A month has passed since the Agency Workers Regulations (AWR) went into effect in the U.K., and some effects are becoming clear. Among them is the so-called Swedish Derogation.
Swedish Derogation refers to an opt-out clause negotiated by the Swedish delegation to the European Union when the Agency Workers Directive (AWD), on which the U.K.’s AWR is based, was formed. Basically, it means that temporary workers who are employed on a full-time contract by an agency or umbrella company do not fall under the equal pay provisions of the AWD. The Swedes bargained for this opt-out because all temps in Sweden are employed directly by agencies. Under this model, the recruitment agency is the legal employer of the temporary workers and guarantees paying workers between assignments as well as additional payments if the contract is terminated.
In the run-up to the introduction of the AWR, there was much speculation as to what extent U.K. companies would take advantage of this provision. Since the AWR has been in effect, trade unions have been very keen to shine a spotlight on any employers adopting Swedish Derogation, fearing that the practice may become more widespread. Brendan Barber, general secretary of the Trades Union Congress (TUC), calls the practice “deplorable”. The U.K. media have also been very proactive in highlighting any employers that have adopted Swedish Derogation, deriding the practice as a “get-out clause” or “loophole”. Swedish Derogation is, in fact, not a loophole but a perfectly legitimate approach defined within the AWR.
Despite the negative attention the practice is receiving, one positive outcome is that a good body of anecdotal evidence already exists as to trends in the UK staffing market, only one month in from the introduction of the new regulations. Among the large UK companies adopting Swedish Derogation are:-
- Carlsberg (drinks manufacturer)
- DHL (logistics/mail services - part of Deutsche Post)
- Marks & Spencer (retailer)
- Park Cakes (food manufacturer)
- Premier Foods (food manufacturer)
- Tesco (supermarket)
- Yell (online directory)
Additionally, Morrisons, the fourth largest supermarket chain in the U.K., is also reported to have “held discussions” with its manufacturing and logistics staffing suppliers regarding Swedish Derogation.
Meanwhile, The Financial Times contacted a few major U.K. staffing companies to ask about the extent to which their clients have been asking for Swedish Derogation. Adecco said that, so far, clients employing a few hundred of the 15,000 temporaries in its general staffing business had opted for derogation. Randstad is looking to use the model for teachers, where rigid pay scales made it hard for schools to hire experienced temps. Pertemps said fewer than 10 percent of its clients had considered using the derogation. More active is Staffline, a logistics and manufacturing staffing specialist, which plans to move 8,000 of its 25,000 temporary workers on to permanent contracts.
There’s a common theme emerging: Swedish Derogation is mostly being adopted in low-wage sectors such as logistics, food and manufacturing. And this is hardly surprising given that, in many higher-waged professional staffing sectors, temporary workers were already earning an equivalent amount to comparable permanent staff, if not more.
New Flexibility, New Challenges
Unions argue that the Swedish Derogation is an underhanded way to exploit temporary workers. Tom Hadley, head of policy and professional services at the Recruitment and Employment Confederation (REC), refutes that claim. “In fact, the Swedish Derogation can be seen as great news for temps who want to work in this flexible way as it provides more security and essentially means that they have been given a permanent job,” he told HR Magazine.
Swedish Derogation provides a new and interesting model that employers can consider in using contingent labor, but it is already clear that only a minority will opt for it. For those that do, it is important to recognize that Swedish Derogation does not remove workers from the scope of the AWR entirely. While the model does take workers out of scope of the equal pay provision, those employed under Swedish Derogation (or Regulation 10) contracts are still entitled to day one rights, such as access to collective facilities and to all other equal treatment provisions following 12 consecutive weeks in the same role with the same employer.
Further, employers should be wary of switching a temporary onto a Swedish Derogation contract before they have finished their current assignment. As Frances Lewis, a consultant at law firm Osborne Clarke, explains, “Where a worker has done the same thing, day in and day out, for the same hirer and are on a continuous assignment, it would be hard to convince an employment tribunal all of a sudden that the assignment has come to an end. There is room for interpretation and that causes problems.” With unions keen to support test cases, this is one area of the AWR that could come under closer legal scrutiny. The REC recently issued a warning to its members that prematurely ending an assignment and then re-engaging the temporary using the derogation model was a “medium risk”.
There’s also a price attached to the derogation model: When a temporary is not out on assignment, staffing companies are obliged to pay the worker a minimum amount of at least 50 percent of the worker's basic pay while on assignment for an aggregated period of not less than four calendar weeks. Such pay also has to be above the national minimum wage. Not surprisingly, staffing companies will be expecting their clients to help them meet this additional cost and risk (including the administrative cost of tracking the worker post-assignment). Some research suggests that Swedish Derogation only becomes cost-effective for assignments of nine months or more, however this will vary depending on the uplift in pay required to meet the equal pay provisions of the AWR after the worker has been on assignment for longer than 12 weeks.
Whatever the cost of a worker hired under a derogation contract might be, it is also important to recognize that unpredictable post-assignment financial liabilities will make it much more difficult for employers to manage and forecast their staffing budget. Companies thinking about Swedish Derogation need to consider not only the practical, risk and cost aspects, but also the reputational implications. Whether it is a fair interpretation or not, it is clear that those using a Swedish Derogation model will face castigation by some as poor employers who are simply underpaying their workforce.
An alternative strategy which has been adopted by a number of companies is to reinstate “starter” pay grades for newly recruited permanent workers below the rate given to fully-trained staff. The lower starter pay grade can then be used as the comparator in calculating the appropriate temporary pay rate. However, while this may be a valid alternative to Swedish Derogation, such an approach will no doubt also attract union opposition.