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Not long after the Agency Workers Regulations came into force on 1 October, they hit the headlines with reports that increasing numbers of employers are considering whether to use a legal loophole (commonly referred to as the "Swedish derogation") to avoid the full impact of the Regulations.
How does the Swedish derogation work?
The aim of the Regulations is to provide temporary agency workers with the same pay and benefits as permanent staff after 12 weeks’ working with the same company. However, reports in the national press indicate that employers are asking agencies to hire temporary agency workers directly. If an agency hires a temporary agency worker directly, the employer can take advantage of the Swedish derogation exemption in the Regulations. It is worth noting, however, that the derogation takes agency workers outside the scope of the Regulations but only in respect of their right to equal pay.
To take advantage of the derogation and avoid 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, which must meet various requirements. In particular, the agency worker must be paid certain minimum payments between assignments and the contract must be entered into before the beginning of the first assignment under that contract.
What is the impact on temporary agency workers?
Reports indicate that the use of the derogation is becoming widespread across a variety of industries and is attractive to employers that use low paid temps, such as supermarkets, manufacturers and logistics companies. Increasing numbers of large employers, including Carlsberg and Marks and Spencer, are reportedly urging agency workers to sign contracts in which they waive their rights to equal pay. Other retailers have also followed suit and are holding discussions with their agencies to make use of the derogation.
If temporary agency workers sign up to permanent contracts of employment with an agency, they will relinquish their rights to equal pay. This means that the agency workers would lose out on a likely pay increase after 12 weeks' working at the same company. However, having a permanent contract of employment with an agency will allow agency workers to benefit from employment rights including the right not to be unfairly dismissed (although they will soon have to wait 2 years for this right), so there are clearly advantages as well as disadvantages of the derogation for agency workers.
Unsurprisingly, the use of the derogation has caused some concern. The TUC has stated that temporary agency workers are paid about a third less than permanent staff doing the same job and the Daily Telegraph has also reported 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. Unions are therefore worried that the use of the derogation by employers will lead to agency workers being worse off and being exploited by employers, which is against the spirit of the Regulations. In light of the concerns, we may well see unions willing to fight test cases for agency workers on the derogation issue, which will give tribunals the opportunity to provide guidance on how the derogation works in practice.
Other options?
Until further guidance on the derogation is provided, there are other options which employers could consider. For example, employers may wish to consider whether it is feasible to employ more workers directly as permanent staff and therefore reduce the use of temporary staff.
Furthermore, in conjunction with using the derogation, another option may be to introduce a starter pay for new permanent staff, below the rate given to fully trained staff (subject to NMW limits). This means that when temporary agency worker rates are compared with permanent staff doing the same role, the temporary agency worker could be paid the lower starter rate. However, it should be borne in mind that starter grades which apply primarily, or exclusively, to agency workers may not be compliant if not applied generally to direct recruits.
Whether or not the derogation will work in practice remains to be seen, as it may not be a complete solution for all. We are likely to see claims reaching the tribunals over the next year, which will provide both hirers and agencies with some indication of whether the derogation will become commonplace.
Olivia Baxendale, Solicitor in Fieldfisher’s Employment and Pensions practice.