Company Opt-Out: What does it mean? Why it’s a win-win

In the dynamic world of recruitment and company contracting, the term ‘opt-out’ often pops up, but what is it, and what’s the story behind it?

‘Opt-out’ refers to a pivotal choice made by both a limited company and the individual working through it when working with a contractor supply agency. In effect it’s an agreement that regulations designed to protect agency workers don’t apply to the contracts put in place. The regulations are the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (Conduct Regulations), which impose various obligations on supply agencies to ensure that agency workers are not exploited.

By opting out, company contractors (including those operating through umbrella companies) are able to distinguish themselves from being regarded as temporary agency workers and may be able to command a higher net value in the market place. In particular the opt-out supports the concept of business independence that all contractors love, and which helps them with their IR35 tax affairs. At the same time supply agencies can better protect their fee structures. So it’s a win-win for both.

But how does this process work? There are two simple steps. First the limited company and the individual must both agree to opt out and confirm that agreement to the agency. The confirmation should always be in writing or digitally evidenced.

Second the agency must inform the end user client of the fact of the opt-out. Both steps must be taken before the contractor’s work starts otherwise the opt-out will not be valid. It is crucial to retain the evidence of both opt-outs and the notice to the client in case there is any dispute over application of the Conduct Regulations down the line.

Unfortunately many agencies get the steps wrong, usually by getting the opt-out agreement too late, or by failing to inform the client in time, or by failing to keep the evidence. This point is only relevant of course where the contractor wants to opt out, and it’s important to note that there is a restriction in the Conduct Regulations prohibiting the agency from coercing the contractor into opting out. So for example a refusal to find work for the contractor unless it has opted out would be an offence.

The importance of getting the opt-out process right cannot be over emphasised particularly where the agency may want to protect its transfer fees. For more on this see our upcoming articles on a recent case study, and how our digital platform can help, both of which will be published shortly.

Opting out is not suitable for all contractors, and for more about opt-outs please see our 2012 article. This mentions that the government may review the opt-out provisions at that time but we can confirm that as at October 2023 it has not done so, the opt-out provisions remain in place and effective, with no expectation of change in the near future.

Finally for those interested as to how the opt out came to be in the Conduct Regulations, it resulted from a consultation in 2002 on the then proposed Conduct Regulations in which Lawspeed, as a participant on behalf of its agency clients, suggested the concept specifically to help agencies and contractors. We were delighted at the time with the government’s uptake of our idea which has proved very popular and benefitted thousands of agencies and contractors.