Practical tips for dealing with client imposed migration and agreeing client contracts in todays mar

1
Practical tips for dealing with client imposed
migration and agreeing client contracts in
todays market

• Frances Lewis
• Partner
• Blake Lapthorn Recruitment Sector Group
• frances.lewis_at_bllaw.co.uk
• Recruitment Consultant Conference1 April 2009

2
Agenda

• Current market trends
• Payment terms and dealing with rate cuts
• Competition law
• Migration issues
• Liability, indemnities and insurance
• Restrictions and confidentiality
• Passing risk to contractor
• Future developments

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Current market trends

• MSP/MV/RPO back in vogue cost saving and
  efficiency of supply drivers
• Existing arrangements being challenged
• Low margin offers pressure to match or further
  undercut rates
• Requests to migrate contractors to new
  supplier(s)
• Widespread contractor rate and margin cuts now
  across most sectors
• Less room to negotiate on pre-agreed MSP agreed
  terms
• Late/non paying/insolvent clients - and MSPs?

4
Current market trends continued

• PSL framework agreements for 3 - 5 years - must
  not be too onerous
• Onerous contracts can have an adverse impact on
  company valuation, particularly if insurance does
  not adequately cover the risks
• New legislation re-visit existing agreements to
  check indemnities, particularly those relating to
  tax and agency temps
• Check migration clauses do they apply in the
  circumstances? Do they work?

5
Payment terms and rate cuts

• Check payment period and clause wording
• from date of invoice or longer period?
• reduce payment period as low as possible for new
  deals
• Check termination rights
• do they allow recruiters to terminate without
  cause on reasonable notice?
• right to terminate for client insolvency?
• right to terminate for own insolvency?
• right to terminate for MSP insolvency? Can you
  recover direct from end user?
• MSP/RPO pay when paid clauses are you prepared
  to accept/fund the risk? Will your
  lenders/investors accept such clauses?

6
Rate and margin cuts

• Current market pressures
• Client imposed rate reductions often mean
  margin cuts
• Now widespread
• Reports of some MSP imposed margin reductions
  cutting margins to xpence per hour
• PAYE temps, umbrella contractors other employed
  temps increase in statutory paid annual leave
  entitlement from 1 April 2009

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Rate and margin cuts

• PAYE temps and non opted-out contractors
• cannot vary the contract rate without the
  workers agreement
• breach of contract
• breach of Conduct Regulations (Reg 14(4))
• unlawful deduction from wages claim
• possible client breach if temp payment rates are
  transparent in client agreement

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Rate and margin cuts

• Employed temps
• Cannot vary contract without employees agreement
• as previous slide
• unfair dismissal/constructive dismissal
• unlawful deduction from wages claims
• check whether temps are engaged under contracts
  of employment
• collective redundancy consultation legislation
  may apply - protective award take legal advice

9
Rate cuts

• Opted out company contractors
• still a risk of worker based claims, e.g.
  unlawful deduction from wages
• treat as commercial rate reductions and word
  communications accordingly avoid employment
  language
• address the company not the individual direct
• manage carefully to avoid breach of contract
  claims from contractors, e.g. comply with
  contractual notice periods
• may need to terminate and re-engage avoid
  triggering wages/unfair dismissal claims
  administration cost

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Margin cuts

• Client and MSPs imposing margin cuts
• Requires agreement to variation but look at
  contractual variation terms agreed with
  client/MSP
• Competition law issues?

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Competition Law

• Competition Act 1998 prohibits agreements,
  concerted practices and conduct that may have a
  damaging effect on competition in the UK
• Current OFT investigation into alleged collective
  price fixing and refusal to supply into a MSP by
  8 recruitment companies

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Competition Law

• Do not
• collude with competitor suppliers re terms with
  MSP or client fees contract terms
• collectively boycott an MSP

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Competition Law

• Question whether MSP is breaching Competition
  Law
• Is it dominant in the particular market?
• Is it abusing its dominant position?
• Is it deliberately undercutting existing
  suppliers and incurring short term losses with
  the intention of eliminating rival suppliers?
• Is it connected to any of the suppliers such that
  the supplier is privy to confidential pricing
  information of other suppliers?
• If so, take advice BEFORE raising with MSP/client
  or possible report to OFT

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Migration issues

• Different issues depending on whether incoming or
  outgoing supplier
• First step check contract.
• any express migration provisions? Do they
  apply?
• temp to temp fee provisions
• Are any of your own or outgoing suppliers staff
  assigned to the account? If yes, TUPE?
• Consider migration risks
• Factor in cost of migration before offering low
  margin rates to take over the supply of
  contractors

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Migration issues continued

• Migration risks
• employment status for tax, NIC and employment
  claims purposes company contractors are not
  chattels to be moved around (Muscat)
• breaches of data protection legislation has
  contractor/temp consented to new supplier
  processing their personal data?
• breach of confidentiality e.g. rates,
  contracts, contractor/temp details

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Migration issues continued

• Migration risks
• breach of restrictions in contractor agreements
• can you rely on your restrictions if you need to?
  
• restrictions will be lawful only re opted-out
  contractors not temps
• inducing a 3rd party breach claim
• triggering temp to temp fees
• business interruption if contractors/temps
  terminated

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Migration issues continued

• How do you legally transfer existing contractor
  arrangements?
• novate or
• terminate and re-engage?
• Difficult to achieve quickly and efficiently
  unless outgoing supplier co-operates what is
  their incentive to do so?
• Temp to temp fees
• look at what was contractually agreed
• do contracts comply with the Conduct Regs?

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Migration issues continued

• Consider alternatives
• compensation
• margin-share
• match the cost of supply offered by the incoming
  supplier same outgoing cost without the
  disruption and associated costs
• Avoid overselling what can be achieved by
  migration timing, cost

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Liability Indemnities

• Recruitment services or consultancy services?
• Different types of risk typically involved
• tax, NICs
• employment claims
• contractor acts and omissions
• performance/quality of service contractor
  provides
• immigration
• breach of IPR
• health and safety/personal injury
• Many end user clients assume that it is
  reasonable to outsource all of these risks to
  recruiters by all means offer to assist but do
  not indemnify

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Liability Indemnities continued

• Basic principles to bear in mind
• When negotiating with a MSP/MV/RPO there is often
  little scope to change a liability/indemnity
  position which has already been agreed with the
  end user client (but it is worth trying!)
• Do not collude with other suppliers to affect
  liability position
• Recruiters are probably not, as a matter of law,
  vicariously liable for contractor acts/omissions
  (although the position may vary from sector to
  sector e.g. rail and engineering, construction,
  some liability may rest with recruiter)

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Liability Indemnities continued

• Basic principles to bear in mind
• Clients often expect recruiters to assume a
  significant degree of contractual liability over
  and above their legal liability
• Recruiters should avoid/restrict contractual
  liability as far as possible to ensure that it is
  insurable, reasonable and back to backable down
  to the contractor

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Liability Indemnities continued

• Cap liability for the different risks to a
  reasonable/insurable level NB avoid agreeing
  caps up to the level of insurance cover
  aggregate cover
• Exclude liability for consequential loss can
  offer to make this reciprocal
• If you have to agree indemnities carve out
  liability arising from client /other third party
  act/omissions, e.g.
• discriminatory act by client
• tax re arrangements client has referred to
  contractor
• breach of health and safety obligations
• Back to back liability in contractor agreement
  of limited use in practice but better than
  nothing

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Insurance

• Insuring recruiter business risks is not
  straightforward because
• recruiter does not employ or control
  temps/contractors and so is not automatically
  vicariously liable for their actions
• usually cannot insure against tax/NICs liability
  of the client
• most insurance policies exclude liability for
  contractually assumed risk, i.e. contractual
  indemnities which accept liability beyond what
  the recruiter would be liable for at law
• Therefore, there will usually be
  liabilities/indemnities under a contract which
  are not or cannot be insured against.

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Insurance

• Certain specialist insurance cover is available
  for recruiters to cover liability under
  employment claims indemnities agreed NB a
  standard LE or EPLI policy will NOT cover this
  risk
• Recruiter liability positions are non-standard
  because recruiters do not usually have any
  control over temps/contractors actions
• Therefore, use a broker who understands how
  temporary recruitment works and who offers
  recruitment-specific policies

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Insurance

• Appropriate and adequate insurance is often
  overlooked but can be very important on the sale
  of a business
• Ensure that the premiums you are paying are
  buying the right cover
• Avoid relying on insurance to allow policies of
  signing liabilities without due consideration or
  negotiation of the risk

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Restrictions and confidentiality

• Do restrictions restrict your business from doing
  business with other divisions, group companies or
  with any other end users (e.g. a competitor of
  the client)?
• Can you impose the restrictions on the
  temp/contractor?
• If temp or non-opted out you cannot impose any
  restriction
• Are the restrictions reasonable or are they a
  restraint of trade?
• Umbrella companies cannot usually agree to
  restrictions the same way that PSC contractors
  can

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Restrictions and confidentiality

• It may be reasonable to restrict the contractor
  but to remove the recruiter from the restriction.
  Worth raising with client/MSP
• Think carefully before agreeing a restriction
  with a MSP which prevents recruiter from dealing
  direct with client ensure applies only for as
  long as MSP remains MSP of the client.

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Contractor agreement

• Back to back risk
• not ideal still risk exposure so better to
  remove from client contract as much as possible
• deterrent effect
• assumption of business risk for IR35
• always include any performance warranties and
  obligations to re-work if they cannot be removed
  from client contract
• require insurance to cover risks as far as
  possible
• act in accordance with the contract as far as
  possible to reduce employment risk, e.g.
  encourage client/MSP to route all contract
  terminations and extensions through you and
  request reasons for termination.

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Future Developments

• Temporary (Agency) Workers Directive
• Revisit existing client contracts to ensure that
  new obligations are agreed
• Client will probably seek indemnities from
  recruiters to cover risk of non-compliance
• Increased role in immigration process?
• Tax HMRC has said that it is targeting certain
  areas, e.g. MSC, offshore arrangements, NICs,
  CIS. Check tax indemnities to ensure that you
  are not too exposed.
• BERR consultation on umbrella company opt outs

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Conclusions

• Clients tend to want to outsource risk
• Recruiters are often forced to agree onerous
  contracts
• Private equity investors/lenders do not like
  onerous contracts
• Dont believe that you are the only recruiter
  challenging onerous terms but DO NOT collude with
  competitors
• Better to negotiate out, carve out or cap
  liability than to agree to cover risks against
  which you cannot insure or over which you have no
  control
• Dont underestimate the cost and inconvenience of
  migration
• Back to back to contractor as a precaution but do
  not rely on this as your only means of covering
  risks

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Practical tips for dealing with client imposed
migration and agreeing client contracts in
todays market

• Frances Lewis
• Partner
• Blake Lapthorn Recruitment Sector Group
• frances.lewis_at_bllaw.co.uk
• Recruitment Consultant Conference1 April 2009