Recruiters working within a recruitment agency should always be paid as an employee of the agency via PAYE payroll, with all salary and commission payments being subject to national insurance and taxation rules. This is because the work being conducted would be deemed that of an employee under HMRC rules as the work being done is under the supervision, direction and control of the recruitment agency director and they are representing the agency they are working for. Paying a recruiter via PAYE also adds protection to the agency under employment law and allows the agency to impose restrictive covenants (on use of agency data or starting up a rival business) should the employee leave.
However, on a number of occasions over the past few years, TBOS has been asked if a recruitment consultant can be paid to via their own limited company/sole trader entity instead of being paid via the PAYE payroll. There have been various reasons for this, such they would not have to pay the employers NI, the person is on a short-term contract or that the recruiter is being paid on a commission-only basis (no basic salary). However, in nearly all the cases the agency still wanted the protection as the recruiter would be using the database, office premises and doing the same job as other staff members.
TBOS has advised that the agencies do not pay the recruiters in this way and these are the reasons given:-
- Agency Could Be At Risk From HMRC
Paying a staff member who should be paid under PAYE via a limited company/sole trader entity could mean that HMRC may launch an investigation into the conduct of the agency. If HMRC deem that the recruiter was an ‘employee of the agency’ and should have been paid via PAYE, they may charge penalties, fines and back tax to the agency and the recruiter.
- You May Be Paying Under Minimum Wage
In some cases, agencies have said they would pay the recruiter for commission-only element to make it less apparent that they are an actual employee. However, if the recruiter does not make enough commission each month but still put in the hours worked, they may turn this against the agency and declare they have been paid less than national minimum wage.
- Would Make It Harder To Enforce Restrictive Covenants
If an agency does pay a recruiter via a limited company/sole trader entity then the services provided would stick with that company/ entity that they are engaged with and paid through. However, if that recruiter leaves the agency and either works at another agency or sets up their own business, there is nothing to stop them from using the client and candidate data.
- No Tax Benefits To The Recruiter… Unless They Are Dodging Tax
Any recruiter using a limited company/sole trader entity would have to follow the same rules and regulations as a temp/contractor under IR35. As they would be deemed to be classed as an employee under IR35, the limited company/sole trader entity would need to pay them under PAYE with no allowable expenses so there would be not tax advantage for the recruiter. If, however, the recruiter decided to class themselves as a self-employed worker instead and use this benefit to pay themselves a small salary, expenses and dividends, this may be considered tax evasion and could again leave the agency exposed.
TBOS provides staff payroll services to all of the recruitment agency clients which includes PAYE payroll calculations, pension enrolment, commission calculations, staff benefits and expenses. We work with the agencies to arrange salary and commission schemes for each agency to ensure they remain competitive and profitable against other agencies in their markets. TBOS ensures that agencies are aware of the dangers of paying staff outside of the PAYE payroll to avoid any repercussions on the agency directors.
For more information on how TBOS can help you with your back office and accounting needs, including staff payroll, please contact our office.