Does the use of outsourcing companies increase the risk of worker exploitation?

Worker Exploitation

The Labour market enforcement strategy 2023 to 2024 has made a call for evidence (issued on the 13th April 2022 with responses requested by 31st May 2022) regarding evidence of worker exploitation linked to the

Gig economy workers, employment through umbrella companies, joint employment models and any other employment models that might give rise to compliance concerns.

The Department for Business, Energy & Industrial Strategy (BEIS) has pledged to increase enforcement to make sure good businesses aren’t undercut by unscrupulous rival employers who aren’t paying or treating their workers correctly.
 
As low charge rates (in comparison to market rates) are also an indicator of exploitation, modern slavery or illegal working.
 
The government is also proposing legislating in their green paper – Transforming public procurement to further tackle payment delays in public sector supply chains and give small businesses, charities and social enterprises (deep in the supply chain) better access to contracting authorities to expose payment delays.
 
The BEIS announced plans to create a new Authority to take over the responsibility for tackling modern slavery, enforcing minimum wage and protecting agency workers.
 
With the following 3 departments combined to create a single enforcement body:

• Gangmasters and Labour Abuse Authority (GLAA),
• Employment Agency Standards (EAS) Inspectorate, and 
• HMRC National Minimum Wage (NMW) Enforcement

 
The Director of Labour Market Enforcement – Margaret Beels, has also requested evidence on the challenges (in terms of compliance and enforcement) for the 3 enforcement bodies under the Director of Labour Market Enforcements remit (GLAA, EAS, HMRC NMW)

Labour exploitation involves coercion, (victims cannot freely leave for other employment) receiving unacceptable low pay, poor working conditions or excessive wage reductions.
 
Victims are employed in a legitimate and often low-skilled job, with legal working conditions, by an employer unrelated to the offenders.
 
Most or all wages are taken by offenders often through control of the victims' bank accounts.
 
The UK Government has produced a free Modern Slavery fact sheet on labour exploitation.
 
Victims of modern slavery can be men, women or children. They can be British citizens living in the UK, EU nationals, or those from outside the EU e.g. Ukraine.
 
The Labour Market Enforcement Strategy for 2023 to 2024 is due to be delivered to government in autumn 2022, with stakeholder engagement scheduled for June 2022.  

What is an umbrella company?​
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Umbrella company is a term used for a company that employs a temporary worker (an agency worker or contractor), often on behalf of an employment agency.

The agency will then provide the services of the worker to their clients. Umbrella companies do not find work for the workers they employ.
 
The Trades Union Congress TUC believes that umbrella companies should be banned. 

The TUC argue that the labour market enforcement bodies do not regulate umbrella companies.
 
This is despite the government accepting a recommendation from the Taylor Review into Modern Working Practices, that enforcement of umbrella companies should be stepped up. 

According to HMRC - mini umbrella company fraud is primarily based around the abuse of two government incentives aimed at small businesses:

1. VAT Flat Rate Scheme and
2. Employment Allowance.

 
But HMRC suggest this type of fraud can also result in the non-payment of other taxes such as PAYE, National Insurance and VAT.
 
HMRC argues that fraud creates an uneven playing field for those employment agencies and businesses who follow the rules.

​And a fraudulent supply chain can lead to reputational and financial damage to the organisations who contract with these organisations in good faith.
 
Mini umbrella company fraud is low down in the supply chain, making it challenging to spot. It is not limited to a specific trade sector; it can be found whenever labour supply chains are used.
 
Workers in mini umbrella companies usually do not know who their employer is. They can be moved regularly between mini umbrella companies to help maximise profits from the fraud.
 
The creation of multiple limited companies facilitated by a promoter business or an outsourcing business which has other linked businesses to support the operation, creates complex layers of businesses within the supply chain to help to facilitate fraud.
 
HMRC has listed the common characteristics of suspected mini umbrella companies as:

• Multiple companies with a similar name, set up at a similar time.
• Business activities listed on Companies House do not relate to services workers provide.
• Foreign nationals are often listed as directors.
• Employees move frequently between different mini umbrella companies.
• A mini umbrella company will be dissolved by Companies House within 18 months for not meeting filing obligations. New mini umbrella companies will take their place in the supply chain.

 

How can you protect your business? 
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​HMRC suggest the only way to protect your business from becoming involved in mini umbrella company supply chain fraud is to understand how workers in your supply chain are employed and paid.
 
The government recommends assuring the integrity of your supply chains, minimising your exposure to risk, testing the credibility, legitimacy, legal and tax compliance of your suppliers, supplies, customers, employees and labour supply.
 
Exploitation is easier to hide below the surface of a supply chain when effective due diligence is not performed by all parties.
 
An effective due diligence process (such as the one described below) may help your business to assess its exposure.
 
Check

• Is your supply chain unnecessarily long?
• Does the workers contractual rate comply with the National Minimum Wage or the National Living Wage.
• Any business charging less than the Association of Labour Providers (ALP) or Gangmasters Labour Abuse Authority (GLAA) hourly rates for the supply of labour – suggests unsustainable practices.
• Is your actual supplier of labour the business you hold a contract with?
• Companies House, scrutinise the credibility of the directors, who is in control of the business? What other businesses do the directors own?

 
Act

• Keep a detailed record of all the checks you do.
• Add a clause to the contract requiring your authorisation before further sub-contracting to a third party.
• Fully understand what the relationship is, for example:

 

• who provides the workers,
• who the workers are,
• what their employment status is,
• who is responsible for paying the workers,
• how much are workers paid,
• is there is any indication of exploitation including modern slavery,
• are workers allowed to work in the UK.

 
Review
 
You must decide what checks are relevant, reasonable and proportionate for your own business – when you’ll carry them out, and how often.

About the author
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Naomi Clews

Naomi Clews is an independent purchasing and supply chain management consultant with decades of experience helping organisations save money, secure contracts and develop their commercial skills. Find out more here.  ​