Agency Charge Rates Explained

Since the beginning of the COVID-19 pandemic, one thing most businesses have discovered is that they need to be operating a more digitally aligned strategy. This includes becoming more aware of what they are paying for and having more control over their processes.

Through discussions we've had with various operators, we've learnt that although they know their outgoings, many companies don't know how much their flexible contract workers are being paid and therefore have no real idea of the margin they are being charged by their recruitment suppliers.

With IR35 being implemented in 2021, this shifts the liability for non-compliance up the chain, therefore forcing companies to take a closer look at how individuals being supplied to them are actually being paid. A significant percentage of the contract HGV driver market today operates under a LTD structure, with little transparency on which structures the drivers being supplied to them are operating under.

We have outlined the 3 main driver payment structures below, breaking down the costs for LTD, PAYE and Umbrella.

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LTD

Technically known as a Personal Services Company (PSC), where the individual supplies their own services through a Limited Company structure - a B2B transaction.

Drivers who operate under this structure are not employed by the agency and therefore hold little to no employee rights.

Before COVID-19 had struck, many companies had declared in their Status Determination Statement that contract driving work would all fall inside of IR35, therefore requiring drivers to be paid under a PAYE structure.

Below is a comparison of our fees against agency fees for drivers working under this structure.

PAYE

Under a PAYE structure, full payroll needs to be operated, meaning that the following statutory deductions and accruals need to be made on top of the rate paid to the driver:

Holiday Pay - 12.07%
This should be accrued and paid to the driver when they are on holiday.

Statutory Sick Pay - 1%
This is an industry recommended amount to be accrued to cover the costs if a driver is ill and needs to be paid while unable to work.

Employers National Insurance - 13.8%
13.8% of the Pay and holiday pay is to be paid the HMRC after the first £169 is paid out to the driver, exceptions to this can occur if the driver works for multiple companies in any given week.

Pension - 3%
The driver should be automatically enrolled in this scheme, although they can choose to opt out of this if they wish.

Apprentice levy - 0.5%
This is only payable by employers who operate a payroll over £3m a year.

Another thing to consider when engaging drivers under a PAYE structure is Parity Pay, Agency Workers Regulation (AWR). After 12 weeks of continued work with the hirer the worker needs to be given the same rights as employees who are doing the same job.

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UMBRELLA

Umbrella companies are used by agencies that do not want to run an internal payroll to pay their drivers. Under this structure the agency will advertise a 'Limited PAYE' rate to the driver which will then be paid to the Umbrella company to then run payroll. The driver will be shown the same rate as a LTD company driver, but will then have the employers national insurance and all the other statutory deductions and accruals taken from this rate.

In addition to the driver having to pay all of the payroll costs (including employers national insurance), they also have to pay the umbrella companies fees on top of this - usually £10 - £20 per payslip.

It is also common practice for agencies working with umbrella companies to agree a commission structure, allowing the agency to earn as much as £10 per timesheet for 'introducing' the driver to them every week.

Many drivers will be told they are being paid the headline rate before all of the employment charges are deducted - leaving the driver with significantly less than they were expecting to be paid before income tax is deducted.

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CONCLUSION

With IR35 having been postponed until April 2021, we are encouraging companies to use this time to investigate the exact payment structure used by their agency suppliers. Many agencies will be using umbrella companies when they switch over their drivers operating under a LTD company. Here they are likely to maintain their charge rate and their margin, pushing all the additional costs onto the driver. We encourage all operators to insist on  open-book billing to gain a clear understanding of exactly what their contract drivers are being paid.

“At Connected2 we have created a structure where a company is able to control the actual pay rates offered to the drivers - providing complete transparency throughout the flow of money from the company to the driver. This is a big step forward to increase contract driver engagement - helping to build up trust in the transport operator <> driver relationship. improving this relationship is a huge step forwards in improving operational performance” - Simon Crick, Connected2 CEO

If you want to understand more about how our platform can help you to not only recruit the best drivers, but also save money in the process, head over to our operators page or get in touch to request a free demo.

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