“Inflation will put more pressure on chief procurement officers to manage their departments strictly within budget,” according to the Ardent Partners Annual Research Report. That said, here are some compliance pitfalls to be aware of when hiring contingent workers.

Worker classification. A common freelance hiring issue originates from a poor chain of custody around worker classification. Without legal worker classification, your organization is in danger of costly litigation. If your worker classification is outsourced to a managed service provider (MSP), they may also have outsourced this important function to a vendor management solution (VMS).

Many businesses have redistributed the responsibility of worker classification to a third party or still have paper processes in place, which is precarious and, dare I say, archaic. The party you employ to carry out worker classification won’t be in the hot seat if an audit occurs, so it’s up to you to ensure your worker classification is compliant with the law.

Selecting poor MSPs/VMSs. Poor vendor choices can happen using an outdated MSP. Many MSPs have not updated their practices to include modern technology and inevitably have inaccurate need analysis and data errors. Using inadequate MSPs and VMSs can leave you non-compliant, and may contribute to a perceived talent shortage because of their limited bandwidth in quickly and compliantly hiring contingent workers.

If your MSPs or VMSs are not adhering to the established set of guidelines laid out in their contracts, your organization is at risk for fraud, corruption and rogue spending. Dependable vendors can also be the link between you and a flowing supply of labor. Capitalizing upon what VMSs and MSPs do well while directly sourcing your own external talent could save you time and money. Tech tools allow you to sidestep low-quality recruiting services, undelivered talent quotas, questionable ethical standards and compliance risks around hiring.

PREMIUM CONTENT: The US Gig Economy — 2022 Edition

No agile workforce strategy. Smart enterprises are hiring at speed using External Workforce Management systems to minimize the effects of the talent shortage by adopting strong external hiring processes. A good process streamlines onboarding, tracks progress and compliantly pays freelancers on time.

Procurement teams can benefit from External Workforce Management to reduce risks around signing contracts, non-disclosure agreements, background checks and the long-term storage of and access to onboarding documents. Standardized procurement procedures in one central system allow internal stakeholders to know exactly what to do at each hiring stage because the system is virtually automated.

According to Deloitte, “Only 8% of respondents, for instance, said that they had established processes to manage and develop alternative workforce sources…”

Managing independent contractors compliance -at speed- can be difficult. Nonetheless, there are technological workarounds that procurement professionals can use to speed up the notoriously slow non-employee hiring process while upholding ethics, data privacy, transparency and other legal requirements surrounding employment laws.

Don’t Be Afraid to Tap Into the Gig Economy

It’s critical to hire flexible global talent to stay competitive. While communicating with external talent is more straightforward, engaging contractors for flexible work and maintaining compliance can seem overwhelming without the right innovation.

Using agile talent means you can scale your labor force during seasonal demands, contract talent to fill gaps in your teams, reduce workers during slower periods and have access to a larger talent pool.

According to Statista, “In 2021, there were about 23.9 million independent workers in the United States, an increase from 12.9 million in 2017.” Using quality External Workforce Management  can help you outmaneuver the competition with perks that include tax benefits, increased productivity, higher ROI and lowered overhead costs while providing options for increased diversity and inclusion. Advanced tech exist that works alongside your MSP and VMS, not replacing them, but enhancing the workflows around labor law compliance, worker classification, custom contracting and spend visibility — cutting out rogue, low-quality hiring practices.

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However, HS2’s breach of the legislation lies with how the organization works with third party organizations acting as consultancies. These distinctions made by HMRC have important implications for agencies offering project-based products and SOW-based IR35 solutions.

What We Know

From HS2’s internal review and additional HMRC guidance, we can see that HS2 did not carry out employment status determinations on a number of contractors because they were supplied by a third-party provider.

HS2 took the view that it was the third parties’ responsibility for determining the IR35 status for each individual contractor. In principle, this is correct. Consultancies that provide genuine contracted out services to a client would be responsible for determining the IR35 status.

However, we are seeing an increasing number of cases where the service the consultancy or agency is providing is a provision of labor as part of or disguised as a consultancy agreement or SOW. This would leave the end client open to investigation, as the agreement between the consultancy and the end client does not reflect a genuine managed service and therefore changes the responsibility for IR35 determinations by moving it to the end client — in this case, HS2.

What Does Outsource Service Provision Mean?

When engaging with contractors through a third party, there are different things the end client must consider. Arrangements should be carefully analyzed to ensure that a contract has not simply been re-labelled as a managed service when what’s being provided is a source of labor. Agencies and other service providers should ensure that the right contracts and practices are in place to make the distinction.

This is not an issue that can be dealt with by an IR35 status tool such as CEST; an IR35 specialist should review the arrangement to ensure the person responsible can be correctly identified. If labor is supplied, the IR35 rules may still apply depending on what is being provided and who is providing it.

PREMIUM CONTENT: Direct Sourcing Platform Landscape

How Does This Affect Contractors?

If the service is genuinely outsourced and the outsourced service provider is classed as a small company, contractors will still be responsible for their own IR35 determination. This should be advised by the consultancy, but it is important to get this in writing. If the job role changes or the consultancy grows in size, the IR35 position may change. This issue is becoming more common in sectors with long supply chains and where sub-contracting takes place, particularly in the oil and gas sector where there are often six or seven people in the supply chain.

What Should End Clients Be Doing?

If you think the contractor supplied to you is genuinely part of an outsourced service, ensure you have the appropriate documentation to evidence this in case of investigation by HMRC. You should be considering this for all contracts which involve the use of contractors, and it is recommended that you liaise with all service providers on this issue for peace of mind.

What Should Agencies Be Doing?

If you provide outsourced services in addition to your core recruitment business, you should ensure you have taken IR35 advice from a specialist, or you could inadvertently bring risk to your clients. This may lead to short-term gain in helping your clients alleviate their own IR35 responsibilities, but this could cause long term reputational damage if HMRC investigates and finds this not to be the case. If you are unsure who should be responsible for assessing the contractors, get legal advice to review the circumstances before the contracts are agreed upon.

Don’t Be Caught Out

Using a contracted-out service as an IR35 get-out was once viewed as a silver bullet to the IR35 changes, but HS2’s mistake highlights that it is vitally important to ensure full due diligence is carried out to minimize the risk of a hefty fine. Always seek expert advice if you are uncertain to protect yourself and your supply chain.

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As many talent acquisition leaders will know, keeping up with the ever-evolving pace of international, national and local employment regulation and compliance changes can be complicated and sometimes even intimidating. However, it’s critical that employers take the time to understand country-specific legal requirements and what they mean for their business. Here are some key regulations to be aware of.

International Differences: Europe

Across the globe, there are specific legal obligations that must all be adhered to. However, lesser known is that in-region screening solutions are also varied across countries. A good example of this is the General Data Protection Regulations (GDPR) within Europe, which leave it up to individual countries to determine who can process criminal conviction data. Some countries are significantly more stringent than others — Spain being one of these.

Under Spanish law, employers need a legal requirement — not legitimate interest — to process a criminal conviction. This nuance in criminal screening requirements across Europe recently came to the foreground when the first legal case and fine for undertaking illegal criminal checks was issued this year. As a result of this breach, a €2M fine was handed out to a major global retailer for processing the criminal convictions of its delivery drivers in Spain.

Comparatively, certain countries place all responsibility on the employer to determine whether this check should be conducted. For example, in Germany, employers must determine if personal integrity is indispensable to the specific role before they can then conduct a criminal record check.

Meanwhile, in the UK, there are many legal bases for employers to process employees’ criminal convictions. For example, employers may seek to help prevent or detect unlawful acts, help protect the public against dishonesty and help prevent fraud. The UK government has made it relatively simple to determine which criminal check you can give your staff, and a simple survey is even available to help firms know which check is appropriate.

PREMIUM CONTENT: North America Staffing Company Survey 2022: Initial Findings

Mitigating International Hiring Risks

Here’s what hiring teams can do to help minimize risks and prevent your firm from incurring any unexpected fines:

Consult work councils and trade unions. When setting up a global screening program, consulting with local work councils and trade unions can also be valuable. Going back to the Spanish GDPR fine mentioned earlier, it was in fact a work council that brought the issue to the attention of authorities.

Map your recruiting data. It’s always a good idea to conduct regular companywide data audits. This process will show what kind of data your organization collects for what reason and where it’s being taken from and stored.

Stay up to date with developments. International hiring protocols are already complex, and it’s likely that this trend will continue, with authorities always outlining new regulations. It’s important to stay on top of changes in data protection rules across any country you’re operating in or expanding to.

Safe and Secure Data Transfers

It should be noted that data transfers will be an inevitable element of global hiring, and ensuring that these are safe and effective will be paramount. You must have robust information security and privacy policies in place to ensure that any risks arising from cross-border transfers are minimized.

While data transfers have become increasingly more complex in nature, particularly within the EU and the UK, utilizing a trusted global screening partner that has met all the required protocols and meets all best-practice standards required by your business will prove to be invaluable for hiring teams.

While there are a variety of cross-border challenges to consider here, the UK’s chronic skills shortages alongside dried-up talent pools mean that international hiring is simply a must for those businesses looking to get ahead.

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A New Workforce Composition

Businesses are increasingly diversifying the way they engage workers in order to achieve greater agility, cost savings, efficiency gains and access to talent. As a result, the full-time workforce continues to shrink. We see this with the rise of the contingent workforce at all levels of the organization.

Shift-based workers are a huge part of this equation. They are absolutely critical at the site level, particularly in industries like manufacturing, logistics, healthcare and education.

Businesses need shift-based workers, often with short notice, to meet immediate demand, fulfill orders and ensure facilities are fully staffed so they can remain open. Without them, operations are disrupted, slowed or halted. We’ve seen this many times over the past two years as companies continue to face staffing shortages.

Managing the Shift-Based Workforce

Most large businesses have developed a sophisticated strategy and implemented technology to accommodate the management of the contingent workforce. Just as an applicant tracking system (ATS) manages full-time employees, a vendor management system (VMS) performs the same function for contingent workers.

Unfortunately, a VMS wasn’t built for the complexities or high volume of shift-based workers. They are transient, working just one shift or many, and often accept shifts just days or hours in advance. This type of dynamic scheduling and real-time communication needs between clients and suppliers can’t easily be accommodated by a VMS. Companies often resort to manual processes or some combination of technologies to manage shift-based workers, which leaves room for error, especially as it relates to paying workers correctly.

Compliance for this segment can be tricky no matter where your company is located, but California’s laws pose additional requirements that can be difficult to navigate.

PREMIUM CONTENT: US Healthcare Staffing Market Assessment: 2022 Update

In California, workforce compliance requirements are far more complex than those in other states. VMS tools can easily accommodate these compliance needs for traditional contingent workers. But how is all of this accounted for with the shift-based contingent workforce? Without a strong technology backbone that can accommodate these rules, it’s a manual, laborious, error-prone process.

Simplifying Compliance for California-Based Shift-Based Workers

Many companies have tried to manage their shift-based workforces through existing tools like a VMS, or even manually via spreadsheets. However, they fall short without a fit-for-purpose tool.

If employees aren’t paid correctly on time, employees can recover up to $200 plus 25% of the amount withheld. Apart from stiff penalties like these for employers, it’s important to create an experience that makes shift-based workers want to accept shifts. Mainly, they want to be paid on time and correctly, every time. In California in particular, it’s incredibly difficult to do so without the help of technology built specifically for the dynamic shift-based workforce.

What should California-based businesses look for in a shift-based workforce management technology?

Real-time flagging. A technology solution should communicate, not just track, in order to allow employers to make real-time decisions. Is a worker approaching overtime or double time pay? Notifications can help the site manager make better decisions.

Automated compliance checks. There are numerous positions where shift-based workers must ensure they are up-to-date on certifications. Take forklift operators, as an example. In order to view and qualify for open shifts, they must be up-to-date with credentials. Technology can also track health and safety training required during onboarding.

The ability to automate pay. Shift-based workers won’t continue to accept shifts if there are errors and inconsistencies in their pay. Employers who have automated tools that account for California pay differentials, including those mentioned above, create a more seamless experience for workers and drive longer-term engagement.

Managing compliance in California associated with the shift-based workforce helps businesses mitigate compliance risks and also enables them to attract and keep talent. In today’s work where agility is king, this is a key workforce strategy to becoming an employer of choice.

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Hire the right people. You need a good team in place to help you execute your idea in the countries or regions that you are expanding to. You may consider relocating your current staff to the new country, hiring an entirely new local team or a mix — just remember that the best team is the one that meets your unique needs. Relocating individuals from your current team can add diversity that drives creativity and innovation, whereas a local team can help you with the local language and culture and build on existing client relationships, contacts and networks. Evaluate your needs and hire accordingly.

Speak the language of the people. One of the challenges that you are likely to encounter when expanding globally is the language barrier, so prepare a multilingual strategy to help you conquer the hurdle. Moreover, if you are to be heard by your target audiences, learning to speak their language is paramount.

Additionally, your products, brand message and promotional materials need to be understood in the local language. To navigate cultural and linguistic nuances, work with partners who offer professional translation services to help with your localization strategy. But even translation services can miss the mark sometimes; hiring locals can help you get your messages across.

PREMIUM CONTENT: May 2022 US Jobs Report

Ensure compliance. The last thing you need during a global expansion is to get into legal tussles with the regulatory authorities in the regions that you are expanding to, which can be costly and cause delays or unending legal battles. So, do your due diligence by engaging compliance experts in your target market or ensuring your staff conduct its own thorough research into the legal requirements in your region of interest — including labor laws, industry regulations, advertisement restrictions and consumer protection requirements. Ensure that you get all the required licenses and certifications so you are in compliance from day one.

Adopt global HR management. Expanding into new geographies requires adapting your human resource management to the targeted environment. The regional selection process should include skills availability assessment. Compliance as it pertains to hiring and employee management is a consideration that bears repeating. Do your due diligence or engage the services of experts to ensure you are in compliance with local employment laws.

You will also want to align your salaries and compensation packages with local market rates. In addition, aim to incorporate training on legal and cultural differences and the best ways to handle them in every region.

Going global sets up your business for possible exponential growth. However, going about it blindly could cause losses that affect your existing business. Proper planning and research are paramount to navigate obstacles such as language barriers, cultural differences, legal requirements and employment. Adopting these strategies could be the key to set your business up for success.

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As our working lives changed, so did candidate compliance and screening with everything moving online. Initially as a temporary measure, the Home Office shifted from in-person Right to Work (RTW) checks to allowing documents to be scanned digitally. On April 6, 2022, new legislation regarding RTW checks took effect that allows for screening to be carried out permanently online. This shift will be facilitated by certified digital identity service providers (IDSPs) using Identification Document Validation Technology (IDVT) to carry out digital identity checks on behalf of employers and recruiters.

This decision by the Home Office to continue to allow online checks cements the notion that hybrid working is evidently here to stay.  Digital RTW checks enable businesses to access a geographically wider talent pool and onboard candidates more quickly so as to avoid missing critical hires.

What Are IDSP and IDVT?

The change in regulation allows job applicants and existing employees to send digital, scanned copies for RTW and Disclosure and Barring (DBS) checks on live British and Irish passports through an app or email, rather than via sight of original documents (although this is still permitted if preferred).

Recruiters are required to use a certified IDSP using IDVT to ensure full compliance when checking documents. Access Screening, a long-standing provider of automated compliance software to staffing firms and HR professionals across all industries, is working with its integrated partners in the certification process of their technology.

Why Automate Screening?

The requirement to understand, document and maintain compliance as an employer around identity checks is paramount, especially with increasing compliance burdens of programs such as the EU Settlement Scheme. With new visas to help attract talent from overseas in sectors like academia, science and tech, there is an additional layer of complexity alongside many other background checks that calls for effective management of candidate screening to avoid fines or reputational damage.

For recruiters that need to undertake a host of additional sector specific background checks, such as in the healthcare and construction industries, automating screening with all data visible within one platform will improve efficiencies and mitigate risk. It is also likely to be a more cost-effective solution by implementing certified screening software in-house.

PREMIUM CONTENT: Most Complex Contingent Markets Globally 2022

Transforming Candidate Onboarding

The new legislation is forcing the digital agenda. However, aside from being able to continue to perform digital RTW checks, there are numerous added benefits of automating screening processes.

Speed and accuracy are both proven to be improved with onboarding times reduced by up to 50%. Alerts for ongoing document updates keep both the employer and candidate compliant. Plus, given the prevailing candidate short market, the quick validation of documentation and references allows for a smooth candidate experience, decreasing the risk of counter job offers.

Every business will have its own specific requirements, and the technology can be easily configured to meet these needs and accommodate the employer branding. Not least, screening software makes the application of any new or changing legislation much easier since the rules will be already set up within the technology.

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Learnings from the public sector. The NAO report “Investigation into the implementation of IR35 tax reforms” is far more balanced than HMRC’s recent attempt to mark its own homework. It also provides some very helpful learnings for how the new rules can be better managed in the private sector.

First, HMRC has recouped £100 million more than expected in tax receipts, which suggests that many public sector organizations placed more workers inside IR35 than was really necessary. This is a practice that private sector businesses would be advised to avoid in the current competitive environment for attracting and retaining contractor talent.

Second was the report’s coverage of HMRC’s Check Employment Status for Tax tool (CEST), with it clear that historic errors in use of the tool resulted in public bodies being penalized and handed significant tax bills. Although the House of Lords report goes into further detail on the challenges around CEST, the NAO’s recommendation is that appropriate training is put in place by businesses in order to fully understand HMRC’s guidance. As ever, any automated tool is only as accurate as the information fed into it.

Finally, the NAO report recognized that HMRC massively underestimated the ongoing commitment required by organizations to maintain IR35 compliance, with dedicated staff, independent review structures and formal approval at senior levels recommended as best practice. While this may seem onerous, it will allow businesses to unlock one of the key advantages of centralizing responsibility for engaging with off-payroll workers: a more holistic view of status determinations both internally and in the supply chain. Organizations that follow this advice stand to benefit from improved access to a flexible workforce, while keeping a tighter rein on costs and compliance.

PREMIUM CONTENT: Temporary Staffing Platform Update

Limitations of CEST. The House of Lords enquiry makes clear that CEST should not be a substitute for law, so companies that use the tool should understand their legal responsibilities for reasonable care and how to use CEST in this context. However, until we see an enforcement case come to court, there is currently little legal precedent for how these new rules should be applied, and CEST still appears to be the inaccurate yardstick by which compliance in the public sector is being measured.

The House of Lords recommendation to introduce mutuality of obligation considerations into the tool will be a great help, but only if, as outlined in the NAO report, people using the tool are fully trained and able to clearly interpret the rules.

Blanket bans. The House of Lords report recommends the HMRC to police the use of blanket bans – where contractors are put onto a payroll without assessing IR35 status – and blanket assessments – where a hirer deems all engagements as outside IR35. In a recent Brookson Legal survey of 500 business leaders responsible for IR35 –  Reassessing IR35: The unspoken opportunity for growth report – 25% of companies we spoke to indicated that they had used a blanket approach to status determinations. Whether HMRC heeds this advice or not, we would advise these companies to review this practice urgently to avoid losing out on talent to companies who are able to offer outside IR35 roles for the more skilled roles in their flexible workforce.

Looking forward. The House of Lords committee recommends the findings of the 2017 Taylor review be implemented more fully, which we support. A healthy economy needs a tax framework that enables access to flexible workforces for businesses, while valuing the vital contribution that genuine contractors make and the financial independence that they require in order to work effectively in this way.

The NAO’s and House of Lords’ IR35 reports provide useful learnings and food for thought for the private sector as it embarks into the next phase of its IR35 journey. Only by heeding the warnings surrounding reliance on CEST and blanket bans will organizations be able to recruit and retain talented contractors, and embed a compliant and robust IR35 solution that supports business growth.

MORE: The future of talent acquisition

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Background checks are fraught with risk and employers face injury and discrimination claims, as well as class actions for technical violations under the Fair Credit Reporting Act. Just last year, a Florida jury returned a verdict of $1 billion against a trucking company  for failing to verify that its driver had a valid commercial driver’s license when he struck and killed an 18-year-old student. The case was pursued under the theory of negligent hiring, in which an employer is liable for the wrongful acts of its employee if it “knew or should have known” the individual was unfit for the job and hired them anyway.

To avoid such claims, employers have to demonstrate that they exercised due care — including evaluating each specific position, the nature of the worksite and the tools used to perform the work — to determine if a background check is required when hiring. And simply doing a background check won’t eliminate risk, as the scope and depth of any screen varies greatly by vendor and by price. Skimping or working with the wrong vendor may lead to missed convictions one should have arguably known about. The reality is negligent hiring claims don’t arise often — but when they do, they are usually extreme. An employer’s actions (or inactions) will always be judged in hindsight, and jurors will look for just about any reason to compensate a sympathetic victim.

PREMIUM CONTENT: The Future of Candidate Evaluation: a New Paradigm

Given the risk, requiring a background check for all positions might be tempting; however, you are likely trading one lawsuit for another. Screening policies with blanket disqualification criteria (e.g., “no felonies”) can lead to claims of discrimination, as the Equal Employment Opportunity Commission requires — and many jurisdictions have passed laws mandating — individualized assessments before denying employment based on a candidate’s criminal history. Illinois has gone so far as to require employers to play the part of probation officers in that, before denying employment, they must consider whether the candidate would pose an unreasonable risk to property or safety. If so, then the employer must then also consider additional factors including the facts of the case, the nature and severity of the conviction as well as any rehabilitation efforts the candidate demonstrates.

The dynamic interplay between the risk of negligent hiring and the risk of violating individual rights forces employers to play social scientists, handicapping the likelihood that a past criminal act is or is not a predictor of future behavior. The risk is compounded for staffing firms given the fact that we fill thousands of different roles at as many different locations. Moreover, clients are often unaware of rapidly changing regulations, forcing staffing firms to adopt potentially unlawful adjudication standards.

To protect against large verdicts and class action lawsuits, in the short term, staffing firms should dust off their background check policies and have them reviewed by competent counsel. They should be prepared to make difficult but necessary changes and have hard conversations with clients. If a client insists on using screening criteria that creates risk, staffing firms should insist on contractual  indemnification.

In the long-term, staffing firms and all employers should band together and demand legislators pass a law providing some relief from negligent hiring and discrimination suits arising from background checks. If a staffing firm can demonstrate that it followed a consistent, fair and well-defined process in hiring and placing an employee, it should be afforded immunity from suit by way of allowing an affirmative defense to either claim. Such a  legislative solution would satisfy the duty of care owed to the public while ensuring opportunities for those with conviction records are available. While not eliminating the guess work for employers, employers would have a safety net even if — after carefully balancing safety and individual rights — they guessed wrong.

MORE: DE&I hiring: Try placing potential over credentials

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According to evidence presented to the House of Lords Finance Bill Sub-Committee, many businesses have invested considerable time and resource into implementing IR35 correctly. For those businesses, the end of HMRC’s soft-landing period will not be a significant cause for concern, but an opportunity to reflect and review their current IR35 solution. However, for others, it is a trigger point that will help ensure a robust and compliant IR35 approach is in place.

Some organizations are feeling a false sense of security, according to recent Brookson research of 500 business leaders responsible for IR35. Our Reassessing IR35: The unspoken opportunity for growth report found that while 87.6% of midsize to large companies believe they understand the “reasonable care” requirements set out by HMRC and are confident they’re compliant, many have relied upon questionable IR35 solutions.

For example, 47% of businesses relied upon HMRC’s Check Employment Status Tool for contractor status determinations, while 42% relied upon other automated online tools. However, online automated tools such as CEST have been found responsible for recent public sector fines – clearly demonstrating they are not fail-safe; as with any automated tool, they are only as useful as the level of skills and knowledge of the person using it.

A third of businesses also asked agencies (31%) or contractors (35%) to make IR35 status determinations. This is against the instruction of the new off-payroll working rules; we strongly recommend seeking a robust solution that can meet the needs of the organization as soon as possible.

PREMIUM CONTENT: IR35 Off-Payroll Working Rules: Updated FAQs for Buyers

Reviewing IR35 Solutions

Positively, when asked in the fourth quarter of 2021, 25% of midsize to large businesses now responsible for the IR35 compliance of their contractors had already reviewed their solution, 31% planned to do so before January 2022, and a further 27% planned a review before April 2022. This clearly demonstrates the diligent approach the majority of organizations are taking to ensure compliance.

The end of the soft-landing also coincides with plans by 90% of companies to extend their use of contractors over the next 12 months to support business growth. This will see IR35 solutions increasingly replied upon, and where solutions are robust and compliant, could provide businesses with a competitive edge and the ability to offer roles outside of IR35 where appropriate.

However, 17% of businesses will not be reviewing their solution before April, 4% of which do not have an IR35 solution in place. This is concerning, particularly when considering the broader approaches that some businesses have taken to IR35. While 71% determined IR35 tax status of contractors via individual assessment on a contractor-by-contractor basis, 41% are also using more manageable role-based assessments and 25% have applied a blanket decision across their whole workforce or subsets of the workforce. By using a blanket approach to IR35 determinations, end hirers risk being left behind as competition for talented contractors continues to increase.

Ongoing Responsibility

Beyond the initial solution put in place for managing IR35, ongoing status determination checks will be necessary, which forms a key part of the end-hirer’s reasonable care responsibility.Data surrounding how often businesses plan to review the status determinations of their contractors was positive – companies plan to review contractor status’ each month (22%) or every three months (39%), while only 30% plan to review every six months and 8% once a year. Ongoing reviews of status determinations is a distinct feature of reasonable care, so it’s important that all hirers regularly review contractor determinations in case of role changes.

April marks a clear milestone in the private sector’s IR35 journey and provides an opportunity for all organizations to review the IR35 solution they have in place. This period of reflection will also enable end hirers to iron out any teething issues with their IR35 approach and be sure that it will provide an effective framework for accessing the benefits of the flexible workforce and importantly, will meet the needs of a growing and agile business.

MORE: The potential IR35 compliance/confidence gap

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Conflicting data. To uncover the impact of IR35 on the private sector, the House of Lords Finance Bill Sub-Committee undertook a review of the “off-payroll working rules.” HMRC’s evidence stated that most businesses find the new IR35 rules “easy” and “reasonable to apply.” Research of 500 business leaders by Brookson Legal reveals how HMRC might reasonably have arrived at this view, but it also sounds alarm bells that there may be a significant gap between confidence and compliance for some businesses.

Responding to our report, “Reassessing IR35: The unspoken opportunity for growth,” 87.6% of those responsible for IR35 in medium to large companies said they understand the “reasonable care” requirements set out by HMRC and are confident they’re compliant. For a large number of businesses who have invested time and energy into getting to grips with the new legislation, this will be the case. When exploring the solutions that a significant number of organizations have implemented, however, the warning signs become apparent.

IR35 approaches. One of the most common risks is reliance on HMRC’s Check Employment Status for Tax (CEST) online tool. Both the House of Lords Report and a recent National Audit Office inquiry into IR35 in the public sector have been heavily critical of the limitations of the tool. Placing trust in CEST has proven costly in the public sector, where recently Defra became the fifth ministerial department to be hit with an IR35 tax bill which totaled £48 million. Although HMRC continues to stand by CEST, this should be a clear warning sign to all businesses that it does not guarantee compliance.

Data from our report found that 47% of business relied upon contractor statuses determined through the use of CEST, while 42% used other automated online tools. While it is possible to make compliant status determinations for 80% of contractor roles using CEST — leaving 20% as undetermined via the tool — an accurate result relies on the knowledge and understanding of the person inputting the data, so training is key.

Of greater concern is where organizations have asked recruitment agencies (31%) and contractors (35%) to determine contractor IR35 status. The changes to IR35 clearly moved responsibility for status determinations to the end hirer, so this outsourcing not only buries risk and potential tax liability in the supply chain, but also goes against the new legislation.

PREMIUM CONTENT: US Internal Compensation Estimator: 2022 Update

The scale and risk of hidden tax liabilities. Although our report found that rising contractor costs (53%), talent attraction challenges (42%) and project delays (42%) are now of greater concern to businesses than unforeseen tax bills (31%), the scale of the tax liabilities from IR35 should not be underestimated. IR35 tax bills have been issued in the public sector for several million pounds, where liabilities built up over a period of years while the organization believed it was compliant. Significant tax bills could leave a private business permanently affected, leaving it unable to recover or significantly altering its growth trajectory.

Attempting to sidestep this risk, some businesses — including 25% of businesses surveyed by Brookson Legal — have applied blanket inside IR35 determinations to contractor populations. However, this approach is both a direct contravention of the reasonable care guidelines and a barrier to skilled talent attraction. According to HMRC’s own estimates, only around 33% of contractors should rightfully have their roles determined as inside IR35. Furthermore, the House of Lords report has recommended that false inside IR35 determinations be enforced with equal rigor to those outside.

The way forward. HMRC will shortly transition into its enforcement stage for the new legislation. Even for businesses who are currently feeling confident, this presents an opportunity to revisit processes to ensure that they haven’t fallen into the confidence vs. compliance gap. Not only will this avoid costly tax bills by meeting HMRC’s threshold for “reasonable care,” but it will ensure access to the flexible workforce to support growth.

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