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Agency workers and auto-enrolment

This guide was last updated in February 2013.

Between October 2012 and February 2018 employers will need to start automatically enrolling all of their 'eligible jobholders' in a pension scheme which meets minimum requirements. Auto-enrolment comes hot on the heels of the Agency Worker Regulations in extending the benefits of employment status to agency workers. This creates additional costs for agencies and a dilemma for the business as to whether (and to what extent) to pass those costs on to customers.

Efficient implementation and a carefully managed opt-out process can help agencies to mitigate additional costs.

This guide will consider the duties of employment agencies, as 'employers' under auto-enrolment, in brief.

Who does auto-enrolment cover?

Employers must enrol 'jobholders' (subject to age and earnings thresholds) into a compliant pension scheme. Jobholders include all but the truly self-employed. Only a very limited part of the workforce is excluded from the auto-enrolment requirement.

Excluded categories include:

  • those paid in a payroll cycle of under one week;
  • one-person companies;
  • those not working (or ordinarily working) in the UK.

On this basis it may be possible to exclude some workers from auto-enrolment, but this is not a 'silver bullet'. The policy intention is that agency workers are included in auto-enrolment.

Who provides the pension?

The obligation to provide the pension lies with the 'employer' for the purposes of the worker's contract. In the absence of a worker's contract, the obligation to provide the pension lies with whichever party is responsible for paying the agency worker (or actually does pay the worker).

In the main, this will mean that the employment agency is required to provide the pension.

What sort of pension scheme needs to be provided?

Employers may use an occupational pension scheme (run by trustees) or a group personal pension scheme (run by a pension provider). The key point is that, unless the scheme is a defined benefit scheme, the employer must make minimum contributions.

Contributions start low (1% of salary until September 2017) and are due to rise to 3% from October 2018. One of the key strategic decisions for employers is to work out what definition of 'salary' to use for the purpose of determining contributions. The basic statutory definition of 'earnings' is unwieldy and other options, such as 'basic pay', may be much easier to administer.

'High churn' workforce            

Agency workers are different from other workers and so present particular challenges. Many are seeking work for only a short period. Many will register with a number of different agencies and will, in fact, only be 'employed' by a particular agency for a short period. The auto-enrolment obligation applies to all workers who meet the age and earnings thresholds, but there are options which may assist those employing high churn groups of workers.

Employers can make workers wait up to three calendar months before enrolling them into a pension scheme. If the worker has left by the end of that three-month period, then there is no need to provide that worker with a pension.

Opt-outs

Auto-enrolment is not the same as providing a compulsory pension - workers can opt out. Indeed, given the nature of the employment relationship, agency workers might well be expected to generate higher rates of opt-out than permanent members of staff. Making it easier for workers to decide whether it is appropriate to opt out will be key to efficient and cost-effective implementation.

Prohibitions

The legislation makes it very difficult for employers to get around the auto-enrolment obligation. Any agreement to contract out of auto-enrolment will be legally invalid. Other similar practices will be prohibited, such as:

  • offering additional pay, or other financial incentives, to opt out;
  • offering positions only on the basis that candidates opt out;
  • charging a lower rate to your customers for those workers who have opted out of pensions;
  • the employer providing workers with an opt-out form - the form must come from the pension scheme;
  • allowing a worker to submit an opt-out form before being enrolled.

Legal advice which takes a pragmatic, risk-based view of the legislation will make it easier for those who want to opt out to do so. This is important. For employment agencies, successful opt-out strategies will not just be a benefit in terms of reduced HR costs, they will help to ensure competitive pricing to customers.

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