Do you treat your contractors like staff? Published: May 2018.

Differentiating contractors from staff as off payroll compliance shifts to the client.

If you’ve worked for a very large company, you’ve been worried at one time about going ‘over your headcount’, the number of ‘heads’ you are allowed and the number you have in your team. But what are heads? You’ve probably questioned HR on what defines who is ‘on’ headcount and who is ‘off’, dusting off the rule book to figure out how you go about getting under your cap. For most companies, it turns out that contractors are on headcount like staff, and resources from consultants and service providers are off headcount.

During research workshops we’ve facilitated for companies with more than 2,000 contractors, we’ve heard some pretty wild stories about the creative ways used to stay under headcount; sourcing the same resources from consulting firms at higher rates, issuing ‘service contracts’ to recruitment firms, rapidly mobilised but poorly executed statements of work, shifting swathes of people to different cost centres for short periods, or even terminating contractors at financial year end and re-hiring under new contacts in the new one.

On Contract or Off Payroll?

But if you’re familiar with that headcount-fudging game, that was just the warmup for the main headcount-fudging Olympics; figuring out which workers are genuinely independent contracted labour (for the sake of symmetry let’s call this ‘on contract’) and which ones are contractors in name only (this is called ‘off payroll’). How and why has this come about? Determining whether a contractor is off payroll will shift from the individual limited company to the client. There is a consultation paper open for comment right now. Introduced to the public sector last year, it will most likely hit the private sector in 2019.

The objective for most organisations will be to identify and assess their contractors as on contract. This maintains the status quo and requires no change. However, if companies dig slightly deeper than the written contract, and finds there is little actual day to day difference between contractors and staff, they may need to consider their contractors as off payroll. This will mean a significant increase in cost per contractor, more administrative burden and disruption to the external workforce as contractors leave to find other work. So where the fudging game would normally start, because the outcome of this process has an external referee, HMRC, there is no massaging of definitions or quick year end fixes to get around it.

So what are organisations doing about it? Many attendees we’ve interviewed have also told us about their plans or speculation: from no plan at all, shifting the burden to their Managed Service Providers by increasing insurance and indemnifications, putting everyone through a second intermediary, changing payment terms, re-issuing ‘IR35 proof’ contracts or even getting contractors to group together to start a new company. Or some combination of all of the above. We believe that this is unsustainable, and worse, shortsighted. If the behaviour that we’ve seen in headcount-fudging plays out with off payroll working, it is also a huge waste of valuable time and effort.

Changing the game

But what if you didn’t play that game at all? What is we used that time and energy for a better and constructive purpose? Private sector companies have about a year and possibly more before new legislation is implemented. It is also about time that the regime for managing permanent & contractors was properly reviewed anyway, so this should be seen as a timely catalyst for change rather than a pure business risk. Given most contractor agreements are c. 6 months, there is also time for companies to genuinely adapt the way that they work with external contractors.

There are five smart things you can start to do now, that will have a material impact in a year when you need to put your plans into action.

1. Early Assessment. Contractors are not monolithic. Some individuals are brought on to backfill and provide augmented resources on business-as-usual activities. These individuals can be off payroll. Many are brought on for specific purposes and outcomes with limited time duration. These could be on contract. It's important to undertake an early assessment to stratify the risk and label the type of resource so the effort to secure compliance is targeted at the right group.
2. Definitions and reporting. Review and update HR definitions of staff, consultants, contractors and service providers to be more granular and relevant to the #futureofwork. Start reporting on a more modern list of resource types — as this means better and earlier transparency. Market disintermediation is already here anyway, the gig economy, expert economy, professional marketplaces so it is worthwhile doing now. Most companies have 3–4 resource types, this should be more like 8 — 10.
3. Tracking Subcontracting. In all resource contracts, get suppliers to start identifying where they are using contractors instead of their own permanent staff. HMRC is going to require companies to verify that off payroll workers provided to them through their labour supply chains are complying with the off-payroll working rules. This ultimately will include consulting firms, service providers, contractors and outsourced contracts. Check out page 24 and section 6.14 of the consultation if you’re interested.
4. Better contracts. There is no such thing as an IR35 proof contract. HMRC won’t stand by results achieved through “contrived arrangements designed to get a particular outcome from the service. This would be treated as evidence of deliberate non-compliance.” Statements of work (SoW) direct or via RPO provider drive the right behaviour from the outset: it makes budget holders think about the work, leads to outcomes based agreements, payments linked to milestones and deliverables provided under the contractors control. Its also easy to do a SoW with a genuine contractor — if it is hard, then they are more likely off payroll.
5. HR and Procurement alignment. Both departments own the policies and processes relevant to external workforce. Sourcing and Talent need to harmonise their activities to ensure a standardised approach to non permanent staff. This includes everything from how contractors are engaged, interviewed, briefed and managed, to the legal documents, supplier relationship management approach, measurement of outcomes and reporting. If these are not coordinated, the fragmentation of the approval processes and contracts will be a blocker to the approach.

Our prediction is that HMRC will be looking for a significant test case by 2020 for professional contractors. The government currently has a parallel consultation on employment status after the Matthew Taylor Review on Good Work. This is to create a new test for a category called ‘dependent contractor’ which is not being addressed in the off payroll working consultation. This combines changes to employment status with the shift in IR35 responsibility for compliance to the corporate organisation. If you’re a large company with 1000’s of contractors, you’ll likely be at the front of the queue for a HMRC review… so best have your house in order now.

Deployed

Deployed is a startup changing the way that companies engage and manage their external workforce. We want to move away from titles, copy-and-paste job descriptions and historical skills to well defined work based on outcomes, deliverables and payment linked to performance.

As we develop our SaaS product, we’ve been using our data in proof-of-concepts to deliver benefits to our pilot clients. One exciting way has been our method to deconstruct work and define activities; this has helped to bring transparency to contractors and consultants, and consequently, off payroll assessments.

Contact jamie@deployed.co for more information on how we could support you.