Contractors’ Questions: Do two opt-outs affect if I can charge interest?

Contractor’s Question: I work as a contract designer with a limited company. But before I became limited I was under an umbrella company and signed up with a recruiter and agreed to 'opt out.' About a year later, they placed me for work but, by that time, I was already a limited company. I then had to refill out their online forms to ‘re-opt-out.’

For the final payment they were 19 days late, which to my understanding I am within my rights to charge interest on. But I want to clarify if this is the case, as I had to re-opt-out once I was already placed. Or does the initial opt-out under the umbrella company still stand?

Expert’s Answer: You are referring to the Conduct of Employment Agencies and Employment businesses Regulations 2003 (often called the ‘Conduct Regulations’).

These regulations govern the way in which what we commonly call ‘agencies’ work.  Strictly speaking, an 'Employment Agency’ finds people who will be engaged and paid directly by the client, whilst an ‘Employment Business’ engages workers itself, and hires them on to the client - and so payment is routed through the ‘Employment business’. But in common parlance we call them all ‘agencies’. In this response I actually mean ‘Employment businesses’.

Three parts of the regulations have particular relevance to contractors:

  • Regulation 6 makes it unlawful for the agency to impose a restriction on what the worker may do after the contract with the agency ends.
  • Regulation 12 makes it unlawful for an agency to withhold payment for time the worker has in fact worked
  • Regulation 32 gives workers operating through a limited company (I’ll call these ‘contractors’) the right to opt out of these regulations, if they so choose.  

Agencies like contractors to opt out. Then, they can impose restrictions - handcuff clauses - they can put conditions in the contract allowing them to withhold money in specified circumstances - and they can actually withhold money, if they think it suits their commercial interests to do so.

The Employment Agencies Act 1973 makes it an offence for an agency to breach these regulations. But if the contractor opts out, they don’t have to follow the regulations at all.

A self-serving myth has been created and perpetuated by many agencies. They like to scare you by telling you that if you don’t opt out, it will put you in greater risk of being inside IR35. If an agency tells you that, it’s nonsense. It is my opinion that whether you opt in or opt out, it will not have the slightest impact on IR35 status. Some agencies even tell umbrella contractors that - but forget to tell them that umbrella contractors are not subject to IR35 anyway, because they only receive taxable employment income, and possibly some reimbursed expenses. Many contractors still fall for the myth.

Let’s come back to opting-out. The effect of regulation 32(13) is that an agency cannot lawfully require you to opt out. Why would you want to? I’m still waiting for a persuasive answer to this question.

As to your specific points:

  • Your rights under the Late Payment of Commercial Debts (Interest) Act 1998 on overdue payments are unaffected by whether or not you opt out under the Conduct Regulations
  • Your opt-out with the umbrella would not be effective when you switched to your own company. If you wanted to opt out then, you and your company would have needed to opt out again, although whether that would have been effective if you had simply continued to work in the same role without a break is another question entirely, since for an opt-out to be valid, it must be given to the agency and notified by the agency to the client, before you are introduced or supplied to the client. And, from what you say, you were already there.

The expert was Roger Sinclair, founder of egos, a legal advisory to contractors.

Thursday 31st March 2016