Retales™ - Can retailers avoid the Agency Workers Regulations?

It has been just over one month since the Agency Workers Regulations came into force.  Given that the retail sector uses a large number of temporary agency workers, it will undoubtedly be affected by the Regulations.  A number of retailers have already hit the headlines by asking agencies to hire temporary agency workers directly, using a legal loophole (commonly referred to as the "Swedish derogation") to avoid the full impact of the Regulations. 

What is the Swedish derogation?

The aim of the Regulations is to provide temporary agency workers the same pay and benefits as permanent staff after 12 weeks’ working with the same company.  However, many employers are taking advantage of an exemption in the Regulations, known as the Swedish derogation, to avoid the cost consequences. 

The derogation takes agency workers outside the scope of the Regulations in respect of their right to equal pay.   To take advantage of the derogation and circumvent the requirement to pay an agency worker the same as a permanent member of staff, the agency must hire the agency worker under a permanent contract of employment.  The contract must be entered into before the beginning of the first assignment under that contract and meet various requirements, including that the agency worker is paid certain minimum payments between assignments.

Response from the retail sector

The use of the derogation is becoming widespread.  Increasing numbers of retailers, including Tesco and Marks and Spencer, are urging agency workers to sign contracts in which they waive their rights to equal pay.   Morrisons has also followed suit and is holding discussions with its agencies to make use of the derogation.  The downside for temporary agency workers, if they sign up to a permanent contract of employment with an agency, is that they relinquish their rights to equal pay.  However, on the positive side, the agency workers will benefit from employment rights including the right not to be unfairly dismissed.

Response from the unions

As a result of employers using the derogation, unions are concerned that agency workers will be worse off and will be exploited by employers, which is against the spirit of the Regulations.  According to the TUC, temporary agency workers are paid about a third less than permanent staff doing the same job and the Daily Telegraph reports that an agency driver for Tesco is likely to lose about £150 extra a week as a result of Tesco’s use of the derogation. It is possible that unions would be willing to fight test cases for agency workers on the derogation issue.  In due course, we may therefore see clarity provided by the tribunals on how the derogation works in practice.

In the meantime…

Until tribunals provide further guidance on the derogation, retailers may also wish to consider other options. For example, it may be worth considering whether it is feasible to reduce your use of temporary staff and employ more workers directly.   In addition to using the derogation, retailers could also consider introducing a starter pay for new permanent staff, below the rate given to fully trained staff (subject to NMW limits).  This means that when the employer subsequently compares temporary agency worker rates with permanent staff doing the same role, it could pay the lower starter rate to the temporary agency worker.   However, bear in mind that starter grades may not be compliant with the Regulations if they are applied primarily or exclusively to agency workers and should therefore be applied generally to all new recruits.

If you would like further advice on the implications of the Agency Workers Regulations and how to apply the Swedish derogation exemption, please contact Nick Thorpe, Partner, or Olivia Baxendale, Solicitor (Employment and Pensions Group).