EU Agency Workers Directive may prove hard to enforce.

Barry Roback, Chief Executive, JSA Services Limited, specialist accountants for IT contractors, warns that the latest proposed piece of Brussels legislation could play havoc with the market for temporary workers. If contractors wants to retain the emotional and financial benefits of independence, they must acquaint themselves with sufficient knowledge of both tax and employment legislation to ensure they do not get trapped in the EU/Treasury pincer movement.

It is regrettable, but many of our mainland European cousins find the concept of self-employment hard to grasp. The French, in particular, appear to have turned it into a bureaucratic nightmare. Derived from the Napoleonic concept of master/servant, many Europeans still find it hard to believe that someone might actually choose to work outside a PAYE system. This is reflected in the fact that private pensions are relatively rare in most EU countries since everyone expects the state to provide generously. The latest piece of proposed legislation from Brussels - the EU Agency Workers Directive - is part of this overall trend to blur the lines between permanent and temporary staff and which could have a significant impact on white collar professionals. Admittedly the legislation is still under debate, but if past form is anything to go by, it may well be on the statute book in the not so distant future.

This directive attempts to give temporary staff the same rights as permanent workers after only six weeks in employment. The UK government, which originally opposed the proposals, has now given its tacit approval but is fighting for a number of amendments and exclusions before enactment. Most notable of these is to delay the effect of legislation by six months from the contract start date and the exclusion of Limited Company contractors form the legislation.

Many agencies predict that the legislation will dramatically increase the cost of recruiting temps, fearing amongst other things that some companies may be tempted to change their agency staff every six week. Some agency chiefs say that instead of some temporary jobs being a platform into permanent positions, temps will constantly be reassigned, as clients will not want to take the risks involved with offering permanent employment rights to a temp, wiping out these opportunities altogether.

Fears have also been expressed that temps would be entitled to the same benefits including pay, fringe benefits and possibly pension and share option rights as comparable permanent employees. They would also be entitled to redundancy and unfair dismissal protection like that enjoyed by permanent employees.

Another area of concern is the type of mechanism that would be necessary to give temps pension rights equivalent to those enjoyed by comparable permanent workers. This could be a very difficult issue for end users still operating final salary pension schemes, and it is likely that major users of temps may well be forced to reduce benefits for 'comparable' permanent employees. Despite all these proposed additional benefits, under the draft legislation, temporary staff would still be able to leave their post without notice whilst still being entitled to the same benefits as their permanent counterparts, such as sick pay, holiday, employment rights and financial rewards. Hardly an even-handed arrangement!

As always with any piece of proposed legislation, the pros and anti's always take extreme positions. In reality, the position of high-end contractors, particularly those operating as limited companies, is unlikely to change, particularly if they currently escape IR35. This is because limited company contractors will probably not fall within the protection of TAWD anyway. Even if the UK Government does not successfully insist on an express exclusion of limited company contractors, the practical difficulties of drafting legislation which effectively covers limited company contractors will be very difficult to achieve.

Probably the most difficult part of the proposed legislation to enforce will be the comparator mechanisms. This has already been tested and found wanting by the European Court of Justice regarding the similar Part Time Workers Directive legislation, in which part timers must be paid pro rata the same as their full-time colleagues doing equivalent jobs. In a recent case brought by the Dutch, The European Court said it was very difficult for an employer to identify a permanent worker whose job was strictly comparable with that of a part time employee.

So what action should contractors and agencies now take? The answer is probably not a lot at this stage. Limited company contractors can probably breathe a sigh of relief and forget all about it - although nothing is certain where Brussels is concerned. Nonetheless, all contractors need to be aware of the increasing difficulties of defining "self-employment", even if they do not fall under IR35. They should always look carefully at any contract offered, particularly since a recent Court of Appeal ruling in the case of Brook Street v Dacas has to some extent already pre-empted some of the proposed directive. This case involved an agency worker, who worked for the same client for four years, after which she was dismissed. She claimed unfair dismissal, both from the agency who had placed her there, and the client for whom she had worked. The original tribunal found she was employed by neither, so she appealed against the ruling that she was not employed by the agency. After much consideration, the Court of Appeal decided that there was no implied contract of employment with the Agency. BUT, had they been asked to, they would have ruled that the client was deemed to be the employer!

There is little doubt that employment legislation is becoming increasingly complex, and if contractors wants to retain the emotional and financial benefits of independence, they must acquaint themselves, preferably with the help of a specialist adviser, with sufficient knowledge of both tax and employment legislation to ensure they do not get trapped in the EU/Treasury pincer movement.

Barry Roback, JSA Services Limited

Friday 11th March 2005