What Does IR35 Mean for Background Screening?
This post looks at how IR35 may impact background screening requirements for contractors in the UK.
UPDATE: Since this article was first published, the UK Government has announced that it is suspending the implementation of IR35 for 12 months due to the outbreak of COVID-19. However, the steps to be taken to prepare for IR35 remain the same, as are the things to think about when screening your extended workforce.
When it comes to the upcoming changes to IR35 legislation, worker status should not be the only thing on employers’ minds. They also need to consider how any changes could impact background screening.
While the ins and outs of IR35 are hotly debated, many companies, including some large UK-based multinational banks, have already opted for a cautious approach, making public their decision to move away from engaging with contractors through personal service companies (PSCs).
For some organisations, this may mean their HR team is frantically completing the necessary paperwork to turn all their contract roles into PAYE positions on their company payroll before the legislation comes into force for private sector employers in April.
But in order for this to happen, the contractors first need to agree to their new terms of employment, which may not be favourable for them, particularly regarding tax and NICs.
Many companies may also be reluctant to commit to bringing their contractors in as employees, especially if they make up a significant proportion of their workforce.
This could have significant repercussions for their business, including increased overheads, additional HR resources staff required to support new employees, new equipment needing to be bought and NICs to be paid by the company for the new workers.
However, the situation is being addressed by the companies affected, it’s important to consider the impact IR35 may have on an employer’s background screening programme.
What’s the difference?
From a legal standpoint, in the UK there are a few key differences between a contractor and an employee.
These include mutuality of obligation (whereby contractors are not required to accept or to be offered work), control (contractors will probably have freedom over the hours they work and set their own schedule), and substitution (when a contractor could hire someone in their own right or get someone else to do the work).
However, in reality, many businesses may have employees and contractors conducting identical roles for their companies.
Yet, the background screening process that contractors go through may be less stringent than that of an employee. This could be for a number of reasons, such as:
The contractor is needed for an urgent project and the company does not have time to process a full background check before they can start.
The contractor may have refused certain employment checks as completing them may have made their role seem more like that of an employee and not a contractor with possible tax implications.
To reduce HR admin around the screening process.
The contractor may only be engaged on a short-term basis and so it is not considered cost-effective to conduct a full background screening.
The role is working remotely so the perceived risk is less than an employee based in the office.
The company that the contractor works for conducts their own background screening process that is less rigorous that the company’s own policy.
The contractor is not a fixed person (for example, a company is contracted to complete the work, but a number of individuals may be sent by the company to complete this work over time).
Assessing the risk
Many companies already use a risk matrix to assess the level of background screening that is proportionate for their workforce.
A risk matrix can be used to split workers into a number of different categories depending on the perceived level of risk, with those in senior positions or with access to financial information typically being screened more rigorously than those in entry-level jobs.
However, contractor roles are not always included in this risk matrix, meaning that existing contractors may have only been subject to a minimal background check, or possibly no check at all.
It’s an area to review, particularly when considering that many contract roles are well-paid highly-skilled specialist roles where the individuals are immediately placed in positions of trust, potentially with access to confidential company information.
Arguably, contract workers could pose a greater threat to a business than its employees do as they are often working independently and unsupervised and could even be contracting for a direct competitor of theirs.
It is advisable to assess the risk of each worker based on their job role, seniority, and what is legally permissible and proportionate to screen, not based solely on whether they are an employee or a contractor.
This will help ensure that background screening processes are sufficient to mitigate against the risk that each worker brings to a business.
Background screening and IR35
For companies looking to add current contractors to their payroll and who already conduct pre-employment screening on their new hires, now is the time to think about how to manage this process for soon-to-be employees and how to introduce them to background screening if they’ve not had a background check before.
Given that the legislation around IR35 is due to be implemented (for private sector companies) on 6 April, employers have quite a narrow window to go through the necessary process to transition their freelance workforce to PAYE employees (if this is the path they choose to go down), and also to conduct any pre-employment screening that is needed to ensure that their new employees are screened to an equivalent standard as their existing staff.
If your business currently hires contractors and is going to be affected by IR35, you should consider getting in touch with your background screening provider to discuss how they can support your changing screening needs.
This can help to ensure that your old contractors have all had their information verified to your company’s employment standards before bringing them on board, helping to mitigate your people risk before bringing potentially thousands of new people onto your company’s payroll.
Originally published on Personnel Today on 3rd March 2020.
You can read more about the latest update on IR35 on the Gov.uk website.
Release Date: March 10, 2020
Caroline Smith
Caroline is a UK qualified lawyer with over 18 years’ experience and currently serves as HireRight’s Deputy General Counsel for the EMEA and APAC regions. When not “lawyering” or writing blogs, Caroline can be found striking yoga poses in remote locations such as Mongolia and Bhutan.