PEO Model Set to Help UK Recruiters Grow

The UK labor market, like many others in the developed world, is undergoing profound transformation. One mega trend is the increased ubiquity and importance of the non-traditional workforce in the UK economy.

A thriving temporary workforce. According to IPSE, or the Association of Independent Professionals and the Self Employed, “freelancers” represent some 2 million of the 4.8 million self-employed workers in the UK. According to the organization’s surveys, some 84% are very satisfied with their way of working (well above results of surveys conducted by the Chartered Institute of Personnel and Development, or CIPD, indicating satisfaction levels among permanent employees).

There is also the growing presence of the gig economy; within the UK, the CIPD estimates that some 1.3 million people worked through an online platform in 2016. Globally, the McKinsey Global Institute estimated in June 2015 online talent platforms could raise global GDP by $2.7 trillion.

Interestingly, despite some negative publicity around working in the gig economy, the Work Foundation (August 2016) research stated we find no evidence that the gig economy has increased the share of insecure employment in the labor market.”

Legislative onslaught on non-traditional worker’s earnings. Despite the above, a raft of recent legislation in the UK has hardly indicated a celebration of this flexible labor market by the Government.

This has included IR35, MSC, “Agencies Legislation” as well as s689 ITEPA in respect of “overseas intermediaries and more recently the clampdown on “T&S” tax relief (s339A of ITEPA) and the off-payroll IR35 changes affecting the public sector.

Many are asking, given the inability to claim legitimate expenses to increase net earnings, where the benefit for a contractor may be in using an umbrella company. Furthermore, the widespread use of personal service companies generally may decline if the Off Payroll rules are extended to the private sector; the REC for their part “believe they will have to move into the private sector at some point.”

The PEO Model. In light of the above, we have seen a move to providers offering the professional employer organization model as an alternative solution for contractors and recruitment agencies.

The core purpose of a PEO model is to permit clients to focus on “the business of their business.” It has no interest in claiming tax relief (legitimate or otherwise) to increase workers’net pay.

The PEO model has a decades-long record of success in the US, where partnering with a PEO enables SME employers to offer to employees a range of benefits (particularly healthcare) that the PEO can secure at attractive rates with its purchasing power (given it may employ thousands of workers).

There are now some 780 to 980 PEO providers in the USA partnering with more than 150,000 SME employer clients and payrolling in excess of 3.4 million workers.

Research by the National Association of Professional Employment Organizations (NAPEO), the trade body representing 85% of the industry’s estimated $152 billion in gross revenue, suggests that partnering with a PEO can help clients to grow faster, reduce staff turnover and significantly reduce the prospects of business failure (“The State of the PEO Industry 2016: White Paper September 2016).

And the PEO model (suitably nuanced for the UK labor market)may become a significant trend in the UK temporary labor marker for in the words of Pat Cleary, president and CEO of NAPEO, “I can tell you that the function of a PEO, the value of a PEO, knows no borders.”

UK Market: Opportunities for PEO. The PEO model which is being offered by pioneering payroll providers such as RACS Group, offers significant value-add to all in the tri-partite arrangement characteristic of modern staffing supply chains.

  • For contractors, there is the peace of mind of being paid PAYE and having access to a suite of benefits usually reserved for permanent employees and, in the case of RACS, the chance to receive advances on earnings from the outset (with additional benefits being added continuously).
  • For agencies, seeking to optimise capital value on any exit the due diligence process, as far as payment of employment taxes, may be less fraught. Furthermore by offering a range of benefits the PEO partnership can help attract and retain candidates, not to mention saving time and cost on vetting and maintaining PSL’\s
  • For end-user hirers, the use of PEOs to payroll contractors de facto is likely to eliminate significantly “supply chain risk” and reputational risk in sectors where Trade Unions have recently been highly critical of umbrella providers in the national press.

With evidence suggesting 14% of full-time permanent employees are enticed by the idea of freelance work, the likelihood is that the non-traditional workforce will grow. Furthermore, with more segmentation of the supply chain (pre-screening, Onboarding, Compliance etc), innovative PEO partners may stand to add more value to agency partners in the ever-evolving UK temporary labor market.

Suhail Mirza

Suhail Mirza
Suhail Mirza is a former employment lawyer and former co-owner of a family healthcare business (employing 250 people) which was successfully sold in 2014. He is currently chairman of H1 Healthcare, a staffing business headquartered in Scotland. He is also on the board of RACS.

Suhail Mirza

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