ABFA

The ABFA is the trade association representing members of the invoice discounting and commercial finance industry. ABFA members provide finance, mainly to SME’s, using products such as factoring and invoice discounting. ABFA members include many banks (including the commercial finance arms of the main clearing banks) and also independent companies and are currently advancing in excess of £15 billion per annum in cashflow funding to companies in the UK and Ireland.

This paper aims to highlight a systemic problem which has arisen in the way that many public (and some private) sector entities engage agency workers using companies which are often called managed service providers or recruitment process outsourcers ("RPO companies").

Bank funding is important in the agency worker supply chain because staffing companies nearly always have to pay their workers before they have been paid by their clients, the end users of these workers. Staffing company profit margins rarely allow funding of this cashflow shortfall from their balance sheet i.e. retained profits. This cashflow is therefore normally bridged by invoice discounting and factoring - with funding being advanced by a financier against the value of unpaid end user invoices. Without this funding most of the staffing industry would not be able to trade, agency workers would not be available to end users on attractive terms, if at all, or there would be a reduction in the availability of agency workers and an increase in the cost of agency workers to end users, including the public sector.

All major political parties have acknowledged the important role a flexible labour force plays in UK competitiveness and access to cashflow funding is a vital cog in the agency worker process.

Historically invoice discounters regarded staffing companies as low risk customers because those staffing companies usually had a large number of different (often blue chip) end user clients and so it was unlikely that any end user client would fail to pay an invoice and even if any did fail that invoice would rarely represent more than a small percentage of the overall sum lent to a particular staffing company client. As a result invoice discounters have hitherto been happy to provide relatively low cost funding to staffing companies to fund their business.

A problem has now arisen which has led to the risk that funding may be withdrawn from staffing companies supplying agency workers for public sector (and some private sector) clients unless a suitable solution can be found. This problem stems from three market developments in relation to which this paper aims to offer an explanation and a solution.

The first development is the trend in recent years for many public (and some private) sector organisations to appoint one of a relatively small number of RPO companies as contractual intermediaries between the staffing company and themselves, the end user. A few RPO companies increasingly act as sole counterparty for a growing proportion of staffing company suppliers. This makes the default of one end user a much more serious risk if it happens - a financier could be badly exposed if 25% or more of its advances to a staffing company was consolidated into one RPO company. This problem is made worse by the fact that many RPO companies have very low credit ratings and certainly do not have the credit status of, for example, the public sector (or blue chip) entities they have replaced as contractual counter parties.

The second development is that RPO companies are compounding this risk by inserting ‘pay when paid’ clauses and clauses banning the assignment of their debts into their contracts with staffing companies. The fundamental basis of raising finance by invoice discounting is that there is an enforceable debt obligation that can 1) be assigned to the financier and 2) be enforced by the financier. The effect of these provisions impact on both and with the RPO being the debtor but not obliged to pay unless or until paid themselves and neither the staffing company (nor the financier as its assignee having any recourse to the end user the value of the debt against which the invoice discounter would ordinarily advance is often extinguished or at best materially reduced. This is making it difficult for staffing companies to obtain or maintain the levels of funding they have previously enjoyed and could be a barrier to small businesses gaining access to funding via invoice finance.

The third problem is that some RPO companies are asking for invoice discounters to advance to them in respect of the sums owed to them by end users at the same time as the staffing companies below them in the contract chain are themselves also invoice discounting in respect of the same debt. Some workers' timesheets can have two (or more) separate organisations looking to obtain invoice discounting against them, with the result that financiers can unwittingly end up advancing more than once against one timesheet! In order to obtain such finance the RPO companies have sought to keep the contracts between the end users and the RPO companies and the RPO companies and the staffing companies entirely separate (often referred to as the principal model as the RPO company acts as a principal contracting party and not as an agent). Whilst legally that may enable the obligations to appear divorced the reality is there is only one supply of labour and the RPO companies make a margin on that supply. Sometimes they like to do this to mask the size of that margin and for that reason it is not at all certain that the end user is really getting as good a deal as it thinks or anticipates from its RPO company arrangements but the point is that because of the RPO companies desire to raise financing but without incurring risk the contractual position that separates staffing companies from end users has arisen and is causing the problems with financing in this arena. The addition of pay when paid provisions and ban on assignment clauses have only compounded that problem.

These RPO contract models which have become prevalent in the public sector (and some parts of the private sector) are potentially disadvantageous to every party in the supply chain - including the end user. If the RPO intermediary or staffing company becomes insolvent due to withdrawal of funding, the entire supply chain can collapse, potentially leaving the end user with extremely disgruntled unpaid workers. The end user could then face claims from those workers, despite already having released the cash to pay them into the supply chain. The workers could claim that the end user is their actual employer rather than the staffing company which has gone out of business. In theory these claims can succeed as suggested by the Court of Appeal decision in Franks v Reuters. HMRC would no doubt then also look to the end user for payment of unaccounted for PAYE and NICs. Often the hirer will want to pay the workers anyway just to ensure continuance of supply and avoid walk outs.

The principal promoter of the RPO model is usually the procurement department of the end user, even though, ironically, the end user as a whole may in many cases benefit very little. The RPO contract model appears to simplify the process of managing a large number of suppliers, and appears to provide clear accountability should something go wrong. This model, however, increases the risk that the staffing companies at the end may not be able to pay workers.

So, what are the solutions to these funding difficulties?

Several legal solutions have been put forward by those advising the ABFA and its members.

• RPO contracts can be framed so that staffing companies have a direct contractual right to be paid by the end user. This can be done using the "agency" model of RPO contract which is already in place at some end users. This "agency" RPO contract model requires a slightly different set of contractual documents to the normal RPO contract and some end users are reluctant to use it because for example they think it may make them liable for acts and omissions of the RPO company (which public sector organisations can be loathe to agree to albeit our advisers consider that this risk can be managed by tight contractual terms). We understand that some end users have introduced the "agency" model without mishap and without altering the commercial terms (i.e. cost and convenience of agency worker use from an end user perspective).
• Alternatively a mechanism can be adopted giving staffing companies "step in" rights against the end user if not paid by the RPO – these "step in" rights allow the staffing company to claim direct from the end user if the RPO company has not paid within a certain number of days. The "step in" rights clauses have not yet been tested in Court and there may in practice be problems where the end user claims that it has paid the RPO company in respect of sums claimed by the staffing company but which the RPO company claims it used and/or was entitled to use for other purposes. However, again our advisers view is that any uncertainties can be contained within tight contractual provisions.
• Another solution, which is possible but which would cause problems for all involved is a legal challenge under EU competition or public procurement laws. Unfair arrangements can be challenged if they reduce competition and thereby push up prices, or if an RPO appointment is made without checks being made that the RPO company's supply model is appropriate. If current RPO models put smaller recruiters out of business leaving sister companies of major RPO companies with a monopoly or a more dominant market position and therefore drives "independent" suppliers out of the market, that could reduce the overall supplier base and could be deemed anti-competitive especially if agency worker costs then go up as a result of the monopoly.
• A final solution which the public sector may not find attractive but which is worth mentioning, is for the end users to guarantee debts from RPO companies to staffing companies.

The ABFA, on behalf of its members , is working to encourage changes in contractual arrangements set up by major users of agency and contract workers. To its members the agency model is the preferable option. The process of educating end users is slow but there are signs that they are increasingly recognising that the financial problems experienced by supply chain partners can come back to haunt them.

The ABFA is encouraging all parties in the supply chain, end users, RPO’s and suppliers to review any arrangements of this nature to which they are party and make others aware of the potential dangers of adopting RPO structures which do not allow staffing companies to fund cashflow.

This article was provided by APSCo and was written by K Sharp, ABFA CEO.