UK Budget – What Effect Will It Have on the Contingent Labour Market?

We wrote here about the government's new measures to increase tax revenues from the contractor population and clamp down on what they call "disguised employment" - individuals who are basically working under supervision and direction for an organisation but do it through their own tax-effective service companies. Contractors working through their own firms can avoid some taxes such as National Insurance and have more options in term of how they take money out of the business.

Given the huge growth in the contractor population, and the increasing use of these flexible options by organisations, what do procurement teams and category managers in this sector need to consider now, post the budget changes?

The changes in dividend rules will affect many contractors, and reduce their earnings in effect (whether they still take dividends or move to more salary based payment). Many contractors will see their income, all else being equal, dropping by at least 7%. So that might put upwards pressure on pay rates, particularly as many sectors are pretty buoyant in terms of demand. Contractors may look to recover their "losses" through demanding higher day rates or looking for better paid roles, so more churn in the market may be a result. Similarly, the changes in the National Insurance Allowance rules will directly increase costs by a couple of thousand a year for many contractors.

Contractors can no longer claim travel and related expenses when they are working "under supervision." Now often they will be getting T&E from the client organisation anyway, but where they do not, this move will again push up costs. So expect to see contractors putting a higher priority on getting T&E covered by the client, or again looking for higher rates to cover their loss of tax relief.

All of this might also make some contactors decide that the hassle and expense of having their own company just isn't worth it. Some may choose to go self-employed: fewer tax benefits but lower costs too in terms of accountants, etc. Others may decide to go back into employment, so that might be good for growing consulting, technology and services businesses who have struggled to find good people in recent years.

The focus on IR 35 - although this is just at consultation stage - will also just increase the general nervousness of contractors and clients. Liabilities for employer's National Insurance for instance could come back to those employers who have had the same people sitting there year after year doing jobs that really are "staff" rather than contractors. A whole new range of people might be open to that discussion.

So what should procurement people be doing? First of all, obviously you need to understand these changes and what they mean. Assuming procurement has some involvement with the "temporary / contingent labour" category, the starting point must be simply to understand the situation within your organisation. Along with that understanding, basic controls on hiring contractors, reporting, on and off-boarding, are all pretty essential particularly if the rules are tightening. We then get onto the more complex issues such as ensuring contractors are appropriately qualified, security issues, and managing / monitoring their performance.

There is help available as well. We've seen considerable growth in the market for VMS software - solutions to help manage you contingent labour estate. IQ Navigator, Beeline and Fieldglass come to mind immediately, and a whole range of firms now focusing on angles such as labour that comes from alumni pools and personal contacts rather than the traditional agency route. Then there are firms such as our sponsors Comensura, who offer services around managing the contingent labour workforce, in effect a complete managed service to take responsibility for handling agencies and the workforce.

All in all, we don't think these budget changes will put a brake on the growing use of the temporary labour workforce as a key approach for many organisations. But they may change the shape of that workforce somewhat, and, as we explained earlier, it may cause some upward pressure on rates, so watch out for that too. And if you haven't got a grip on your contingent labour spend, or on managing the performance of your temporary workforce, then we'd suggest that is a very worthwhile priority for procurement to address.

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