Contractors' Questions: Was I misled about my recruiter's margin?

Contractor’s Question: As a limited company IT contractor, I’ve discovered a sizeable discrepancy between the rate which the recruitment agency claims they are charging the client, and the rate the client is actually paying.

The agency told me they are charging the client, say, £200 an hour, but I can prove that the client is paying the agency, say, at least £240 an hour. The agency told me initially and still assures me that its commission isn’t big enough to account for the difference. Also when I asked them, they answered away the gap in rates by attributing it to “holiday pay.” Is this a fishy explanation? If so, is there legislation to prevent such underhandedness? And from a legal/contractual standpoint, how should I broach or tackle the issue?

Expert’s Answer: In order to provide you with firm advice, I would need to see your contract and receive other information. However, in the absence of those, the following pointers may get things moving for you:

  1. Unless in your contract the agency gave you - the contractor - an assurance of what their margin or charge to the client was, it is unlikely that you would be able to show that there was a breach of that contract.
  2. As the contractor, if you can show that the agency mislead you in preliminary discussions as to their margin or the charge to the client, and you relied on what you had been told in taking your decision to enter the contract, there may be some grounds for treating that (misleading in preliminary discussions) as a misrepresentation.
  3. If so, then even a general provision in the contractor-agency contract excluding liability for misrepresentations would not let the agency off the hook for fraudulent misrepresentation – which this may be.
  4. The agency’s apparent ‘explanation’ (answering away the gap in rates by attributing it to ‘holiday pay’) makes no sense whatsoever to me. If it was ‘holiday pay’, in the contractor's shoes I’d be asking ‘where is it, when can I take the holiday?’  If there is an element of what is paid by the client that is intended to reflect holiday pay (for example, to ensure compliance by agency and client with the Agency Workers Regulations) then that should generally be paid to the company which is the worker’s employer, as part of the rate, and for the worker’s employer to administer payment of holiday pay. It needs to be seen to actually reach the worker.
  5. Consider - the client may be a more helpful avenue for you to explore. Sometimes, a client will engage an agency on the basis that they charge a pre-agreed margin;  if that was the case here, and if the agency has failed to honour this obligation, then (a) the client may have grounds for complaint, which may result in them putting pressure on the agency to put things right;  and (b) it may be that the contractor could have rights under the Contracts (Rights of Third Parties) Act 1999 (although such rights might themselves be excluded by the agency-client contract). But to explore these angles would require cooperation from the client, and sight of the agency-client contract. The upside is an agency interested in doing future business with a client will not want to be seen to be in breach, and should have some interest in putting things right - if they are in fact wrong.

As stated before these five pointers, the facts of your engagement need to be clearer if you’re seeking advice that you can act upon. My recommendation is that you obtain all the relevant details and evidence and hand both to a legal professional, so the full picture of your situation can be clearer and therefore advised on more precisely.  

The expert was Roger Sinclair, legal consultant at egos, a contracts advisory specialising in the IT sector.

Thursday 4th Sep 2014
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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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