expenses.
Does the provider work on a three-way contract basis? If so, this could significantly increase your exposure to risk. Three-way contracts mean that, in the event of a dispute involving your contractor, it’s again very difficult to prove who the employer is. By ensuring that the single contract is between yourself and your provider, and that the
What should I consider when drawing up a PSL?
5. Are you at risk from the Bribery Act?
The practice of offering incentives in this market is as old as the market itself. However, under the Bribery Act 2011, if a provider offers you an incentive and you accept, you could be held legally accountable from both a corporate and personal perspective. The maximum punishment for getting this wrong is 12 years in prison. Having a robust PSL in place, along with a transparent rationale for selecting your providers, will enable you to demonstrate that there has been no undue influence in the event of an investigation.
6. Do your providers’ credentials stand up?
As noted earlier, there have been some high-profile failures of umbrella companies. Many had the backing of industry organisations, and proudly displayed ‘kite marks’ on their websites and in corporate literature. In these circumstances, the accreditation ultimately counted for nothing.
There is only one independent accreditation body that has the backing of HMRC, PCG, APSCo and the CBI, and that is the Freelancer and Contractor Services Association (FCSA).
The FCSA has introduced a strict and transparent code of conduct for its members, which includes rules on financial stability. The code is backed by an ‘open-book’ policy and an annual independent audit by one of the ‘Big Four’
