Background information on approaches to regulation of temporary employment agencies and on-hired employees

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1 Background information on approaches to regulation of temporary employment agencies and on-hired employees The purpose of this background note is to provide a summary of recent trends in relation to the regulation of temporary employment agencies. 1. Current state of regulation No restrictions No restriction of the operation of temporary employment agencies applies in the USA, Canada, Ireland, Denmark, Finland and Hungary. 1 In the UK, temporary employment agencies are also not restricted in their operations. However, 6 April 2004, new regulations have been put in place in the UK that set some minimum standards for some aspects of the operation of temporary hire agencies. These new standards are summarised in Attachment 1. New Zealand also permits temporary employment agencies to operate with no limit on the number of renewals and cumulated duration. Removal of restrictions in other OECD countries In the 1990s, virtually all OECD countries removed the prohibition of temporary employment agencies where it existed. Legislative barriers to temporary work agencies only now apply in Turkey (except for agricultural work) and Mexico. Korea and Japan limit the use to temporary hire agencies to certain occupations and industries. Focus on the assignment Temporary work agencies can now operate with little or no restrictions in Sweden, Switzerland, Greece, the Netherlands, Austria, Germany, Spain and Italy. 2 However, in many of these countries, the temporary assignment itself at the client firm is regulated. This varies from restrictions on the duration of the assignment, its renewal or on the reasons for using employment services. Having an objective and legitimate reason for the temporary assignment, some limit on the length of the assignment and whether it can be renewed or not are legally required in to some degree in Austria, Belgium, France, Greece, Norway, Portugal, Spain, Sweden and Switzerland. Focus on the contractual relationship Another approach is for governments to regulate the contractual relationship between the onhired worker and the employment services agency. In Sweden, after a radical deregulation of labour hiring arrangements in the mid-1990s, the focus has shifted to ensuring that the on-hired worker has an employment contract with the employment services agency. The Dutch legislation of the late 1990s removed practically all regulation of the assignment and the sector. However, new legislation required that the agency worker have an employment contract at the agency, which over time gives increased employment protection. After 18 months with a single user 1 See Attachment 1 2 Background document to OECD Employment Outlook 2004, Table 7 Regulation of temporary work agency (TWA) employment. 1

2 enterprise or 36 months with various enterprises, on-hired employees are entitled to an openended contract (that is, permanent employment) with the employment services agency. Developments within the European Union The European Commission has proposed in December 2002 a new directive on working conditions of temporary (agency) workers. The proposed directive seeks to apply the principle of equal treatment to basic working and employment conditions. It requires that agency workers should not have less favourable employment conditions than permanent workers in the client company where they are sent to work unless this is objectively justified. Equal treatment would not be required for posts of less than six weeks, nor where agency workers are covered by collective agreements or where agency workers are employed on permanent contracts. 3 The proposed directive also requires that member states periodically review restrictions on the use of temporary agency workers and take measures to make it easier for them to find permanent jobs. The UK Government is concerned that the proposed directive risks decreasing the atractiveness of agency workers to user companies, which might reducethe number of jobs available Explanation of the differences Two broad types of socially embedded labour markets can be identified. Liberal market economies can be distinguished from coordinated market economies in terms of the relative weight given to regulation and the free play of market forces. The term liberal market economies describes the type of arangements in the so caled anglocapitalist economies. These are, in order of size, the USA, the UK, Canada, Australia, Ireland and New Zealand. The term coordinated market economies describes the arangements in Germany, Japan, the Nordic countries and the Netherlands. 5 A generic term sometimes used to describe these countries is Rhineland capitalism. 6 Liberal market economies, suchas Australia s, tend to have production systems that produce standardised products and services, using general skills. 7 These economies rely more on numerical, temporal and pay flexibility to achieve competitive advantage. This is because market forces in these economies are given freer reign to use these forms of flexibility than they are in coordinated market economies such as Germany, Japan, the Nordic countries and the Netherlands. 8 The latter tend to emphasise industry and enterprise specific skills and put in place mechanisms to protect employees who have invested in acquiring these more narrowly-based skills. 9 This different approach to skills formation and skills use helps to explain why employment protection Explanatory Memorandum on European Community Legislation: Amended Proposal For A Directive Of The European Parliament And Of The Council On Temporary Work [15098/02] COM(02)701 Submitted by the Department of Trade and Industry on 10 January Hall, P; & Soskice, D; eds; 2001, Varieties of Capitalism: the Institutional Foundations of Comparative Advantage. Oxford University Press, Oxford, p Hofmann. J; 2004, Co-ordinated continental European market economies under pressure from globalisation: Germany's "Rhineland capitalism, German Law Journal No. 8, 1 August 7 Ibid 8 Ibid 9 Ibid 2

3 laws in the liberal market economies of the USA, the UK, Australia, Canada, New Zealand and Ireland are less severe than those of the coordinated market economies of continental Europe. However, in Australia s case, scope for pay flexibility is more limited than in other liberal market economies as a high proportion of the workforce is covered by legal minimum wage rates specified in industrial awards. Indeed, many RCSA members note that their on-hired employee services are paid the same or better pay wage rates compared with the employees of the client enterprise. This leaves numerical and temporal flexibility as major sources of comparative advantage for the Australian economy. Difficulties of transferring institutions to different settings These two types of economic and social arrangements are so interconnected that it is extremely difficult if not impossible to transfer one policy concept from one concept to another. A good example of this failure is the attempt by the UK Government to set up a German type apprenticeship system. Attempts in Britain by the Government working in association with national business associations to replicate the German training system has been described as a fiasco. 10 Borrowing policies from other countries is always problematic. Trying to do so with a country whose industrial structure, main industries, political organisation, school system and employer-union relations are all so hugely different from one s own prety much guarantees disappointment. 11 Accreditation or licensing In liberal market economies, a common approach of governments is to promote industry self regulation which can be supported by strong incentives or even penalties in the form of withdrawal of government funding for example. So in industries where it is difficult to be too prescriptive because of the high level of discretion required by staff to perform their duties, some control over inputs is instituted. This usually takes the form of an accreditation process to ensure, for example, that staff have threshold qualifications, access to ongoing training and that quality control procedures are in place. Accreditation processes are common in Australia in the health sector (eg hospitals and general practice clinics), and in aged care and childcare facilities. However, quality inputs are considered a necessary but not sufficient condition for better health outcomes. For structural measures to be a valid dimension of quality, there must be evidence that variations in structural measures lead to changes in patients outcomes. 12 In other words, accreditation is increasingly seen as too narrowly focused on controlling inputs with little or no attention to outcomes. In the UK, for example, the Government has since 1993 vigorously promoted the Investors in People national standard to promote good practice among enterprises and the public sector in relation to the training and development of employees. The Investors in People standard revolves around four principles and 12 indicators related to showing commitment, planning, putting the plan into action and evaluating what has been done. 13 The standard has been adopted by organisations covering 29 per cent of the workforce (August 2004). 10 Kay, J; 2004, The Truth about Markets: Why Some Nations are Rich and Most Remain Poor. Penguin, London, p Wolf, A; 2002, Does Education Matters? Myths about education and economic growth. Penguin, London, p Brook, Robert, et al, "Defining and Measuring Quality of Care: a Perspective from US Researchers," International Journal of Quality of Health Care, Vol. 12, No. 4, 2000, pp

4 Attachment 1: The specific changes to the UK s Employment Agencies Act (EAA) regulations, 6 April 2004 Restrictions on charging introduction or transfer fees Changes to the Employment Agencies Act 1973 in 2000 permitted the government to restrict charges to temp to perm, temp to temp, and temp to third party fees. Firstly an introduction fee for a temporary worker may not be charged by an agency unless the client business is given the option of paying the fee or taking the worker for an extended period of hire. The amount of the fee and the period of hire are a matter for negotiation and are without restriction. Secondly a business may be charged an agreed sum of money if they take on a temporary worker, either on a permanent basis or through another agency, within a period of eight weeks after the end of an assignment provided the business has the option of keeping the worker on a temporary basis for an agreed period of time instead. Again there are no restrictions on the length of either the initial period of hire or the extended period and no restriction on the amount of the fee. Agencies are still entitled to charge client companies temp to perm fees when they take an agency worker on permanently, although there are now some restrictions in terms of when a fee can be charged A business may also be charged if it introduces a worker to another person, who may be another agency, who then employs that worker within eight weeks of the end of an assignment, provided they have been given the option of an extended hire period and chose not to exercise this. [If it is the first assignment for that worker with that client business, the period during which you can charge a fee is the longer period of either 14 weeks from the start of that assignment or eight weeks after its end.] Limited company contractors Since the definition of a work-seeker has changed from an individual to a person limited company contractors seeking work through employment agencies or businesses are protected by these Regulations. Many contractors objected to this claiming that it might affect their status for IR35 and so the government has introduced an opt-out for those contractors who do not want the protection of the Regulations. This will be in the form of a declaration before the start of an assignment and there are measures to prevent work-seekers being coerced into signing this. If a contractor submits to the protection of the Regulations agencies cannot restrict him from taking up work directly with a hirer to whom he has been supplied by an agency. However the business may be charged a transfer fee (see above). A new provision will allow agencies and businesses to charge limited company contractors for finding them suitable assignments. 4

5 VAT friendly schemes The new Regulations prohibit the practice of introducing workers to a hiring business to be employed directly by them, continuing to pay the worker and thereby claiming that the only part of the charge that attracts VAT is your margin. In future if the client business does not want the worker on their payroll you will have to engage the worker as a principal and charge VAT on the full cost of providing their services provided the service attracts VAT. Customs and Excise may offer a concession in some circumstances but at the time of writing it is not known whether and in what circumstances any concession will be given. Paying temporary workers Employment agencies will be unable to withhold pay in circumstances where either the client business refuses to pay for work done, as a penalty for not completing an assignment or in circumstances where the worker does not produce a signed timesheet, provided the business can satisfy itself by other means that the work was done. Agreement of terms Agencies will have to get the agreement of workers and clients to any terms offered together with any variation in those terms and record these in a single document. This means agencies will have to get a signature or some evidence of agreement and may not have important information such as rates of pay or refund terms in a separate document to the terms of business. Information from and to the hirer and work-seeker Detailed information about the work and any risks to health & safety will have to be obtained by agencies from a hirer before the assignment starts. While confirmation of a worker s identity and their willingness to take the assignment must be obtained from the worker before putting their details forward. The Regulations also detail the information that agencies must give orally or otherwise, when introducing a worker or offer work to a work-seeker. Unsuitable candidates Agencies who become aware within three months of an introduction to a client of any information that makes a candidate unsuitable for the position they have been placed in must inform the hirer without delay. This provision may give rise to some interesting issues over Data Protection and so the detailed guidance expected to accompany the Regulations will be important for interpretation of the circumstances this will apply in. For further information: Source: Recruitment and Employment Confederation 5