Umbrellas gearing up to compete with agencies?

It has long been a dormant concern of agencies that umbrella companies, those providers that offer ‘tax efficient’ and employment services to contractors, may one day start competing for the very services that agencies offer to their clients. After all, agencies provide them with details of candidates and clients such that the providers are able to build a significant database of contacts that most competing agencies would love to get their hands on.

Let’s get it straight, many agencies want to deal with umbrellas for good reason. However as a result of the dormant concern, some agencies are careful to ensure that they have the right contracts in place with umbrellas to ensure that they do not suddenly find they are unwittingly dealing with competitors rather than service providers.  Umbrellas do not provide work-finding (i.e. placement) services. However the prospect of de regulation following the ongoing consultation process into agency conduct regulations and the Employment Agencies Act changes the picture. Removal of rules relating to the process of making placements, including checking suitability of candidates, could open the way for umbrellas (and indeed others) to vie with agencies.

Is there anything wrong with that? Most agencies would undoubtedly object to direct competition  from an organisation that it regards as a supplier, probably taking the view that it is ethically wrong. This is because agencies deal with umbrellas on the basis of trust that the information they provide is not then used for any purpose other than the servicing of the contract for the placement. That information must include the identity and contact details of the client. This implicitly means that the umbrella will not use the information, or its position in the supply chain, to compete. Many, if not all, recommendations of contractors have been made to umbrellas on that understanding.  

Also, “competition” does not just mean making placements (i.e. providing work-finding services) it means providing any service to a client that the agency itself could provide. Thus for instance an umbrella offering to provide any time and performance reporting service or any HR service direct to a client or any party further up the supply chain would be offering a competing service as would an umbrella that makes placements direct where the client or contractor has asked it to do so.

So, what should agencies do to protect themselves? Firstly should they wait until the outcome of the government’s decision on the consultation? The answer to that would be yes if it were not for the fact that there is evidence that some umbrellas are already now offering direct ‘competing’ services, both in terms of making placements and offering other services. So risk averse agencies would be wise to recognise that the threat exists now.

Second agencies should revisit the terms on which they are dealing with umbrellas, check out their activities, and seek appropriate undertakings including new protective contract terms that mean the umbrella cannot compete.  Simple assurances regrettably would not be sufficient, and those that cannot obtain sufficient legal protection may want to reconsider their arrangements. ‘Innocent’ umbrellas will probably comply and may even use their stance as a marketing tool!

Adrian Marlowe, MD of the recruitment law specialist Lawspeed, said “agencies regard umbrella competition as crossing the red line, and we first warned about the possibility of this threat more than 10 years ago. Since then we have included anti competition clauses in contracts for our agency clients, the latest having been developed after discussion with umbrella providers. However although the vast majority of umbrella companies no doubt have no plans to compete, it is clear that some now have ambitions beyond being simply ‘payroll providers’. We would advise all agencies to take this issue seriously.”

Lawspeed has provided protective and effective contract terms for agencies since 1997, and also has numerous umbrella clients. Adrian concluded “for a long time there has been a consensus. However things are now set to change, not the least as a result of those parties who have lobbied government to de regulate. Many umbrellas will probably be more than happy to continue on the basis of that consensus and accept suitable non competition clauses but this is no longer a given because of the ambitions of a possible few. It’s a dog eat dog world, so getting the right terms and contracts in place is a sensible precaution for agencies to take to protect their business.”

For advice in this area, new contracts or a review of your current umbrella contracts, please contact Lawspeed on 01273 236236 or email [email protected].