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The importance of managing a compliant contingent labour force

​In 2016, Eurofound published a report that covered the fraudulent contracting of work across Europe. Self-employment and freelance work were reported to be significantly affected by fraudulent use, particularly with respect to disguised subordinate employment. According to the report this poses risks to workers’ employment conditions, fair competition between companies and the fiscal sustainability of social protection systems.

In this article, David Korthals-Clarke, Head of European Compliance at Investigo gives our clients an update on what to look for in a recruitment partner when sourcing and managing a compliant European contingent labour force. ​

Despite the United Kingdom not being a member of the EU anymore, in 2020 it was reported by the World Employment Confederation that the UK recruitment market was the largest market in Europe, responsible for nearly 10% of all placements in the region. Despite waving goodbye to Brussels, could the current regulatory landscape in the UK perhaps inspire the way countries in mainland Europe reconsider their labour and tax legislation in the years to come?

Let us start by exploring the heavily debated regulatory changes that were recently enacted in the United Kingdom.

IR35: the catalyst of HR reforms in the UK private sector

UK staffing providers and their private sector clients spent the lead up to 6 April 2021 fine-tuning their onboarding processes to ensure readiness for the latest changes in the Off-Payroll legislation (better known as IR35).

The essence of the Off-Payroll rules is that if contractors who operate through their own Personal Service Company (PSC) work as employees they need to be taxed as employees. It will be the responsibility of the end user to make an IR35 status determination on the actual working practices of an assignment and exercise reasonable care when making that determination. By conducting an IR35 assessment or completing a specifically designed questionnaire , the end user should assess if a contractor’s earnings from an assignment need to be taxed as employed income or self-employed income. If the tax status is deemed to be employed, then the end user will need to instruct the fee payer (often the recruitment business) to make the relevant statutory PAYE deductions before paying the contractor’s invoice.

These recent developments have certainly incentivised clients in the UK to reconsider their hiring practices and to more carefully select a diligent recruitment partner who has the expertise to assist with managing a heavily increased compliance burden. Many UK businesses now want to be reassured that recruitment businesses either work with an FSCA accredited umbrella company or have the capability to payroll workers in-house under a PAYE Agency Worker model.

Moreover, clients now realise that selecting the type of contingent workforce they need is more important than ever. Recruitment businesses should therefore think outside the box and offer a more robust HR and consultancy service model to their clients. They need to understand the relevant implications of hiring an independent contractor, a worker or a completely outsourced workforce to complete a project.

Classic recruitment versus modern workforce solutions

As outlined above, due to the recent legislation changes it is now very common for UK recruiters and clients to have in-depth conversations about the relevant status determination before determining the appropriate payment set up.

Many UK recruitment businesses have furthermore invested in consultancy-based models that more closely replicate project-based work that historically was undertaken by the Big Four. If undertaken in a correct manner, offering a genuine consultancy service may take away some of the employment reclassification risks related to contracting. Instead of recruiting a contingent workforce that consists of independent contractors, some businesses like Investigo now offer a fully outcome-based project solution whereby instead of hiring a day or hourly rate contractor, clients can procure projects-based services under a statement of work whereby price structures are based on completion of a set of agreed milestones and deliverables.

This model of course should not be used to disguise pseudo self-employment, but many clients and staffing businesses have identified that in some cases a so-called statement of work model is much more suitable for their project requirements than the classic recruitment model. Clients may be in a better position to forecast their outgoings, and due to agreed time constraints and associated statement of work elements they will also benefit from higher levels of accountability and therefore better quality. Safeguarding IP rights may also be an important factor when considering statement of work services. Again, it does not necessarily work for every type of engagement, but it could be a good solution for businesses who are looking to run their projects more efficiently.

Now that we understand the dramatic changes that recently took place in the UK, it is time to take the Eurostar back to the European mainland. How is the regulatory landscape changing and what role can the recruitment business play to overcome some of the legal challenges that may threaten the stability of the supply chain?

Pseudo self-employment: reclassification of contractors

Although some European countries have strict labour laws regarding temporary agency work, the reality is that there is a widespread lack of knowledge on the onboarding of freelancers and the relevant working practices.

Inviting contractors to company events, telling them who ‘their manager’ is, and providing them with a company email address are all examples of where the distinction between an employee and an independent contractor becomes blurred. Unfortunately, many businesses lack the awareness that making a distinction between employees and independent contractors is important.

Businesses mistakenly assume it is ultimately the responsibility of the agency, but this approach is short-sighted. Treating contractors as employees can lead to tricky situations with the tax authorities or employment tribunals. If these risks materialise, then the entire supply chain could face significant repercussions including unwanted media attention.

Country-specific rules

The term ‘Scheinselbstständigkeit’ may sound familiar to some of you . Germany is very strict regarding employee reclassification and to mitigate both civil and criminal liability it is paramount that the recruiter and the client discuss upfront whether the assignment should be treated as employed or self-employed and they need to treat the contractor in line with that assessment throughout the assignment. The recruiter needs to have a so-called AUG license if candidates work as employees. Furthermore, both the recruiter and the client need to be aware that if the working practices qualify as ‘employed’, the candidate can only be engaged and paid by an AUG license holder. The end client will have to enter into a direct agreement with the AUG license holder. If a recruiter does not hold an AUG license, it cannot be part of the contractual chain. The AUG license holder, however, can pay the recruiter a referral fee under a margin only agreement.

The Netherlands is quite unique in a sense that clients and independent contractors are encouraged to work under an agreement that is approved by the Dutch Tax Authorities. The so-called DBA agreement reflects the independent status of the contractor and gives the parties involved a high degree of legal certainty that the relationship will not be reclassified by the authorities save for cases of flagrant abuse. Furthermore, the use of a blocked G-account in combination with a NEN certification can exonerate the supply chain from potential tax claims. Although not compulsory, recruitment businesses may choose to become NEN 4400-1/4400-2 certified to evidence compliance to their clients. Investigo recently acquired this licence.

Similar to IR35 in the UK, the Netherlands has been considering the implementation of the so-called end user declaration (opdrachtgeversverklaring) which would be generated by completing an online questionnaire. This legislative initiative is currently being piloted and if it were to be approved by Dutch Parliament, it would set aside the current ‘DBA legislation’ and very much replicate the approach taken in the UK.

Recruitment in Switzerland is very strictly regulated and typically requires the assistance of a SECO licensed recruiter with the added complexity that the SECO license holder will need to sign a contract with the Swiss client directly. Similar to the German model, the non-Swiss recruiter will then only be able to receive a kickback fee from the SECO license holder.

Another example of a country that recently tightened up its regulations is Sweden, where from 1 January 2021 many clients demand non-Swedish businesses who pay workers in Sweden to be registered for F-Skatt, irrespective of whether the worker is employed or self-employed.

Again, the above examples demonstrate the importance of the recruiter and the client having conversations about the intended contractual and organisational structure upfront, instead of just looking for the right skillset and discussing the correct engagement structure as an afterthought.

It is paramount that businesses are aware of any local nuances and speak to their recruitment partner as to how to structure the relevant placement.

Covid 19: redefining the work location

The location where the work needs to be performed may be critical for the outcome of the project. However, the relevant labour laws in each country are different. Before the Covid 19 pandemic many businesses typically expected their contingent workforce to be working onsite. However, travel expenses could drive available budgets to their limits and recruitment businesses furthermore had to worry about potential tax and social security issues.

As the pandemic has clearly shown, in some industries working from home is now the norm. This has made it easier for recruiters to find IT talent across Europe, without the need to travel to the client’s premises.

However, what the pandemic has also shown is that understanding where your contractors are based, and how they structure their tax and social security affairs is paramount. In principle, contractors need to be paying tax and social security in the country where they perform the services unless an exception applies. However, businesses are not always aware of the relevant laws and regulations that relate to the provision of cross-border work services.

Confusion about the often misquoted 183-day rule, the drive to sell and a lack of readily accessible regulatory guidance regarding cross-border contracting are all factors that erode compliance in the supply chain.

UK Criminal Finances Act 2017: the need for supplier due diligence

Many businesses are getting more familiar with the application of the UK Criminal Finances Act 2017 (CFA). Following the introduction of this Act, UK businesses are not only exposed to the possibility of paying civil or administrative fines, but also face the risk of being criminally prosecuted where they have failed to establish reasonable procedures to prevent tax evasion. The scope of the CFA also applies to tax affairs outside the United Kingdom.

This truly reflects a risk-based approach similar to what we have seen in legislation related to money laundering, terrorist financing, modern slavery and data protection. It is not just about getting penalised for committing the predicate offence; policies need to be in place to demonstrate that measures exist to mitigate the relevant risks.

Whereas previously it was unclear as to what extent recruitment businesses were affected by this legislation, HMRC guidelines have made it abundantly clear that recruitment businesses and their end clients are also caught by the CFA. HMRC has issued various due diligence principles to ensure compliance in the supply chain that are directly relevant to the supply of labour.

As explained earlier, other than the possible implications of the CFA, carrying out supplier due diligence also helps minimise the risks of paying the bill for unpaid tax or social security contributions.

Know Your Customer (KYC) and Customer Due Diligence (CDD) are popular industry slang in the financial services industry and relate to client due diligence checks undertaken to prevent money laundering and terrorist financing. It may only be a matter of time before Know Your Supplier (KYS) is common terminology in both the UK and European labour supply chain. Have you asked your recruitment partner what checks they undertake when paying your workforce?

Working in partnership

This article does not intend to scaremonger. On the contrary, it aims to demonstrate how recruiting and managing an international workforce goes way beyond spotting the best CVs in the market. It is key for your business to know how your international contingent workforce is managed and paid in a compliant manner so that any claims or risks are mitigated to the maximum extent.

Good staffing businesses have a wealth of knowledge about the relevant operational models, and they can mobilise their back-office teams to discuss the best possible solution for your workforce and act as risk mitigators for your business. If they do not have all the tools at their disposal to manage the workforce management process from A to Z, they should at least have access to a network of partners who can assist in the paying and billing process.

And they should be able to provide clients with full transparency about their operational and compliance processes. Ultimately you want peace of mind that the right people are doing a fabulous job.

We welcome any conversations with both our UK and European clients to discuss our comprehensive workforce management solutions in more detail.

David Korthals-Clarke

Head of European Compliance

1. The Eurofound report can be found here: file:///C:/Users/david.korthals/Downloads/Eurofound%20report%20on%20fraudulent%20contracting%20of%20work%20in%20EU.pdf


3. An example of an online tool can be found here. This is also known as the HMRC CEST tool.

4. PAYE is a system of paying income tax in which the employer pays employee tax directly to the UK government, and then takes this amount from the employee’s salary or wages. PAYE is an abbreviation for 'pay as you earn'.



7. Workers in the UK are taxed as employees but do not enjoy the same employment rights as ordinary employees.

8. Example of pseudo self-employment in the Netherlands (Dutch only): Example of ‘Scheinselbstandigheit’ in Germany (German only):






14. Find out about the due diligence principles to assure your labour supply chains: