Understanding your labour supply chain

Failing to take reasonable steps to ensure that the labour supply chain is legitimate and compliant is a huge risk to organisations. If not done correctly, this can potentially lead to legal, financial and reputational risks for businesses.

These thorough checks don’t just protect your business, but also play an important role in protecting workers from modern slavery.

This is particularly important if your business uses labour supplied by a third party such as an agency, contractor or sub-contractor, or if you outsource your payroll service.

How can you protect your labour supply chain?

Organisations should ensure they adopt and implement due diligence processes to enable them to monitor the integrity of their supply chains on an ongoing basis.

Exploitation, fraud and tax avoidance can often be rooted below the surface of a supply chain; therefore, it is vital that comprehensive checks are performed which go beyond your immediate supplier base.
Performing a Supply Chain Audit which comprises the due diligence principles of check, act and review, can evidence effective risk management and robust due diligence which leads to increased integrity of your supply chain and ultimately reduces risks and exposure.

1) Check

This involves:

  • Undertaking a risk assessment to identify risks and how they may be mitigated
  • Reviewing and testing your own compliance with legal, financial and social obligations
  • Checking your suppliers and their supplier’s legal, financial and social obligations

2) Act

Perform robust due diligence on your suppliers, entailing:

  • Setting up effective systems and processes for due diligence and act on your risk assessment – don’t just treat it as a tick box exercise
  • Knowing your suppliers – Do not assume compliance. Check the credibility of directors, verify signatories and documents to ensure they are accountable office holders
  • Knowing your supplier’s workforce – understand the relationship between them and their workers and consider:
    • who provides the workers
    • what their employment status is and how are they paid
    • who is responsible for worker payments
    • if there is any indication of exploitation including modern slavery
    • are the workers permitted to work in the UK or could they being exploited
  • Considering the entire supply chain – Margins become tighter with every layer of subcontracting and opportunities increase for fraudulent infiltration. Due diligence should apply throughout the supply chain.

3) Review

Effective due diligence needs continuous monitoring and reviews, including:

  • Due diligence procedures – these should be risk-based, relevant, reasonable, proportionate and most importantly, regular
  • Live risk management – this can stop or prevent harm before it occurs and therefore significantly reduce risk

Whilst such due diligence checks should be reasonable and proportionate for your organisations means, checks will need to be more exhaustive in sectors where there are greater commercial risks or an increased vulnerability to fraud and other criminality.

Check, Act and Review Considerations

Make sure you keep a detailed record of all the checks you perform. It is crucial that you can evidence that you understand and are satisfied with supply chain compliance by considering:

  1. Adding clauses to contracts requiring your agreement and approval before further sub-contracting can occur. Follow up on this to ensure that this is adhered to
  2.  Adding clauses to contracts ensuring that travel and subsistence arrangements for workers and the labour supplier comply with HMRC requirements
  3. Adding clauses to contracts prohibiting the use of offshore intermediaries
  4. If the Agency Rules apply, this may mean that you need to operate PAYE, as if the workers are your employees
  5. If the agency has complied with employment intermediary reporting requirements. Obtain evidence of reports to HMRC where they do not operate PAYE, including when an Umbrella Company is involved
  6. Whether the off-payroll working rules apply and organisations are complying with such requirements to perform an IR35 review, produce a status determination statement and operate PAYE to personal service companies
  7. If the workforce has been repositioned into ‘mini umbrella companies’ to enable fraudulent abuse of government incentives aimed at small businesses, such as the VAT Flat Rate Scheme and Employment Allowance
  8. Whether the supply chain is unnecessarily long and complex, leaving those further down little scope for profit or to meet statutory tax obligations

You should also make sure that workers are paid appropriately by considering:

  • If workers are actually paid their contractual rate which complies with the National Minimum Wage or the National Living
  • The Association of Labour Providers (ALP) or Gangmasters Labour Abuse Authority (GLAA) for the latest suggested hourly rates for the supply of labour
  • Undertaking a sample audit of worker’s pay slips to confirm pay rates and understand who is responsible for paying your workers
  • If the PAYE reference is correct for the business you consider to be the employer

If you do not do checks or take appropriate action afterwards this could amount to corporate failure to prevent the criminal facilitation of tax evasion and leaves companies open to prosecution and an unlimited fine. Furthermore, your organisation could be prevented from operating entirely and you risk reputational damage which can compromise your commercial relationships, affecting your ability to maintain contracts.

Understanding your supply chain is rather challenging and we often find our clients are unsure where to start. If you think your business needs support in order to have full end to end supply chain compliance, get in touch with Brookson today.