Opting out is an ambitious contractor's simplest course

They might have turned six years old this month, but the 'Agency Regs,' to use contractor parlance, are still a source of confusion for IT contractors. Here, David Buckle, head of employment at Cubism Law, gives CUK an overview of the regulations, including their implications under IR35, and what they mean for contractors using agencies, as well as contractors providing other contractors.

Who the rules apply to

The wonderfully named Conduct of Employment Agencies and Employment Business Regulations 2003 apply to "employment agencies" that introduce workers to a client who then contract directly with the worker (i.e. recruitment consultancies) and "employment businesses" that enter into contracts with workers and supply their services to a client (i.e. agency companies).

As a result of these definitions, the regulations can also often affect contractors. They generally apply in two situations:

- When contractors/their service companies are supplied to a client through an agency or other third party (including, potentially, their own service company).

- When contractors supply another contractor/service company/employee (for the sake of this article a "subcontractor") to, say, assist with the project they are on.

Know your rights

In the first situation, the Regulations may be a good thing. The contractor gains additional rights, such as they cannot be forced to take up any additional services from their agencies, any terms they agree with the agency should be in a single document and any changes to that agreement should be agreed in writing. Also contractors should not suffer any detriment if they decide to work through another agency; they are entitled not to be introduced to a client unless the agency has ascertained certain information (e.g. the identity of the client, the type of work, hours and qualifications required and the expenses payable) and, where payment is processed through an agent, the agent is obliged to pay the contractor even if the client does not pay.

Know your obligations

In the second situation, the contractor has probably taken the step of expanding his/her business and becomes the agent. The rights under the Regulations then become obligations on the contractor. These obligations include the contractor confirming their terms of business in writing with any subcontractor; not entering contracts on behalf of the subcontractor without authority, not charging the subcontractor for finding them work (except in limited circumstances) and having to explain the type of work the contractor will find/seek for the subcontractor. The contractor would also be obliged to pay the subcontractor even if the client does not pay. There is also the chance that any restrictions on a subcontractor working direct for a client are void.

In addition to the above, the contractor also gains obligations to the client. The contractor would be required to vet the subcontractor: they must confirm the subcontractor's identity and that they have the qualifications, training, experience and/or references required. The contractor must also notify the client about all their charges and will be restricted to a limited "quarantine" period on any charges to the client if the subcontractor tries to cut them out and work direct.

These obligations are in addition to any other requirements that may fall on the contractor, such a PAYE and employment obligations when the subcontractor will be an employee.

'Ltd' can Opt-Out

On a lighter note, the Regulations allow for an opt-out when the subcontractor is a limited company (i.e. a service company). This means the above obligations can be avoided. To properly opt out of the Regulations, the subcontractor (and their service company) must have given notice to the agent of the opt-out before any contract starts and the client must have been informed of the opt-out. These requirements are not often complied with. It is also optional for the subcontractor to opt-out: it should not be a condition of any agreement to supply services. Often however, the subcontractor can be persuaded to agree to this as it can help with any IR35 assessment.

Due to the nature of the Regulations, should contractors be looking to expand their business by supplying others, the simplest way is to agree to subcontract to other service companies and apply the opt-out. This avoids the hassle employing others and, more importantly, avoids these Regulations.