A compliance tug of war will reshape recruitment liability. Here’s why

A legislative tug of war is poised to reshape the UK recruitment landscape, whereby contractor recruitment agencies will be placed at the centre of two competing regulatory forces, writes Paul Bygraves, a director of contracting and accountancy firm Sapphire

The government’s tightening compliance grip threatens to leave agencies exposed…

As the government accelerates plans to strengthen worker protections, including for contractors, employers are facing increased accountability.

At the same time, new tax compliance rules targeting umbrella companies from April 2026 are poised to shift liability up the supply chain.

The result of the Employment Rights Bill and umbrella company tax compliance legislation coming into force pretty much together? A tightening compliance squeeze, and a sharp increase in exposure for recruitment agencies.

The stakes are high. We believe financial liability, legal scrutiny, and reputational damage are all on the table if agencies don’t adapt quickly, but also carefully.

Top 4 Employment Rights Bill measures impacting contract work

The Employment Rights Bill (ERB) is designed, in part, to extend greater protections to temporary and contract workers.

Four protections in particular:

1. new rights to statutory sick pay from day one;
2. new rights to guaranteed hours;
3. expanded parental leave, and;
4. safeguards against unfair dismissal.

While these changes may be welcome from a worker welfare standpoint, they place more direct responsibility -- and cost -- on the shoulders of employers, including recruitment agencies.

The knee-jerk of PEO/umbrella companies looks far from risk-free

As a result of the ERB, many agencies are turning to umbrella companies or Professional Employer Organisations (PEOs) to reduce the number of workers on their own payroll.

But that strategy appears to bring fresh risks of its own.

From April 6th 2026, under proposed reforms currently being finalised by the government, recruiters are expected to be held jointly and severally liable for unpaid tax contributions if their umbrella company partner fails to operate compliantly.

The plans preclude a ‘statutory defence,’ meaning recruiters will not be able to plead ignorance or point to outsourced relationships. If there’s non-compliance, the agency is likely to be held responsible.

This is where the true compliance tug of war begins.

Why? Well, on the one side, agencies are being pushed to absorb more employment responsibility. On the other, they face steep penalties if they outsource that responsibility to the wrong provider.

Why Preferred Supplier Lists alone won’t offer protection

It’s tempting to assume that agencies can simply direct contractors to their existing Preferred Supplier Lists (PSLs).

But recent history suggests otherwise. Investigations have revealed contractors being chased by HMRC for tax repayments -- in some cases totalling tens of thousands of pounds -- after being paid via Disguised Remuneration schemes.

These arrangements (where workers are paid partly in loans instead of wages), are classified as tax avoidance by HMRC.

How time has been called on traditional vetting methods

Many of these non-compliant umbrella companies were reportedly recommended by some of the UK’s largest and most reputable recruitment firms.

Contractors, who understandably trusted those recommendations, were left exposed both financially and emotionally.

This highlights a hard truth -- even the most compliance-conscious staffing agencies have faced situations where traditional vetting processes weren’t enough.

As standards rise, all agencies -- regardless of size -- will need to go further.

The dual risk facing agencies

At the heart of this issue is control, or the lack of it.

The Employment Rights Bill expects recruiters to take greater control of worker protections. The umbrella reforms, meanwhile, expect them to exert control over third parties they don’t directly manage.

Risk now sits on both sides.

Keep contractors in-house, and face rising administrative costs and legal complexity. Outsource to an umbrella, and take on financial liability if things go wrong.

There are no safe assumptions anymore, only smarter questions to ask about who ought to be trusted and why. 

From compliance to leadership…

What the industry needs now is not just more compliance, but stronger leadership.

That starts with choosing the right partners.

Not just those prospective partners who say they’re compliant, but those who can prove it.

Five things compliant-conscious agencies must look for in providers

Agencies trying to ground themselves amid the push-pull of regulatory forces should therefore work with providers who:

1. Hold independent accreditations (such as FCSA).
2. Offer real-time payroll verification (such as SafeRec).
3. Demonstrate financial stability and transparent pay models.
4. Provide accurate, ongoing RTI reporting to HMRC.
5. Include clear contractual indemnities to shield agencies from liability.

Crucially, assurance can’t rely on annual audits alone. The standard now is real-time visibility, with systems that flag risks before they become liabilities.

The contractor experience (is equally important)

But compliance isn’t the whole story.

The contractor experience matters just as much. Workers who feel supported and respected are more likely to stay engaged, deliver consistently, and recommend the recruitment agency that placed them.

In a relationship-driven industry, experience will remain as important as process.

With L-Day set for July  21st 2025, only the proactive won’t feel fazed

With the draft legislation for umbrella companies set to land in mid-2025, followed by introduction from April 6th 2026, the short time available to prepare must not be wasted.

As for the Employment Rights Bill, some employers will welcome ‘day one unfair dismissal rights,’ like the right to guaranteed work hours, being delayed until 2027. That’s according to the government’s Employment Rights Bill roadmap (published July 1st).

But in a sign that the pace is quickening, the government said on Friday that the draft clauses for the next Finance Bill, which should contain the precise wording relating to joint and several liability, will be published as soon as July 21st on ‘L-Day’ (Legislation Day).

Our takeaway? The contractor recruitment agencies that thrive in this evolving environment won’t just be the most cautious, they’ll be the most proactive.

Finally, here's what proactivity looks like if you’re a contractor recruitment agency…

These proactive agencies will audit more deeply, demand more evidence, set higher expectations, and treat compliance as a strategic differentiator.

As being in the middle of a legislative tug of war isn’t an enviable place to be, agencies must move now, because the rules of recruitment are already shifting.