Opinion

Employment: The next big trend in IT outsourcing?

4 min read

14 February 2014

Plenty has been written in recent months about whether the principal aim of IT outsourcing is to cut costs or add business value. When it comes to employment I’d argue that outsourcing is about neither of these. Rather, it’s a matter of risk mitigation.

For years, the IT industry has been more reliant than most on the contribution of contractors, freelancers and other skilled, flexible workers. Indeed, it’s no coincidence that the sphere of career contracting in the UK is still largely dominated by IT consultants, software engineers, web developers, systems analysts and other IT professionals.

Hiring contractors enables an organisation to access expertise that it may otherwise have missed out on, and liberates it from the limitations of its permanent workforce. These skilled, highly-motivated individuals promote original thinking, solve problems, enable skills gaps to be filled, and ensure time-sensitive projects are delivered on time.

Contractors, who generally rely on recruitment agencies for help securing assignments, tend to work either via their own Limited company or through an umbrella company or professional employment organisation (PEO). 

Limited company contractors are classed as business entities in their own right, and operate business-to-business relationships with recruitment agencies and end clients.

However, when a contractor or freelancer joins an umbrella company or PEO, they become an employee of that company. This, assuming that the organisation in question operates to high standards, entitles the individual to an overarching contract of employment and associated rights and benefits. 

Indeed, a reputable umbrella company or PEO will see no distinction between its head office staff and its contractor employees working in the field in terms of employment rights. These providers, which generally have a HR department of their own, will process payment of wages, offer employee support and handle any HR disputes. 

A fully compliant, UK-based provider will also pay all relevant PAYE tax and National Insurance contributions (NICs). Any disputes or complaints brought by a contractor are handled by the third-party provider, rather than the ‘end client’ that is utilising the contractor’s skills. But because the PEO is the employer of the eyes of the law, it bears ultimate responsibility in the event of a contractor bringing a claim or raising a dispute, for example relating to premature contract termination. 

Outsourcing employment to an external provider in this way enables companies to minimise their exposure to the many legal risks associated with employing people, which is why it’s becoming an increasingly prevalent arrangement within the IT industry.

Proposed legislation designed to clamp down on ‘false self-employment’, as laid out by George Osborne in his Autumn Statement in December 2013, is likely to accelerate the rise of outsourced employment.

That’s because a setup in which contractors and other flexible workers are genuinely and legally employed by a third party can give an organisation peace of mind that it won’t fall foul of the new rules. 

So, will employment outsourcing prove to be the next big trend in the UK IT industry? 

It may not receive the same level of attention as the cloud, big data or wearable technology, but I’d argue that it has the potential to mark a fundamental shift in the way the sector works – and provide lasting benefits. 

Derek Kelly is managing director at Parasol, a professional employment provider for skilled contractors and freelancers.

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