Joint Employment has become a very popular employment model for Umbrella Companies and Contract Agencies, the arrangement between a minimum of two entities within a contractor supply chain. The most commonplace entities in this chain are the recruitment agency and payroll intermediary, although this is not exclusive.
Are Joint Employment Arrangements Legal?
It is often assumed this kind of arrangement is a tax avoidance scheme that is seen as illegal. However, these types of arrangements are totally legal, provided they are documented, managed, and adhered to properly.
Contract Agencies can charge VAT on invoices to the hirer, as they sourced the worker, but assignment costs are exempt. Payroll providers can also invoice recruitment contract agencies separately for “margin” which is also subject to VAT. It is recommended contractual relationships like this are agreed upon on a PAYE basis to avoid confusion and complexity for the workers. Agencies don’t charge the worker for these services under a joint employment arrangement.
What Documentation is Required for Joint Employment?
When preparing documentation it is important to pay attention to the accuracy of the information you provide, including assignment proposals, employee schedules, and invoices.
The nature of the relationship between the joint employers must be defined accurately to avoid any misunderstandings or blurring of one another varying responsibilities to the contractor. In a majority of cases, a recruitment agency is responsible for finding the contractor work, the payroll intermediary is responsible for processing deductions, payments, managing employment policies, and grievance procedures.
To further improve the clarity of what is needed, in April 2020 there was an introduction of Key Information Documents (KIDs) offering another opportunity to establish the exact nature of the relationship and prove compliance. The payroll provider will need to ensure all payslips display accurate data for compliance. For example, the workers’ actual earnings must align with the agreed employment arrangement, the number of hours worked and holiday pay accrued while also detailing all accurate deductions or employment costs. It is crucial to be detailed and clear to avoid any misunderstandings which could lead to financial penalties.
Why is Joint Employment an Advantageous Arrangement?
Where there is a genuine joint employment arrangement in place, there is no VAT chargeable on the cost of employment. HMRC confirms this within ‘Supply of Staff and Staff Bureaux (VAT Notice 700/34)’.
Generally, it tends to be an attractive model to recruitment contract agencies versus an umbrella solution. The Joint Employment arrangement is particularly beneficial for healthcare and medical, charities, banking, and financial sectors.
After the obvious financial savings to organisations, there is the spreading of responsibilities across two entities. A worker can engage with the payroll provider on any queries relating to pay and recruitment consultant to help them source work.