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The Recruiters’Guide to Contract Recruitment

Enter the world of Contract Recruitment with confidence. This eBook covers building contract teams, deal making, financing, providers and compliance.

In partnership with:

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About this eBook

This eBook was born off the back of a Webinar held with our network members. Contract Recruitment is always

something we get questions, queries and give advice on and from the fantastic questions we received from the attendees, we decided the best thing to do is create an

eBook covering some of those questions in more depth.

We decided to bring in the help of Sonovate and 6CATS, freiends of the network and experts in contract

recruitment who kindly supplied us with the fantastic copy that really looks deep into some of these questions.

We hope the contents of this book can help you further evolve your contract recruitment offering.

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Table of contents

Contract Growth

How do we attract contract recruiters?

Building a network of Contractors

Why cash flow in contract recruitment is important

Fees

What Recruiters need to know

How can we identify contract business amongst our existing client base?

Pulling Jobs

Finance Types

Terms and Conditions

Future-proofing: protecting your agency from the risks

Processes

Tech Platform

What are the traits of a good contract recruiter?

Payment of contractors: Umbrellas and Limited companies

What ROI should you expect from a contract recruiter? How quickly should they be billing?

IR35

What sort of KPIs should we have for contract recruiters? Should it be different from perm recruiters?

Placement Process

What commission structure is best for a contract recruiter?

Intro

Building a Contract Team

Doing Deals

Financing Contractors

Provider Considerations

International Compliance with 6CATS International

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Intro

Contract Growth

The world of work is changing. Driving this growth is professional contractors and freelancers. As the value of the UK recruitment industry dropped from £35bn in 2016 to £32bn in 2017, contract and temporary continued placements increased, rising from 76% to 88% in 2017.

Capitalising on the growth is imperative for recruitment agencies who seek to increase their business value and offset perm hiring peaks and troughs. From candidate attraction to compliance, this eBook outlines what a business leader needs to know to enter a contract market.

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The lion share of recruitment billing

Growth in professional contracting

- Contract accounts for 88% of the UK recruitment industries £32.2bn turnover (12%, £4bn generated through permanent placements.)

- Contract and temp work saw an increase in value of 6%, rising from £26.7 billion in 2015/16 to £28.2 billion in 2016/17.

- Currently 4.8m self-employed workers in the UK (IPSE, 2017)

- Self-employed contribution to the UK economy was £271bn in 2017.

- The FCSA (Freelancer and Contractor Services Association) estimate that 70% of the growth in self-employment since 2008 has been at the highly skilled end of the spectrum in the following ONS categories: managers, directors and senior officials; professional occupations; and associate professional and technical positions.

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Building a Contract Team

How do we attract contract recruiters?

The best contract recruiters will have a pipeline of business and live placements extending over a period of months. Getting them to leave their role and join your business can be challenging.

The term “Golden Handcuffs” is an excellent example of why most contract billers find it hard to leave their agencies. One month they could place x amount of contractors on 3-6 month contracts, and for the duration of the placements the recruiter would be earning commission.

So, how can you convince a recruiter with a constant flow of cash to give that up and move elsewhere?

• The new agency could provide the recruiter with a guarantee until they have the contract book up and running.

• Provide them with more autonomy to run their desk - so this could range from: flexible hours, remote working etc. so things that wouldn’t cost the company any money but would improve their morale and work/life balance.

• An exciting uncapped commission scheme.• Empower the individual to grow their own team, give them more

responsibility.

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Talk to your current clients, get to know their business in detail:

• Who are the heads of departments?

• All of the products/services they sell? (This may seem obvious but how many of your clients know the full scope of what your business offers?)

• Where these products/services are offered?

• If you’re an IT recruiter – knowing the clients tech stack is a priority.

• The interdepartmental relationships: Who is the decision maker? Who do they report to? Who makes decisions if they are unavailable?

• Gather information related to future projects / objectives / desired expansion.

• Draft an organogram. Don’t wait for a company to tell you if or when they need someone. Be proactive so you can be in a more informed position to provide talent options.

Have discussions with hiring authorities: find out what projects they’re implementing, capacity needed to complete the project and the duration of the project. This will allow you to sell in contractors there and then if you know their availability and have up to date CVs with full references.

How can we identify contract business amongst our existing client base?

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A good contract recruiter should have these traits:

• Market knowledge - It’s essential to know the key projects happening in your market over the next three-to-six months. The more detail you know about your market, e.g. what your candidates are meant to do on a day-to-day basis, the better you grasp a role specification, gain flexibility from clients and pre-screen candidates.

• Constant business development - The best contract billers are always looking for new ways to develop and to connect with new clients.

• Proactive - Work with your candidate/s to understand the role, responsibilities and future project opportunities they can add value to. They don’t let contracts run out without already having another opportunity lined up for the contractor.

• Check in with candidates and clients - Keep in touch with candidates and clients to help ensure your relationship with them doesn’t dry up. Investing your time in maintaining a good relationship will increase the chances of securing an extension or renewal.

• Obsess about metrics - The most successful recruiters judge every scenario numerically, set realistic goals, and then ensure you hit the numbers you set out to achieve.

• Know your network inside out - The best contract recruiters close the deal before the phone goes down. How they do this is simple, yet difficult to do in practice. They have an encyclopedic knowledge of their contractors, where they’ve worked, their accomplishments and successes. Above all, they have a number of contractors ready and available to start immediately.

• Stay goal oriented - Even when the workload is overwhelming, the best contract recruiters are able to remain positive and focus on reaching their goals. To do so, you need to focus on the things you can affect. Prioritise your workload, keep track of where you’re at with each of your clients and candidates and have realistic expectations of what you plan to achieve each day.

What are the traits of a good contract recruiter?

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All recruitment agencies have different requirements and expectations of contract recruiters. Are they an already established biller? Are they a new graduate in their first position after university? Each role would have different expectations.

Let’s take an established biller who has been in recruitment for several years as an example.

• They’d be expected to bill right away, unless a guarantee was pre-agreed

• The recruiter would know their net fee income/gross profit

You also need to consider other factors such as: how warm the desk is, which sector are you recruiting in, how quickly will they need to build their book, when is the contract arm of the business launching?

However, it all relates to one simple ratio. Capital employed per consultant (commission, base salary, overheads of desk) - you need to be billing more than you’re costing the company for your desk.

What ROI should you expect from a contract recruiter? How quickly should they be billing?

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KPIs in contract recruitment aren’t hugely different from perm, however as contract moves faster, a consultant would focus on:

- How many jobs have you picked up?

- Interview to job ratio

- CV to interviews e.g. 4 CV’s sent, 3 interviews

- Interviews to offer e.g. 3 interviews, 1 offer

- Meetings to jobs taken

- Contractor availability

What sort of KPIs should we have for contract recruiters? Should it be different from

perm recruiters?

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Commission structures vary agency to agency and are influenced by the sector you work in.

An example structure:

- If you bill £0-10k you would receive 10%- If you bill £10-15k you would receive 15%- If you bill £15-20k you would receive 20%- If you bill £20k> you would receive 25%

Incentivisation ideas:

Key client won: Consultant is paid higher commission percentage.

“Kicker”: If the consultant brings on a client at a higher margin, then they would get a higher commission percentage.

Sliding scale: Consultant is gradually paid higher rates of commission based on performance against a target. e.g. 5% of revenue up to 100% of target then 10% from 101-125%, then 15% for 125% upward.

What commission structure is best for a contract recruiter?

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Doing Deals

Building a network of Contractors

In a candidate driven market your number one priority is the contractor. It sounds obvious, but when contract recruitment deals are measured in hours, not weeks, you need to be 100% on top of your network. Knowing who’s available and when will be the difference between doing the contract deal and missing out.

1. Speak to people. Again, obvious, but relying on job adverts to provide a stream of contractors looking for their next role is optimistic. Speaking directly with a handful of contractors who meet your current needs, will provide a lot more insight into who’s available and who’s hiring. Sourcing these calls can come from CV, LinkedIn and database searches.

2. Be specific. Contractors are busy people with job opportunities being pitched to them from a variety of sources. You know you’re not the only recruiter who’s in their network so be specific with what you want to get out of the relationship and what you can offer.

3. Retain regular contact. As contractors move from role to role, they possess massive amounts of knowledge about what’s happening in the market. To keep up with what’s going on, speak to your network.

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If your current clients are not active in the contract recruitment market, finding clients who hire contractors is predominantly the combination of CV stripping, reference requests and talking to your network.

CV Stripping

CV stripping sounds like a black-hat technique but in reality it’s just gathering information from the contractor’s CV about their recent contract role(s). Focus on finding:

• Where did the contractor work previously?• Who ran that project?

By gathering this information, you will have a list of companies who recruit contractors and contacts who are involved in the hiring process.

Reference Requests

• Speak to prospective clients about contractors they worked with. Don’t use the call to sell your service, that’s not the objective. The objective is to find out a) what the referee thought of the contractor’s work and b) to recommend other contractors they rate.

• Make contact with rated contractors and request their CV.• You can then repeat the process.• By doing this, you are building a network of contractors AND are

familiarising your name with potential clients in a non-sales way.

Pulling Jobs

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Profile the position• Why is a new employee needed?• What skills or abilities will the successful candidate

require?• Where does the future employee fit into the business?

Prepare job/person spec• Include as much detail about the role and candidate

as you can - without giving potential applicants too much information.

Finding the candidates• In the digital age, there are hundreds if not thousands

of places for you to advertise a role.• Social media - LinkedIn, Twitter etc.• Niche job boards• Portfolio sites

Review the applications• Qualified candidates should quickly be able to explain

how they fit the role by giving examples from their prior work. Check back over the job description and person specification to see how they compare.Study their portfolio or previous pieces of work

• This is key - this is where you will be able to judge what they can and can’t do.

• Is the work backing up what the candidate is stating, are they proving themselves? Conduct interviews / tests for the selected

candidates• Conduct a face-to-face or video interview. • Many contractors work remotely so video

interviews will allow you to gain a better sense of the candidate.Checking references, drawing up a contract

and offering the job• Once the interviews are complete and you’re

happy with the choice of candidate, draw up a contract and offer it to the candidate.

What’s the candidate process?

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Due to their employment nature, contractors can be eligible to work in a few different ways, such as working under/ for an umbrella company or as a limited company. Being able to work with both types of contractors will increase the number of contractors you have on your book.

Limited Company

Contracting under a limited company means the candidate is responsible for establishing their own company and submitting their own accounts and taxes directly to HMRC.

• If the end client wants to use different terms and conditions, check that they will not hold you accountable if there are any issues with the candidate you supply.

• Make sure your agency has the correct insurance in place to cover yourselves, should any issues arise.

• In the same light, ensure that the candidate has insurance to cover themselves if there are any problems with the end client. This covers your back as well.

• Make sure you have all the necessary paperwork available for the candidates on your books, should HMRC want to see it.

Payment contractors: Umbrellas and Limited companies

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Umbrella Company

Working under an umbrella solution means the candidate is essentially an employee of the umbrella company. The candidate submits a timesheet, which when approved creates an invoice for payment.. The candidate is paid by the umbrella company as a PAYE employee with the umbrella company’s processing fees deducted from the candidates pay. The umbrella is responsible for HMRC statutory deductions and employment liabilities.

• Make sure the umbrella company is compliant across the board, and ask to see proof that they have a qualified, registered accountant.

• Get copies of the umbrella company’s Certificate of Incorporation, VAT certificate and Insurance certificates.

• Verify that the umbrella company has a policy regarding Agency Workers Regulations (AWR), so that you know your candidates will be paid the correct amount.

• Try to work with a list of approved umbrella companies, or do your research on the company your candidate wants to work with to ensure they’re compliant.

• Ensure all parties sign the contract before the work starts.

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IR35 is tax legislation that is designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company.

As an employee, contractors would have PAYE and National Insurance contributions deducted at source, and would forego the ability to offset certain expenses against their limited company.

• The responsibility for determining whether a contractor falls within IR35 in the public sector will shift from the contractor to the client.

• Although the decision sits with the client, the responsibility to deduct NIC and PAYE will be left with agencies.

• For IR35 to apply, HMRC has to determine whether the relationship between a contractor/freelancer and their client is in fact an employer-employee relationship.

IR35

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Verify the candidate details

• You need to ensure the candidate you are putting forward is who they say they are.

• Collect their CV, ID (passport/driver’s licence), references and DBS checks.

• In some cases you may also need to verify their qualifications or if they are have a right to work in the country.

Ensure you have all documentation

• Check with the client as to what information they may require, it shows the client you are making every effort to remain compliant.

• Certain industries need high levels of compliance such as the medical industry in order to protect the client, the public and the agency from legal action.

Ensure the placement complies with Agency Worker Regulations (AWR)

• Keep records of your communications with the client to protect yourself and the client from any future problems.

• Work with umbrella companies that have a policy in place around AWR to ensure the candidates are paid correctly.

Verify the umbrella is compliant

• Have a list of approved umbrella companies or research the umbrella your candidates want to use

• Ask the company on their compliance, processes and payment structure

• Another step would be to ask for copies of their certificate of incorporation, VAT and insurance certificates.

Placement Process

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International placements

• When making placements overseas make yourself aware of the rules of that country. Each country has different policies regarding candidates working in them regarding, visas, tax and social security.

Beware of fraud

• There are examples surfacing of third parties looking to defraud agencies, candidates and suppliers in the industry. By completing your full compliance checks you should be able to identify any fraud before it happens.

Contracts are agreed and signed

• Ensure that all parties agree and sign the contract before the candidate starts.

• Look into cloud software that allows for e-signatures to speed up the process or have contracts with trigger actions i.e. if the candidate goes on site then the contract is deemed to have been agreed.

Placement Process

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Financing Contractors

Why cash flow in contract recruitment is important

For a recruitment agency to successfully operate in the contract space, they need to overcome two challenges; time and money.

Time

Whereas permanent recruitment is a one time event with a single round of paperwork, contract recruitment is cyclical. This takes up a lot of time. Everything from administering contracts and chasing timesheets, to making payments and invoicing distracts a business owner.

Money

Contractors are typically paid on a weekly basis by the agency. Unfortunately, the recruitment industry has some of the worst debtor days*, meaning an agency will have to pay the contractor(s) up to eight times before receiving payment from the end client, causing cash flow issues.

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For e.g. one contractor on a 12 week contract at £320 per day means an agency will pay the contractor £1,600 per week for the duration of the contract, £19,200 in total. If you’re invoicing monthly but receiving payment between 30-45 days later, you have to find the money to pay the contractor at least four times (£6,400) alongside all your fixed and variable costs.

This doesn’t factor in all the paperwork you will have to deal with - everything from contracts, credit control, timesheets, invoicing and making payments falls to an agency.

However, increased digitisation and financial competition means that agencies can choose from a bigger group of suppliers than ever before.

Contractors 1Charge Rate £400Pay Rate £320Margin (%) 20%Placement Duration 12 WeeksInvoice £24,000Contractor Payment £19,200.00Gross Margin £4,800

Times this by 10 contractors and the impact on cashflow is magnified

Contractors 10Charge Rate £400Pay Rate £320Margin (%) 20%Placement Duration 12 WeeksInvoice £240,000Contractor Payment £192,000Gross Margin £48,000

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Invoice finance comes in many forms and is typically broken down into:

Invoice Factoring: where the agency sells their invoices to a third party at a discount. In addition to providing finance, the financier also performs credit control and collects payment on the agency’s behalf in a disclosed manner.

Disclosed Factoring with Back Office: The agency factors invoices with financier in a disclosed way (i.e. the financier collects money on behalf of the agency in the financiers name.) The product is accompanied by back office functions to support, manage and administer the running of contractors. Back office functions vary between provider in terms of quality of tech product and service levels.

Invoice discounting: Purely money all other responsibility remains with the agency – (credit control, payroll, etc).

Confidential invoice discounting (CID):Invoice financing that is arranged confidentially, so end clients are unaware that the agency is being advanced capital against sales invoices before payment is received. ID and CID is typically available to agencies with turnovers in excess of £250k+. A third type of discounting – Disclosed Invoice Discounting is known as a halfway house between factoring and confidential invoice discounting and is for those companies whose balance sheets are not quite strong enough for CID.

Finance Types

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Fees

Fees vary between financiers. Large banks for e.g. (Lloyds, RBS, HSBC, Barclays) have setup fees, where other independent financiers don’t. Key fees to enquire about include:

• Setup fee• Service fees• Insurance (if factoring)• Termination fees• Refactoring fees• Interest fees (also check how BOE base rate rises affect)• Fees associated with reviewing, renewing or increasing your

funding• Administration fees• Account service fees• Legal documentation and process fees

Provider Considerations

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Terms and Conditions

Larger recruitment agencies who have used or are using a form of invoice finance will be familiar with personal guarantees and lengthier setup processes, typically owing to the complexity of the facility.

• Personal guarantee• Debenture (the name typically given to a security agreement that

sets out the terms under which the borrower provides security to a lender.)

• Contract length (ranges from no fixed term to fixed)• Invoice finance facility limit

Some financiers will apply limits to your funding to protect all parties interests. These include:

• Concentration limits• Drawdown limits• Export debt• Facility size• Reserves• Withholding profit

Again, it’s worthwhile going through each point listed with a prospective financier to see if they and apply and at what point they would ‘kick-in’. Providing access to your sales ledger will help you understand your position with regards to the above.

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Tech Platform

Depending on the size of your business and type of invoice finance needed, you will have differing tech requirements. An agency with an established back office team and processes may pursue invoice factoring or invoice discounting. Other agencies may want to bring the solution all under one provider – this is where disclosed factoring with back office financiers come into play.

Things to check if your financier is providing tech to support the process:

• Manual and online timesheets• Credit checking• Contracts (inbuilt, customised)• Invoicing• Payments• Insurance• API connectivity (accounts, CRM)• Apps• Reporting

*56 days according to commercial law firm EMW.

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International Compliance with 6CATS International

International compliance: how to get it right

The world of international contractor placement can be hugely profitable for recruiters. It’s no wonder, then, that so many agencies are moving into this global arena. However, while there’s money to be made, there are also an array of risks that firms face, particularly surrounding compliance across borders.

As authorities worldwide clamp down on incorrect tax payments and misrepresentation of employment status claims, the compliance risks for recruiters have now doubled. On the one hand, there’s the danger of non-compliant solutions being used in the host country of the professional and now on the other hand there’s the added pressure of remaining complaint with the UK Criminal Finances Act 2017 back home.

So what do recruiters need to know about international contractor compliance?

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There are three key pieces of legislation and regularly misunderstood rules that could see agencies facing investigations and possible charges if they fail to abide by them:

Misuse of A1 forms

When we look at in-country issues, we’re seeing a worrying number of contractor management solution providers based in countries with preferential social security schemes misusing A1 forms (formally E101). In essence, these providers are employing contractors through their company and applying for this form in order to reduce the amount the individual has to pay for social security. In many cases, the contractor hasn’t even visited the country where their A1 form has been issued.

The result is that host destinations are being defrauded of social security contributions during the contractor’s assignment. While this loop hole has been utilised for several years now, we are seeing an increase in local authorities implementing changes to halt this abuse of the system. In fact, some contractors are now facing backdated liabilities that go back as far as 2009.

It’s important that recruiters are aware of the specific criteria for applying for A1 forms in order to avoid any association with non-compliant solutions. These forms can be applied for by workers expecting to relocate across borders for an assignment that will last no longer than 24 months.

The individual must have pursued activity in the country issuing the form for at least two months before moving overseas and must also continue to carry out substantial work in the country where the A1 form has been issued from.

While allowing a contractor to operate using a solution that exploits the A1 legislation may offer the contractor a higher return on income, the financial penalties for both the individual and the agency far outweigh the short term monetary gain.

What recruiters need to know now

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Myths of the 183-day rule

We’re also hearing numerous reports of the 183-day rule being misused in host countries resulting in local authorities being defrauded of the appropriate tax, VAT and social security contributions from the worker during their contract.

This internationally recognised tax concept means that workers and corporations operating in a foreign country for less than 183 days aren’t required to become residents and therefore do not pay tax in the host location.

However, the stipulations over this rule are easily misunderstood and subsequently misused. For example, we often hear claims that a contractor is covered by this directive as their assignment will last less than six months. But this is simply not the case.

The 183-day rule is only applicable to dependent workers - those able to prove that they are in a full employment contract with the company in question. It does not apply to self-employed or independent workers.

Those operating through a personal service company (PSC) abroad are also unable to use this rule and will instead be required to become a tax resident in the host country once the contract begins. This applies for the company, its director and any employees.

Recruiters need to be aware that the wrongful use of the 183-day rule when placing contractors could have damaging consequences for their agency. With tax authorities launching an investigation and seeking to penalise your clients as a result of any misuse,

relationships will be ruined long-term and your reputation can be damaged. Then there’s the possible penalties that agencies themselves could face due to their association with non-compliant individuals.

Contractors themselves also risk paying the host country income tax and social security on their entire global earnings as well as corporate tax on all profits by operating through a PSC outside their home country. And, of course, should these workers choose to use a PSC which is not registered in the host destination, they risk fines, penalties and back-dated liabilities.

In more severe cases, the individual and the agency could even face operating restrictions within the country and the contractor could be deported or even sentenced to time in jail.

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Criminal Finances Act 2017

While the above will see the contractor and the agency facing investigations for non-compliance in the host country, failure to abide by the rules will now also breach the recently introduced Criminal Finances Act 2017 in the UK. This means that agencies, clients and contractors could all face prosecution back home as well.

As we hope most agencies are aware, under this Act it is a criminal offence to fail to prevent ‘associated persons’ from facilitating tax evasion. In essence, recruitment firms incorporated in the UK or overseas agencies operating here could face criminal charges as a direct result of the actions of any individual or entity that provides a service to the company.

As the offence is that of failing to prevent fraudulent activity, recruiters can still face prosecution even if they were unaware of what the associated person was doing. The only defence is to demonstrate that you and your firm have reasonable procedures in place which are designed to prevent the facilitation of tax evasion.

It’s vital that agency owners are aware that it is up to their firm to ensure the contractor is engaged and paid compliantly. The recruitment business will also be responsible for ensuring transparency, complete visibility and control of the supply chain. Remember that criminal liability cannot be passed down the chain and as such, ‘flowing down’ compliance responsibility is not an option.

Owners and directors need to be aware that they will be directly impacted by non-compliance in relation to the Criminal Finances Act both professionally and personally, regardless of their involvement in, or knowledge of, the fraud. You will be the one held criminally liable for the actions of your employees and contractors. Claiming ignorance or lack of awareness provides no legal defence for a criminal matter, so it’s vital that you stay on the ball with this.

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It’s important to add that the world of international compliance is changing as legislation evolves to prevent and tackle fraudulent activity. As such, agencies will face a logistical headache when it comes to staying ahead of developments. Aside from partnering with an expert in international contractor compliance, there are a few measures that agencies can implement to minimise risks:

• Get to know all the parties involved in the contractual chain• Ensure the company paying the worker is declaring all income in

the country of work and the correct taxes are being applied• Ensure you have a preferred supplier list in place, with robust

due-diligence carried out • Ask for a signed commitment from the owners of the company

paying the worker that the payment solution provided is 100% compliant in the country of work and does not involve any form of tax evasion

• Train all staff that will be involved in contract placements to ensure they understand what compliance risk actually means to the business.

For me, it’s certainly encouraging to see more agencies that are serious about doing business in Europe recognising the importance of compliance and implementing relevant processes within their business. However, there remain a few who are willing to move into more grey areas in order to reduce costs or give their firm a seemingly more competitive edge.

Future-proofing: protecting your agency from the risks

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Experts, in Compliance, Advice & Tax Solutions 6CATS International is the expert supplier of contractor management solutions to the world’s leading recruitment agencies.

Call us: o207 184 9107Website: www.6catsint.comemail: info@6catsint.com

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