Are construction’s ever more powerful labour agencies holding the industry to ransom?

Behind the door of 11 Downing Street, one Scotsman appealed to another for help. “There is a cancer in the construction industry,” UCATT leader Alan Ritchie revealed to chancellor Gordon Brown. “It’s something we’ve warned you about before, but it has to be stopped now.”

The disease that Ritchie referred to in his private meeting with Brown late last month were construction’s labour agencies. These firms, which exist as the result of a tax loophole, have long been a target for the unions, who accuse them of failing to give their employees standard benefits such as entitlement to notice, and often pay less sick pay and wages than ordinary contractors.

Ritchie’s comparison of such agencies to a dread disease, and Brown’s interest in what he had to say, demonstrate how much their influence has increased in the past few years. Once they were of concern only to unions; the rest of the industry took a relaxed view of their activities. Now it has become apparent that some have the power to hold contractors, workers and entire projects to ransom. At Wembley stadium, for example, the project was disrupted after an agency-led walk-out over money.

Building has uncovered evidence that agency labour frequently forms most of contractors’ workforces, despite industry agreements to the contrary. The T&G union is now investigating one agency after a series of firms alleged that the organisation was adopting doubtful measures to recruit workers.

Construction has always used agencies because they allowed contractors to mobilise and demobilise staff quickly. But now the agencies’ bad practices seem likely to spread to other industries. After years of paying lip service to the unions’ complaints, it may be this threat to the above-board, taxable economy that finally forces the government to clamp down. On the surface, the critics’ problem with the agencies is straightforward. A tax loophole allows workers who would otherwise be classified as employed by the agency to set themselves up as self-employed by establishing their own company. This is then “managed” by the agency (see “What is a composite company?”, below.)

The loophole means agencies and the contractors that engage them do not have to give the agency workers as much job security as a directly employed worker, or as much sick pay they would usually be entitled to (see the box opposite for the reasons for this). It has come to the attention of the Treasury largely because it enables the agencies to avoid paying National Insurance contributions. In a pre-Budget report at the end of 2004, Gordon Brown pledged to close down tax avoidance schemes.

That, however, was 18 months ago. Since then, nothing has been done and the agencies’ stranglehold on the construction industry has grown.

Illustration by Shonagh Rae
Illustration by Shonagh Rae

Agencies are using their contacts in construction to get work, by trying to portray themselves as union-friendly

Bob Blackman, T&G union

A dominant presence

According to the Joint Industry Board rulebook, which governs employment in the M&E sector, the proportion of self-employed or agency labour on a site should not exceed that of directly employed staff. But this part of the industry agreement, JIB rule 17, is rarely upheld in practice. “It’s more honoured in the breach than the observance,” says Frank Westerman, regional officer for M&E union Amicus.

Building can reveal there was one such breach on the flagship Arsenal stadium project, due to open in September. M&E firm Goodmarriott and Hursthouse was found to have exceeded the ratio of agency labour to directly employed. A JIB tribunal – which although not a statutory body is the forum for settling disputes – held at the end of last year that the company had 27 directly employed operatives and 88 labour agency staff on the project: that is 23% directly employed to 77% agency staff.

The contractor admitted the breach, but claimed it had no choice as adverts for directly employed labour had failed. The JIB, which allows the rule to be breached in unusual circumstances, has found in favour Goodmarriott and Hursthouse despite two appeals.

Employers are understandably reluctant to take on a large permanent workforce given the fluctuating workload and locations involved in construction. However, whereas agency labour used to be a “top-up”, they have now grown to such an extent that firms either cannot find staff to employ directly, as happened to Goodmarriott and Hursthouse, or do not have the incentive to do so – agencies can provide labour on tap, without landing firms with a permanent wage bill.

Famous faces

One subcontractor, who does not wish to be named as his firm has recently been involved in a tribunal for breach of JIB rule 17, says agencies are increasingly appointing figures who are already well-known within the industry as directors: a networking advantage which adds to the organisations' power on big contracts.

One such well-known figure is Jim Simms, a former regional officer at M&E union Amicus and one of the architects of the Major Projects Agreement, the pioneering conditions deal on Heathrow Terminal 5. Simms is now industrial relations manager for agency Beaver Management Systems, which by virtue of providing workers to the M&E sector brings him into contact with many former associates throughout the industry. Simms’ background gives credibility to the organisation – the blessing of a former union representative can go some way towards allaying any fears over conditions for the agency workers.

On Wembley in May, BMS virtually halted electrical work by ordering 250 electricians to walk off site

Many believe that labour agencies do not deserve to be given this kind of credibility, but Simms argues that those with a strong track record deserve support. He says: “There are good agencies and bad agencies. I was asked to join BMS. It has no outstanding industrial relations problems with contractors.”

As it is, Bob Blackman, national construction officer for the T&G, says the benefits of hiring a respected industry figure are limited.

And Simms emphasises that BMS does “maintain” workers’ holiday pay, sick pay and redundancy pay in accordance with statutory obligations.

Holding the industry to ransom

Construction employers have traditionally been reluctant to act to control the spread of agency labour. The immediate benefits of having an available workforce without having to support it year-round tend to outweigh stabs at the conscience over training contributions and holiday pay. However, the industry’s leniency is starting to backfire, as the strength of agency presence on some sites means employers are at the mercy of the agencies, which can bring a project to a standstill if they are unhappy over issues such as pay.

This problem was evident on Wembley in May, when BMS virtually halted electrical work by ordering 250 electricians to walk off site. BMS claimed it had not been paid by Phoenix, which said the problem lay with Multiplex. The main contractor was forced to step in and pass some of Phoenix’s contract to rival TB Worrall, a move that is rumoured to have added almost a third to the cost of M&E labour on the project, before BMS was brought back on site.

Of course, any subcontractor providing directly employed labour could in theory do the same thing, but this is unlikely to happen, as subcontractors are not currently legally entitled to stop work over non-payment, so would risk losing the money they had ploughed into a project.

By contrast, a labour agency has little to lose by walking off site. An agency does not pour money into a project upfront as it does not invest in production or materials, and it is not usually obliged to find workers alternative employment if the contractor does not want it back.

I resent my workers being used as pawns in a three-way payment war

Tom Kelly, GMB

Another reason why labour agencies may be more likely to leave a project in the lurch is that they are run on tight margins, so have little room to manoeuvre if they are hit by payment problems in a supply chain. Again, this problem has surfaced on Wembley: Fast Track, a subcontractor that provided steelworkers for Hollandia, had to quit the project after alleging payment problems with steel contractor Hollandia, which claimed it was owed money by Multiplex.

Fast Track director Alan Dwyer says that although his firm is in administration, it is “hanging on”. As the steelwork is in its final stages, the problem was resolved by Hollandia employing the 50 Fast Track steelworkers directly.

But two months earlier, when the problem surfaced, Fast Track had 250 steelworkers and threatened to take them all off site in a move that would have brought work on the stadium roof to a halt. Multiplex agreed a confidential deal with Hollandia to enable it to pay Fast Track. At the time, Tom Kelly, the workers’ representative from the GMB union, said: “I resent my workers being used as pawns in a three-way payment war.”

The skintight margins are bad enough, but there is evidence that some agencies are run in an even more controversial way. The founder of one firm, Sean Hennelly, has been banned from running a company for eight years after accruing £10m of debt as his companies moved into and out of administration over a five-year period (see “Hennelly’s chequered history”, below). His firm, which is also a civil engineering contractor, maintains his workers’ statutory benefits in accordance with their wages.

Illustration by Shonagh Rae
Illustration by Shonagh Rae

The eastern Europe connection

As well as having the power to hold companies over a barrel, unions allege that labour agencies are exploiting workers. Lawyers from the T&G are investigating another provider, which Building has not named as the investigation is continuing, for allegedly encouraging workers to break taxation law.

The material, seen by Building, appears to encourage workers to believe that they should not be concerned about potential legal challenges to their self-employed status if they work for the agency.

We’ve heard stories of workers being railroaded into agencies and having their passports removed

Alan Ritchie, UCATT

This is despite the fact, the union believe, that the agency is operating through a loophole and so cannot guarantee workers’ tax status will be accepted by the Revenue.

The publicity material under investigation states: “Don’t let [tax inspection] worry you at this stage! [Company name] is here to help and assist you, if in the unlikely event your tax return is challenged [sic].” Although this may seem anodyne, officials within the union believe that the document is misleading as the weight of material in its three pages is heavily in favour of the benefits of the agency, and does not inform the worker about potential legal problems.

Unions are concerned about such practices because they believe workers are often tricked or even forced into joining agencies, although not those named in this article. Here, the problem is linked to the much-documented exploitation of overseas labour, as conditions can be much worse for migrant workers who are unfamiliar with UK employment law. Unions have offered anecdotal evidence that some workers, particularly migrants, are strong-armed into joining agencies without realising that they will forgo benefits such as health and holiday pay, and sometimes be tricked into accepting lower wages.

UCATT’s Alan Ritchie says: “We’ve heard stories of foreign workers being railroaded into agencies which then operate like gang-masters. It’s hard for people to come forward, but there are stories of physical toughness and even, in extreme cases, of workers having their passports removed.”

Unions also believe a number of agencies – although again, not those named in this article – are chasing opportunities to buy agencies in Eastern Europe specifically to enable them to have the cheapest workers on board in time for London’s Olympic construction programme.

Presented with such evidence, Margaret Hodge, the recently appointed construction minister, has pledged to investigate the exploitation of workers as well as composite companies and bogus self-employment.

“We know there’re a lot of migrant workers, particularly in London. We must welcome them, we must ensure they are not exploited and that they enjoy their legitimate rights,” she says. “I know that the issue of bogus self-employment is high on [unions’] agenda and while I think that probably all of us accept there is some legitimate self-employment – some people just want their independence and flexibility – what we need to do is stop the abuse. We have also got to see what we can do, as the chancellor said we will, about those intermediary companies that set themselves up to side-step the true employment status of the individual.”

The government has made noises before about tackling the problems associated with labour agencies, but has done little to address the issue. But the fact that Hodge made these comments two months into her new job suggests that the issue has been one of the first to land on her desk.

There is further evidence that the government is listening: Brown’s meeting with Ritchie for a start. Last week, it emerged that the Revenue has removed the right for one of construction largest composite companies, Gabem, which handles payroll and tax administration for the shell companies, to be paid gross of tax, putting its ability to operate as a composite at risk. But perhaps most significantly, Building understands that the government is meeting with unions from across the economy to discuss composite companies. The T&G’s Bob Blackman confirms: “We’re talking to government departments and are working with unions from other sectors. The issue is now broader than construction.”

As labour agencies set up divisions to target sectors such as security, hospitality and catering, the Treasury seems ready to act to protect its revenues. But an effective means of closing the loophole on composites would have an impact far beyond the bank. “The bad practices that were piloted in construction are spreading,” says Blackman. “If it continues, we are getting to the stage of horse-trading over terms and conditions, and ever more powerful agencies.”