Contractors’ Questions: Will the Swedish Derogation model boost my pay?

Contractor’s Question:  Is working through an umbrella company going to be more financially rewarding from October 1st, when the Agency Workers Regulations (AWR) take effect, as I understand umbrellas who apply the Swedish Derogation model will pay their workers in between jobs; when they are NOT actually working?

Expert’s Answer: The AWR stem from an EU-led piece of legislation aiming to ensure temporary agency workers receive the same benefits from their clients as their directly employed colleagues enjoy. 

But in the consultation period for the legislation, the Swedish delegation negotiated an 'Opt Out' from section 5 of the legislation relating to equal pay, which has commonly become referred to as the 'Swedish Derogation' model.

Swedish Derogation Model

If an umbrella company providing agency workers to an agency can demonstrate that certain circumstances have been met in their relationship with the agency worker, then the Swedish Derogation model can apply and the agency becomes exempt from the basic pay regulation.  These circumstances are:

  • The agency worker must have agreed to sign an ongoing, permanent employment contract with the Umbrella Company prior to their first placement
  • The agency worker must be paid in-between assignments - even if they are not generating income for the umbrella company
  • Where an agency worker is between assignments, they must be paid at least 50% of their contract rate (the highest rate of pay received in the previous 12 weeks of work and  at least at minimum wage) for at least 4 weeks before a contract can be terminated, unless the employee resigns.

Pay Between Assignments

While this may sound fantastic on the surface, when you look a little deeper it doesn't look quite like the golden ticket it may have first appeared. Where the above circumstances are in place, the following issues may arise:

For Agency Workers who are PAYE

In return for accepting up to 4 weeks of 50% normal pay between assignments, an agency worker will give up the right to get equal or higher pay if their contract were to last more than 12 weeks.

In order for their agency to be able to cover this 'pay between assignments', they would have to reduce the agency worker’s normal pay to hold back sufficient funds for this pay should they find themselves out of assignment.  

If the temp does not have a 'between assignments' period off work, then they will be entitled to the deductions made from their pay to be paid back to them. It is unlikely that agency workers will like this model, as for the same income, albeit spread over a slightly longer period, they give up the right to be paid more.

For End Clients

On the whole we do not see this as a major concern for end-clients.  Most agency workers not only work alongside permanent staff under the same conditions, but many are even paid at a higher rate than permanent colleagues as is the nature of temporary work.

For Temporary Worker Agencies

Agency IT software providers will need to build in pay variables to cost for those agency workers who are working beyond the 12 week qualifying period so as to ensure the pay and holiday pay is in line with that of the client's permanent staff carrying out similar roles.  This will be required regardless of the Swedish Derogation model being adopted as only basic pay will be exempt.

For Umbrella Companies

In order to achieve the conditions of the Swedish Derogation and so exempt the agents and clients from complying with the equal pay element of the AWR, the umbrella company is going to have to take from the agency worker with one hand, and give back with the other. They may either have to raise their weekly fees to the contractor or hold back some of the agency workers’ salary to pay it back to them during the 4 weeks in-between assignments.

Where temps working under the Swedish Derogation do not have gaps in their placements, the Umbrella Company may profit from the funds held back for the potential 4 week gap.

So overall, the Swedish Derogation is only likely to apply where there is a large pay discrepancy at the end client company between temporary workers and permanent employees. 

As all the other AWR conditions (such as holiday entitlement, working conditions, bonuses and access to client job vacancies and facilities) must still be complied with, and as there will be resistance on the part of agency workers to accept less money and less rights, we foresee plenty of reasons against it becoming a mainstream model.

The Expert’s Answer is based on guidance and commentary issued by Nasa Consulting, a provider of contractor services.

Friday 3rd June 2011