Labour supply chain due diligence – balancing risks and commerciality

When outsourcing contingent labour, should you choose the lowest quote?

When outsourcing contingent labour, should you choose the lowest quote?

Labour supply chain risk

In the first article of our series on labour supply chain issues, we touched on a number of key considerations, opportunities, and risks faced by organisations as they procure labour provided through a 3rd party (’labour provider’).

In this second article, we look at the common situation of the labour provider directly employing workers and applying PAYE/NIC on payments to them (we will refer to them as ’PAYE workers’). Given that the tax risk appears to be managed, we consider the question ’should your decision to appoint a labour provider be based on the lowest quote?’.

To protect its own business from undue risk, it is important that clients have a clear understanding of ‘how the labour provider’s numbers work’.

The contingent labour market is fiercely competitive and it’s not unusual for labour providers to offer low rates for ’PAYE workers’ to win new or repeat clients.   

In some cases, the cost of the PAYE workers may even be lower than the cost to the client if they had had employed the workers directly.  Whilst this may appear like a win-win situation, it is important to check that this is a genuine commercial arrangement and isn’t explained by:

  • Workers bearing the labour provider’ cost: some labour providers pass on their costs to the worker or seek to deny rights afforded by the Agency Workers Regulations 2010. A  common example of this is that the labour provider quotes a seemingly attractive hourly rate to the client and to the worker, but then seeks to recover the cost of employer’s NIC or other expenses from the worker through ‘employee charges’; or
  • Rolled-up holiday pay: instead of paying the worker for holidays taken, the amount of pay relating to annual holidays is calculated and ‘rolled-up’ into the worker’s normal hourly rate. This artificially inflates the worker’s hourly rate, but is technically unlawful, and the worker will be unpaid when they take holiday.  Workers may therefore be tempted to take no breaks from work.

Other practices that might reduce the cost of procuring labour through a labour provider are to account for PAYE and NIC on payments to workers but for only part of the payments e.g. by paying the in the form of loans and expenses that seek to avoid PAYE and NIC.

So, to go back to our question – should you accept the lowest quote? Well, quite possibly so, but only after fully understanding the pay and working practices to ensure this is both legal and isn’t detrimental to the workers so that you can manage the reputational and associated risks.

What should organisations do?

Detail is key. Clients should carefully scrutinise all quotes. Where there is uncertainty, clients should ask the labour provider to explain ‘how the numbers work’, and to retain evidence of this on file.

This should be used alongside the high-level checklist we included in our previous article to help you to understand the risk profile of the sub-contracted agency/umbrella. 

How KPMG can help

KPMG’s Employment Solutions and Employment Law Services teams work with organisations to ensure the robustness of their labour supply chain and mitigate employment status risks, including:

  • Setting up processes and controls to check employment status;
  • Drafting contracts or clauses with agencies, intermediaries, suppliers and workers to manage risk;
  • Identifying contracting routes within the organisation and ensuring appropriate controls across buying channels to mitigate compliance issues; and
  • Reviewing contracts for service or labour provision;

Our team includes ex HMRC officers who can support you to develop a governance framework so that policies are applied, and controls monitored, to support Senior Accounting Officer reporting.

If you’d like to talk through how KPMG can support your organisation’s labour supply chain due diligence, get in touch with Caroline Laffey, Eloise Knapton, Donna Sharp, or your usual KPMG contact. You can also email employersclub@kpmg.co.uk.

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