Time for change - should the UK recruitment industry to look at the way it prices the cost of contingent labour?

By Martin Glick

George Bernard Shaw is attributed as saying that England and America are two countries separated by a common language. One example of this is the term ‘contingent work’ which has been in use in the US for 30 years yet still not widely adopted in the UK. The term is used to describe work arrangements that differ from permanent employment. Contingent workers include agency workers, independent contractors, consultants and interns and in the near future will include robots and drones.    

Following HMRC’s recently published discussion paper on travel and subsistence claims made by workers using umbrella companies and the impact that any new legislation will have on the method of engagement of contractors; is it now time for the UK recruitment industry to look to the US for alternative pricing models for the supply of contingent labour?

Since the birth of the IT contracting market in the 80’s, the UK recruitment industry has steadfastly adopted a single cost inclusive pricing model which is made up of two components, a gross payment rate to the worker combined with an agency margin. Whilst this pricing model works for contractors who operate via their own company, it is problematic for umbrella companies who have to manipulate their billing rate by stripping out the cost of employers national insurance, pension, holiday pay and tax allowable expenses in order to determine a gross pay rate which must not be less than the National Minimum Wage. However much effort the umbrella company puts into explaining the mechanics of their business, the fact is that a large percentage of agency workers do not understand how things work or why they are required to pay the employers costs. Is it any wonder that the Unions get so heat-up about the use of umbrella companies and the perceived abuse of Agency Worker Regulations?

Compare this with the US where a number of pricing models have evolved.

The most common pricing method for third-party payroll providers is a markup model, where the supplier marks up the worker’s pay rate by a percentage that allows for federal and state payroll taxes, their expenses and profit. The traditional markup model is simple to understand for all stakeholders, although it may not provide for the various federal and state tax caps which can result in the client paying slightly more for their contingent workers than they need to.

A much less common pricing model, but perhaps the most cost effective for clients, is statutory plus pricing. In this model, a payrolling supplier charges the actual statutory costs for acting as a worker's employer, together with the payroll provider’s overhead costs and profit for its services.

In both of the above models, the contingent worker is paid a fixed gross pay rate and only becomes liable for the same statutory deductions as any other worker. If they tax deductible expenses they can either claim via their employer or by including them on their personal tax return.   

Cost-plus pricing offers full transparency to all costs associated with payrolling contingent workers and if adopted in the UK, would facilitate a like for like comparison with equivalent FTE’s as required by the Agency Workers Directive. If the UK recruitment industry wants to continue outsourcing the payrolling of contract labour to third parties then perhaps now is the time for change.

Martin Glick is an independent consultant who specialises in the management of contingent labour.