Contractors' Questions: Is my overtime rate being calculated unfairly?

Contractor’s Question: I operate via a limited company and have secured an engagement through an agency working 40 hours per week (referred to as ‘core hours’).

I’ll get paid an uplifted hourly rate compared to PAYE workers, reflecting the amount they save in not having to pay NICs or set aside holiday pay. I’m paid an ‘overtime’ rate after 40 hours per week at time and a half. But the agency have adjusted this rate downwards to deduct the percentage uplift attributable to holiday pay on the basis that holiday pay accrues only in relation to core hours. If it’s legal, isn’t this at least an artificial way to do it, which I should broach with them?

Expert’s Answer: The ways in which agencies establish a rate for limited companies, as opposed to or compared with the PAYE rate, are many and varied. Sometimes there is an element of sharing the saving on employers NI, but I have even seen cases where the agencies’ calculation of the limited company rate results in them paying a higher rate, compared to the total cost of employing someone on PAYE!

For an employee, the first four weeks of holiday required under EU law, should take into account voluntary overtime, if that overtime is regular enough to become an intrinsic part of their job, following the 2017 Employment Appeal Tribunal case (Dudley Metropolitan Borough Council v Willetts and others). Should the agency take that into account when setting the overtime rate? As you are not an employee, they don’t have to.

It is quite easy to get hung up on the justification of a rate when, in fact, it just needs to be a rate that works for both parties. If the level of overtime rate discourages you from working overtime, the end-client may be unhappy and the agency misses out on additional margin. Therefore, the agency might be prepared to negotiate a higher overtime rate. The contract they have with the end-client may have a similar reduction built in to the overtime rate, so they may not have much room for negotiation. Or, there may be other candidates prepared to take the contract at the offered rates.

At the end of the day, your company is entering into a commercial contract with the agency. They have their own way of calculating the rates they offer. If those rates aren’t acceptable, see if they will negotiate, or look for an alternative contract.

The expert was Graham Jenner, director of Jenner & Co, a chartered accountancy firm and business advisory.

Thursday 8th Feb 2018
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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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