On top of all the consultations issued this year, the government has now published a consultation on employment status reform. Since employment status is at the heart of recruitment supply the big question is, could it impact agencies. For most recruitment businesses the short answer is probably not: PAYE agency workers already have worker status and IR35 contractor status does not depend on employment status determination for worker rights. However there is more to this.
The impact falls on any businesses that engage workers on a self-employed basis. This includes recruitment businesses, for example suppliers of CIS workers, locum suppliers and so on.
The consultation, Make Work Pay: employment status reform and protections for the self-employed, was published by the Department for Business and Trade on 14 October 2026. It is open for responses until 11:55pm on 8 January 2027. You can read it and respond on GOV.UK.
Below we set out what is proposed, who is affected and what recruiters should be doing now.
Reform of employment status is a key pledge of the government’s Make Work Pay strategy, and ministers trailed it at the recent party conferences. It was notably absent from the Employment Rights Act 2025, so this consultation is the government’s first concrete move on status questions.
The consultation sets out to tackle what is called false self-employment. This is mainly where substitution clauses are used to avoid worker status and claim self-employment. The plan is that substitution clauses should not be given priority status.
At present, an individual is a worker if they are personally obliged to provide work or services, other than to a client or customer. Currently an individual with a genuine right to send a substitute is not obliged to work personally, and so is not a worker. This could change under the proposals as the belief is that individuals lose out on worker rights because of a substitution clause.
So the proposal is to give personal service less weight and give control more weight. The government is not proposing to remove the personal service requirement altogether, instead, it is considering setting up a presumption or a different control test.
The consultation proposes that if status is challenged the starting position will be that the individual is a worker, with the burden on the hirer to prove otherwise in a tribunal. This will reverse the usual process where it is for the individual who has to establish worker status. The presumption would apply to worker status only. There is no equivalent presumption of employee status.
This suggests that the definition of a worker be changed to include an individual who is subject to significant direction or control by the engager even though the contract contains a right of substitution. There are safeguards that will allow businesses providing services to a client where there is a client customer relationship, which mirrors provisions in the Agency Worker Regulations.
The Fair Work Agency (FWA), which launched in April 2026, is proposed to take on responsibility. What this will look like is uncertain, but it is reasonable to conclude that the FWA could handle complaints; it may be allowed greater powers to determine status and to take matters to tribunal. There is even a suggestion that there could be a new online status test tool similar to the CEST tool operated by HMRC. Heaven forbid!
Tribunals could be authorized to award additional penalties where a business repeatedly fail to recognise the correct status of its workforce. This may impact heavily on gig workers, but of course would affect recruitment businesses and other organisations that attempt to attribute self-employed status in order to avoid worker rights, and perhaps also to avoid application of tax payment rules under s.44-47 ITEPA.
Alongside the status changes, the government proposes new protections for those who remain self-employed. These include entitlement to written statements, protection against trade union related blacklisting and health and safety protections.
The consultation is billed as employment status reform, but in practice it is about whether self-employed individuals should be classed as workers, entitled to rights including paid annual leave and the national minimum wage. It does not address agency worker status directly. Even so, some agencies may be affected, as will agencies that engage their own internal staff on a self-employed basis.
PAYE agency workers already have worker status, and the consultation does not propose to change that. Some terminology may change, including the term “limb (b) worker”.
Some in the recruitment industry expected a far-reaching consultation proposing a single worker status in place of the current worker and employee distinction. There are no such proposals. However, single worker status is flagged as something to address at a later date, so it is not off the table. For now, PAYE worker status remains a valid option for recruitment businesses.
Agencies that engage their own consultants or other internal staff on a self-employed basis should review those arrangements. If the presumption of worker status is introduced, the agency would need to prove those individuals are genuinely self-employed.
The consultation will have the greatest effect where agency workers are engaged as self-employed individuals or sole traders.
Engaging agency workers on a self-employed basis is possible, but it is only common in construction, where contractors operate under the Construction Industry Scheme (CIS). Agencies and umbrellas in construction, or anywhere else engaging on a self-employed basis, should consider the impact now. In particular, they should review how far their contracts rely on substitution clauses.
These businesses will need to decide whether to treat self-employed agency workers as workers. If they do, paid annual leave and the national minimum wage become part of the deal, and rates will need to reflect that.
Outside construction, most recruitment businesses already avoid self-employed engagements. The main reason is tax. Under the agency legislation in Chapter 7 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003, payments to the worker can be treated as employment income. The agency is then liable for PAYE unless it can show that no one has the right to supervise, direct or control the manner in which the worker provides the services.
Status is a further concern. There is already a body of case law in which self-employed individuals have successfully claimed worker status, creating litigation risk for the agencies involved. A presumption of worker status would increase that risk.
The consultation does not consider personal service company (PSC) contractors, whether inside or outside IR35. IR35 determines employment status for tax purposes, not worker status for employment rights, so it falls outside the scope of these proposals. Nothing in the consultation would stop a genuine right of substitution from supporting an outside IR35 determination.
There is clearly some mission creep, with rights being extended beyond current levels in order to address a problem which should largely already be addressed under current legislation. The real problem is that there is no single body able to review bad practices, and so giving remit to the FWA makes sense. But this consultation, as can be seen, goes significantly beyond that practical issue. Having said that, there is no direct attack on recruitment agencies as such and therefore could be seen as a relief for those in this industry.
Is there a missed opportunity, as some have suggested? This depends on your perspective. At present, a PSC contractor working inside IR35 is taxed much like an employee, yet receives neither worker nor employment rights. This, however, is not specifically relevant to agencies, and is not addressed in the consultation.
Also there could have been some consideration of aligning tax and employment status, but this is notably missing from the proposals. No doubt many agencies will be relieved that the review is not further reaching given the large number of new rules they already have to consider under this and next year’s legislative changes.
Lawspeed has been a specialist on employment status throughout our existence as it is central to tri-partite worker supply. This is relevant to our portfolio of contracts, and often key to our advice on tax status including under IR35. Contact us – here to access our wide range of services, specifically devised for, and to help, recruiters.
It closes at 11:55pm on 8 January 2027. You can read it and respond on GOV.UK.
No. Single worker status is not part of this consultation, although the government suggests it may be considered in the longer term.
A limb (b) worker is someone who falls within section 230(3)(b) of the Employment Rights Act 1996. To be a worker, an individual must be under an obligation to personally perform work or services for another party, who is not their client or customer.
It is likely to carry less weight. The proposals would mean a right of substitution cannot override all the other factors that point to worker status, such as a significant degree of control.
No. IR35 concerns employment status for tax purposes, which the consultation does not cover.
Because of the tax risk. Under the agency legislation, payments to the worker are treated as employment income, and the agency is liable for PAYE, unless it can show that no one has the right to supervise, direct or control how the worker performs the services. There is also a risk of the worker claiming worker status in a tribunal.
Yes. The tests are separate, and the proposals could make this mismatch more common.
The consultation proposes a greater enforcement role for the Fair Work Agency, which could increase investigations into employment status.
