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The end of the Swedish Derogation – yes, but what does it all mean in practice? (UK)

One of the changes planned as part of the Government’s Good Work Plan is for the “Swedish derogation” within the Agency Worker Regulations 2010 to be abolished from April next year.   This is causing concern to a number of our clients who use a high volume of blue collar agency workers.    They are estimating that the cost of this change will run into millions.

What is the Swedish derogation?

  • The Swedish derogation is shorthand for a special type of employment contract provided for in Regulation 10 of the AWR.  Its official name is a “pay between assignments” contract because workers engaged on these contracts with a temporary worker agency (TWA) give up the right to pay parity with comparable permanent staff in return for a guarantee to receive a certain amount of pay when they have gaps between assignments.
  • This arrangement has been most commonly used where large numbers of blue collar workers are needed e.g. retail, manufacturing, etc.  According to the Government’s figures, 8-10% of UK agency workers are on Swedish derogation contracts, which means as many as 130,000 people.

Why is it being abolished?

  • The Taylor Review recommended that the derogation be repealed.   The underlying agenda for this is to encourage more employers to take on permanent employees, so providing some greater level of certainty and security to those individuals. It is absolutely not related in any way at all, no really, to the resulting increase in PAYE tax receipts for HM Treasury. The very idea.
  • The Agency Workers (Amendment) Regulations 2019 will come into force on 6 April 2020 and will remove the Swedish derogation provisions set out in Regulations 10 and 11 of the AWR from that date.

What does the removal of the Swedish derogation mean?

  • Abolition of the derogation means that all agency workers will be entitled to pay parity (see below).
  • By no later than 30 April 2020 TWAs must provide workers whose existing contracts contain a Swedish derogation provision with a written statement telling them that with effect from 6 April 2020, those provisions no longer apply. Agency workers can bring a claim in the Employment Tribunal where their TWA fails to provide that statement on time.
  • Workers asserting rights under the new Regulations will be protected from detriment and unfair dismissal.

What is pay parity?

  • An agency worker is entitled to the same basic working and employment conditions as direct recruits of the same business (including pay) once he/she has undertaken the same role with the same hirer for 12 continuous calendar weeks.
  • “Pay” includes any sum payable in connection with the agency worker’s employment, including certain bonus payments, holiday pay, overtime, shift allowances and unsociable hours premiums, but excludes company sick pay, maternity/paternity pay, adoption pay, pension contributions and redundancy pay.
  • It does not include bonuses which are not directly attributable to the amount or quality of the work done by a worker, and which are given to a worker for a reason other than his/her personal output, such as to encourage the worker’s loyalty or to reward the worker’s long-term service.

Why are clients worried?

  • If the client hires agency workers who are currently employed under Swedish derogation contracts, then these changes could have significant financial implications after the 12-week qualifying period because it will then have to pay the agency worker the same rate as direct recruits.
  • TWAs will also be concerned with the change, as many recruitment businesses supply on Swedish derogation contracts of employment because they have been required to supply on this basis by hirers. This mean they will have to re-visit client terms and pay rates, which will cause an administrative burden.
  • How much this impacts on each client will depend on how many agency workers they hire on Swedish derogation contracts, how long for and in what kind of roles. In particular, of course, the cost will depend on how great is the gap between what the client currently pays for those staff and what it will need to pay when they are entitled to the same rates as its comparable permanent staff.

What are the “solutions”?

“Solutions” need to be tailored to the client, but clients are looking at things such as-

  • Creating a permanent internal bank of employed workers;
  • Introducing a probation rate for a specified period of time (e.g. 6 months), which would apply to all new agency workers and permanent employees;
  • Rotating agency workers regularly and limiting the period of time in which they are hired to less than 12 weeks so they do not qualify for pay parity and other rights. Note, however, the anti-avoidance measures in the AWR, which apply when there is a “structure of assignments”. In addition, this could create a serious risk of tail wagging dog given the administrative burden of moving people out on time and the cost to productivity, morale, etc., of continually losing workers just at the point where they have become familiar with and effective in the role;
  • Arguing that the agency workers do not fall within the AWR;
  • Creating a new “comparator role”; and
  • Outsourcing those functions most impacted.
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About this Author

Alison Treliving Employment Lawyer UK Squire Patton Boggs

Alison Treliving is a partner in our Labour & Employment & Business Immigration Practices and is based in our Manchester office. Alison has a wide variety of experience in both contentious and non-contentious employment law. She regularly advises a range of corporate clients in different business sectors on matters such as board-level appointments and departures, outsourcing, disciplinary and grievance matters, cross-jurisdictional disputes and business re-organisations. She is also an experienced litigator who takes a particular interest in complex...

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