Small Business, Enterprise and Employment Bill

Written evidence submitted by the Association of Professional Staffing Companies (APSCo) (SB 39)

Summary

APSCo, the only trade body dedicated to representing the interests of the UK professional staffing industry, are calling for recognition of the damage that ‘pay when paid’ clauses can cause and for a backstop to be included in all future clauses of this kind. APSCo would also like to demonstrate the unique position of the professional staffing industry and the negative impact that pay when paid clauses can have upon it.

1. In a recent report, payments service Bacs noted that the cost to small and medium enterprises (SMEs) of government inaction to tackle late payments is some £9.4 billion per annum. Bacs’ figures reveal that 60% of small businesses are owed in late payments and the average small business is owed £38,186 in overdue bills. Around a quarter of small companies are predicted to be at risk of bankruptcy if these figures continue to rise. While the Small Business, Enterprise and Employment Bill is a necessary step in tackling these problems, this legislation should go further. In particular, a backstop should be introduced to provide greater security within the supply chain and evidence that payment will be forthcoming.

2. The Association of Professional Staffing Companies (APSCo) welcomed the Government’s focus on the payment issues faced by businesses as detailed in the 2014 Queen’s Speech, however, in its current form, the Small Business Bill does little to help SMEs facing payment difficulties. This is a particular concern in the recruitment sector, where firms pay their contractors (temporary workers) and must then fund the time it takes to receive payment from the client. For APSCo members one of the biggest challenges they face is gaining access to finance where master vendors include ‘pay when paid’ clauses in contracts. These mean that the recruitment firm will not be paid until the client receives finance from the master vendor. They may then find it difficult to source the capital they require to meet immediate expenditure and fall into negative equity.

3. While ‘pay when paid’ clauses affect some other sectors, most notably shipping and construction, the recruitment industry is particularly vulnerable to them for four reasons.

i. The time lapse between the payment of temporary staff by recruitment firms and the payment for these services by end clients. In many cases staff will be paid on a weekly basis, while payment for services will be monthly, or even quarterly. As such, delayed payments causes a quick drain on cash reserves.

ii. Recruitment firms are often small, highly-specialist companies which are simply unable to raise the large stocks of reserve revenues needed to compensate for delayed payment. More than 85% of APSCo’s members are SMEs and late payment, unfair payment terms and a lack of transparency of payment terms are routinely cited as key issues they face.

iii. The recruitment supply chain lends itself to complicated supply chains. For example, recruitment process outsourcing companies (RPOs) may contract with end-clients directly, acting as a conduit for recruitment services to the end-client and payment to the suppliers. In this instance the removal of a direct relationship between the recruitment firms APSCo represents and their end clients can lengthen payment terms and add to financing problems.

iv. Recruitment firms struggle for leverage vis-à-vis larger clients and are often under great pressure to enter into contracts that contain ‘pay when paid’ clauses.

4. Clear, affordable access to cash flow is vital for any business to prosper and grow and the success of the recruitment sector is necessary in maintaining a fluid and flexible labour market. APSCo has worked in partnership with the Asset Based Finance Association to raise awareness of financing difficulties, launching the APSCode in May 2012. 20 major RPOs signed up to this document, which affirms that all ‘pay when paid’ clauses should be supported by a backstop date and/or direct recourse to the client. However, despite this improvement, APSCo continues to receive complaints from its members regarding ‘pay when paid’ clauses.

5. More recently, APSCo has engaged with the Institute of Credit Management, the body which set up the Prompt Payment Code in conjunction with the Department for Business, Innovation and Skills regarding the possibility of the APSCode becoming the recruitment sector derivative of the Prompt Payment Code. It is hoped that this could inform discussions and help to form the basis for future legislation.

6. The Small Business Enterprise and Employment Bill is welcomed by APSCo as a necessary move to ease the financial pressures small businesses can be burdened with. However, further amendments are needed to ensure that it is of benefit to APSCo members and the recruitment sector more generally. The inclusion of an amendment to require the inclusion of backstops in ‘pay when paid’ clauses would ease financial pressure on recruitment firms and reduce the burden of risk to small and medium sized businesses. The APSCode has demonstrated that legislation along these lines can be successful, but also that greater cooperation is needed between the public and private sectors.

October 2014