Umbrella contractors, what will the Swedish Derogation Model’s removal mean for you?

There is much hype within the contracting market with the amendments to IR35, but it is worth grounding yourself because, also from April, the government will be implementing a key item from the Good Work Plan and what inspired it -- the Taylor Review of Modern Working Practices, writes Lucy Smith, managing director of Clarity Umbrella.

Although Taylor’s initial report suggested both the revocation of the Swedish Derogation Model (SDM) and the introduction of a governing body for umbrella companies, it appears that we will only see the changes to the SDM -- with the regulation of umbrellas to follow (under the remit of the Employment Agency Standards Inspectorate) at a later, unconfirmed date. This ‘into the long grass’ treatment for the regulation of umbrellas is surprising and at odds with what some industry captains are calling for, given the potential shift towards umbrella usage that the market is likely to experience because of the April 6th IR35 reforms.

The end of the SDM

So back to what’s happening – the end of the SDM. The Good Work Plan described the SDM contract as a ‘legal loophole’ which, in the review team’s opinion, excluded agency workers from the principle of ‘equal treatment’ in relation to pay under the Agency Workers Regulations (AWR) 2010. So in April 2020, legislation will scrap this working practice entirely. It begs the question; what difference is the removal of the Swedish Derogation Model going to make to umbrella company contractors?

Agency workers who previously worked under a Swedish Derogation umbrella contract would have a contract of employment that gave them access to be paid between assignments. This came with an agreement in the form of an ‘opt-out’ of receiving the same wage / employment benefits as other members of full-time staff. Simply put, the SDM was an agreed opt-out from Section 5 of the AWR, which related to equal provision of pay -- while the Contract of Employment maintained continuity of assignment allowing for a provision for pay between assignments.

Pay parity (and a paradox)

This Pay Between Assignment set-up also ensured continuity of employment, which helped provide access to tax relief on expenses, as it removed the ‘permanent workplace’ status for contractors. Even with the SDM model, the rest of the 2010 legislation still applied, granting entitlement to equal treatment in respect of the rest -- duration of working time, night work, rest periods, rest breaks and paid annual leave and statutory payments. So the repeal of the SDM is hoped to ensure that agency workers can be confident that they have a legally-enforceable right to be treated -- and paid -- equally to colleagues employed directly by the employer. It’s rather ironic this is happening now, with the current issues over IR35 and the furore over who pays the employment costs!

So without the SDM, we will see (if it has not happened already) umbrella companies forced to work off a ‘Match Pay Perm’ model (MPP model) that, as the government requires, ensures equal rights for workers.

Little or no change for most professional brolly contractors

But what does this mean to you? For most contractors, the revocation will make little or no difference at all. The SDM effectively allowed contractors to give up the right of equal pay in return for Pay Between Assignment provision – in reality this very rarely happened, so the changes are aimed at the lower paid ‘agency workers,’ to give them added protection in the form of rights but, predominantly, over pay.

When working via an umbrella company, you (the contractor /worker) become an ‘employee’ and as such the IR35 rules do not apply. And this is where the confusion starts! To work via an umbrella company, you should be provided with a Gross Contract Rate -- this is the figure from which all employment costs are met before reaching your taxable salary. This has not changed in the 20-year existence of the umbrella company.

It is almost as if the government has pre-empted this and come April, we will also see the introduction of the Key Information Document (KID), which may be issued by the agency prior to any contracts are agreed. The aim of the KID is to illustrate the options available to the contractor, and specify what rate is being provided. Yet it would seem that this represents far too little, too late, given the current confusion in the market. Post-April 2020, I would imagine we will see more ‘umbrella rates’ provided in contractor job adverts, which would be subject to Employment Costs but of course, not falling under the IR35 rules.

Final thoughts

Pre April, who knows?! Being forced to use an umbrella company with no rate uplift, or simply being declared inside IR35 without individual assessment is a realistic but unwanted prospect for many contractors. And to top it all, I would guess we may see some court action for end-clients and/or agencies breaching the new IR35 regulations. But it is the latter – recruiters – who will potentially feel April’s legislative showers first, as the combo of the start of KID and the end of SDM will force such employment businesses to provide pay comparator details to all their candidates under a ‘MPP’ model which sits in-line with the Agency Worker Regulations. So not for the first the time it’s all change from this April, but this time it’s far from an IR35-only event.

Editor's Note: Related --

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