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By James Reddington, Restructuring Services Manager, Deloitte

Like many firms, across many industries, temporary labour providers have faced a number of challenges in recent months and for many innovation will be key to achieving ongoing success.

The challenges:

Automation - Recent news stories have highlighted the increasing use of technology and the rise of automation within traditional ‘blue collar’ sectors of the economy and also now increasingly within ‘white collar’ industries.

Within ‘blue collar’ and manual labour sectors, where it is more common for staff to be employed on a short terms basis with higher staff turnover, increased level of automation could potentially reduce the requirement for some job roles. Therefore having a knock on impact on temporary placement firms, who as a result of the reducing demand for labour could see their core revenue streams decline. For example - Amazon are developing drone deliveries, Uber are trialling driverless cars and prototypes have been created which can lay bricks quicker and more accurately than humans can.

The rise of the gig economy - Increasingly workers are demanding the flexibility of deciding when and for how long they work. Whilst some workers enjoy the flexibility and freedom that ‘gig’ working offers, it can provide employers with challenges around managing staffing levels and it fails to provide workers with the same protections that employees are afforded. However where ‘gig’ working is well managed, the inherent flexibly allows employers to quickly and easily scale the workforce whilst maintaining staff engagement and commitment.

Brexit -  Many lower skilled temporary roles have historically been filled with staff from EU countries, the uncertainty caused by the ongoing Brexit negotiations and the weakening pound is meaning that some EU workers are favouring roles closer to home. This lack of supply leads to unfilled vacancies or increasing costs particularly in the agricultural sector and the travel, hospitality and leisure industries.

Regulatory focus and increasing costs – HMRC has significantly increased its National Minimum Wage and National Living Wage (NMW/NLW) compliance checks.  In the care sector specifically, employers may be required to pay ‘Sleep in Workers’ back pay up to 6 years, as sleep-ins were typically not treated as working time for NMW/NLW purposes and should have been.  It is predicted that many organisations may struggle to honour such payments which could cost the industry up to £400m.  Had these additional costs been known at the time, they could have been priced in, but a hit following an NMW compliance review may go straight to the bottom line.

The introduction of the Apprenticeship Levy and new regulations proposed following from Mathew Taylor’s recent review of modern working practices, while positive in many respects, will nevertheless increase costs for Employment Businesses further, and will erode margins if these costs cannot be recharged to clients.

The Government has recently responded to these recommendations with the launch of the ‘Good Work Plan’. The plan will aim to increase transparency and protections for workers and ensure that they are paid fairly by proposing that: the Low Pay Commission should assess the impact of higher minimum wage rates for workers on zero-hour contracts, the remit of the Employment Agency Standards Inspectorate should be extended to Umbrella Companies, the Swedish Derogation should be reviewed and possibly repealed, and ‘working time’ for flexible workers who find jobs through apps or online should be redefined so they know when they should be being paid.  The Good Work Plan will also aim to provide agency workers with a clear breakdown of who pays them and any costs or charges deducted from their wages, and asks whether the remit of the Employment Agency Standards Inspectorate should be extended to cover certain activities of Umbrella Companies.

Another consultation on employment status seeks to make it easier to understand when someone is an employee, worker or self-employed and as such determining which rights and tax obligations apply to them.  But a separate consultation on IR35 and whether or not Public Sector rules should be extended to the private sector has not yet been published.  While there is merit in levelling the playing field between the public and private sectors, this would be a significant challenge for employment businesses, who would have to account for PAYE/NIC whenever they supply individuals through their personal service companies (PSCs) to clients, where IR35 would normally apply to the PSCs.

So what do these challenges mean for the temporary labour sector?

In the immediate term businesses operating in the sector need to have a strong grasp of their cost base and be awake to the potential impact that any future cost increases or regulatory changes   could have; this should include ensuring that any contracts are sufficiently flexible to accommodate such changes.  Steps should include reviewing their current margins by contract, proactively assessing hourly rates and working practices to avoid any potential breaches and planning for how they might fulfil contracts post Brexit should the free movement of labour be withdrawn or the UK becomes less attractive to overseas workers.

In the medium term, businesses need to look at ways to innovate and future proof themselves. The temporary labour market is changing and businesses need to change with it to avoid been left behind. Firms need to look for ways to embrace automation and technology rather than see it as a threat and explore ways to incorporate it with softer ‘human skills’ that robots and artificial intelligence can’t offer.

If you are keen to know more about the sector and the challenges facing businesses in this industry watch out for the release of the first Deloitte ‘thought piece’ on the temporary labour sector which takes a deeper look at the issues raised above.


Reddington-James-SDP_8897James Reddington 
James is a manager within the Financial Advisory Restructuring Services team based in the Leeds office. His experience covers advising a range of clients across various sectors including manufacturing, service providers and public sector organisations. His recent projects include advising two businesses operating in the temporary labour sector.
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