Underhill Report On Licensing Arrangements

This review of licensing arrangements for labour hire employers examines the general principles of licensing for labour hire agencies, hereafter referred to temporary work agencies, and the application of licensing arrangements in the Asian region (Japan, Singapore and South Korea), the United Kingdom (UK) and the USA. It also draws upon the findings of the International Labour Office’s guidance material on essential characteristics of licensing arrangements.

The objective of the review is to determine how effective various licensing arrangements have been in improving employment conditions for temporary agency workers. This has proven to be a complex task. The introduction of a licensing system would be expected to create barriers to entry, thereby reducing the number of small and disreputable temporary work agencies, but data is not available on the number of licensed agencies in the countries reviewed. A licensing system would also be expected to result in penalties being imposed and licences revoked when licensing conditions are breached; but this data is also not available. Nor have country-based studies been completed on the effectiveness of licensing arrangements.

In the past decade, a significant number of countries have either introduced licencing arrangements, or strengthened the requirements of existing licencing schemes. The former includes most EU countries, where licencing has gone hand-in-hand with implementation of the EU Directive on Temporary Agency Workers. The latter includes the Japan, Singapore and South Korea. The licensing arrangements in these three countries were increasingly seen as ineffective. Public concerns about the rapidly growing temporary agency workforce and their poor working conditions contributed to legislative change to strengthen licensing systems. For Japan, additional pressures flowed from ILO Committee of Experts Reports on Japan’s compliance with the convention on agency work. The licensing systems for these three countries can be regarded as more mature systems which have been amended to offer more effective protections for agency workers. Unfortunately, however, most changes to their licensing systems have been introduced in the past two-three years, and have not yet been evaluated by local observers (who are best placed to identify changes at a national level). General observations can nevertheless be drawn from the ways in which these systems have been amended to overcome weaknesses in arrangements. After reviewing the operation of licensing arrangements in these countries, it has become clear that licensing is regarded only as a means to an end, and not an end in itself. Its effectiveness is intricately related to the nature of the labour laws which the licensing system supports.

The report consists of four sections. In Section 2 the key features of more effective licensing systems, distilled from the examination of the five country experiences, are summarised. Section 3 presents the main characteristics of agency licensing systems in general, based primarily upon guidance material provided by the ILO. In Section 4 the licensing systems of Japan, Singapore, South Korea, the UK and the USA are detailed. This includes short contextual information to better understand the objectives of their licensing systems, the reasons for strengthening those systems (where applicable) and commentary upon their effectiveness where available.

2. KEY FEATURES OF MORE EFFECTIVE LICENSING SYSTEMS

A significant number of countries have introduced licensing systems for employers of temporary agency workers, or amended existing licensing arrangements, in recent years. The key features summarised here have been distilled primarily from recent changes introduced to overcome weaknesses in pre-existing licensing systems. In this way, they provide information based on systems which have been progressively refined and improved following concerns (often public outcry) about the ineffectiveness of earlier systems.

2.1 Licensing systems which do not create barriers to entry do not offer protection to agency workers’ employment conditions.

Barriers to entry can take several forms. They can include capital bonds, restrictions based on past breaches of labour law, and minimum experience and training qualifications of agency personnel. Licensing systems which only require the supply of key information from the licensee, such as contact details, are ineffective in improving agency workers’ pay and employment conditions. In the UK, for example, a licensing system was established in 1973 which involved little more than administrative information from the agency, coupled with restrictions on fees charged to workers. It did not create an effective barrier to entry, rather it was more akin to a simple business registration process. The industry structure of temporary agency work in the UK subsequently developed in a way similar to Australia – a large number of small-medium firms. Agency workers continue to have employment and enforcement problems similar to that experienced in Australia.

2.2. Licensing systems which incorporate agency worker specific employment practices are increasingly commonplace

Requiring licensees to observe specific practices in relation to agency workers provides additional leverage for improving and enforcing protections for agency workers. Such requirements can include restrictions on durations of placements, prohibitions on placing workers as strike-breakers, and restrictions on synchronised placements (where the agency worker is only employed for the placement). In the European Union (EU), and for countries which have ratified ILO Convention 181, the requirements extend to a wide range of employment practices, including those related to minimum wages and collective bargaining. These requirements are increasingly being incorporated into the Acts which govern licensing, rather than the Acts governing labour law more generally. In

the past 25 years, Japan, for example, has shifted from a general prohibition on agency work through to freeing up practices and eventually reintroducing some of the earlier restrictions. Initially agency placements were capped at 3 years duration, and agencies could operate across most industries and occupations. Host employers found ways to get around the 3 year placement limit, and agency employment grew rapidly. In response to public outcry (stable employment has a stronger cultural base in Japan), and complaints by unions to the ILO, Japan has reinstated some of the earlier constraints on agency employers, including requiring some categories of fixed-term agency employees to be converted to permanent employment. As these changes only occurred in March 2012, it is too soon to evaluate their effectiveness.

2.3 Licencing systems can create barriers to entry without improving employment standards, if other legal protections for agency workers do not exist

Not all agency licensing systems are intended to provide employment protections for agency workers. In Singapore, the 2011 amendments to the licensing system introduced capital bonds and minimum competency requirements. These would be expected to reduce the number of agencies and improve the standard of services provided. However, the licensing system is intended primarily to stem the large inflow of foreign workers brought in by illegal operators. It is not intended to directly improve the employment standards of foreign agency workers who are still not entitled to a statutory minimum wage. Their employment standards may gradually improve as the supply of cheap foreign labour diminishes, but licensing itself does not include compliance with minimum employment standard.

2.4 Penalties for breaches of licensing requirements have to balance penalties for non-compliance against incentives to circumvent licensing There are two aspects to this balancing of penalty arrangements. On the one hand, if penalties are too low, they do not provide a disincentive to operating illegally. Up until 2011, penalties in the Singaporean licensing system, for example, had dropped in real terms to levels which were regarded as trivial. The 2011 amendments increased penalties for operating without a licence from S$5000 for a first offence to up to S$80,000 (approx. A$70,200) and/or up to two years imprisonment. The maximum fine for repeat offenders increased to S$160,000, and/or up to four years imprisonment. Likewise, in Japan, the enforcement system rests upon education processes, or ‘correctional

guidance’. With no clear evidence of a decline in violations of the laws, both the JTUC-RENGO and the ILO have questioned the effectiveness of this process.

On the other hand, if restrictions are seen as excessive, organisations will operate outside of the licensing system. The clearest example of this is in South Korea, where manufacturers have responded to a ban on placements in manufacturing by creating in-house contracting arrangements. In 2012, Hyundai admitted such an arrangement was in fact illegal agency work. Other companies, however, continue to operate with in-house contracting rather than comply with regulations placed upon licenced agencies.

A study of the effectiveness of different forms of penalties is beyond this review. However it is interesting to note that in EU countries, monetary fines (typically 3,000 to 30,000 euros) are the most common sanction. In the Netherlands, criminal sanctions were repealed in 2012 and replaced with administrative fines, justified on the basis that known financial penalties offered a more effective deterrent to fraudulent activities than criminal sanctions. In Belgium, by contrast, the risk of loss of license is regarded as a fairly effective sanction when agencies breach employment laws (Schomann & Guedes, 2012). It is likely that the effectiveness of different penalties is to some extent culturally bound.

2.5 Licensing systems are increasingly imposing penalties upon host employers, as well as agencies

Licensing systems which have undergone amendments in recent years have typically extended their coverage to include penalties upon hosts. Penalties may apply when hosts knowingly use unlicensed agents, or knowingly use agency workers in ways which breach the licensing requirements of the agent with whom they have contracted. This represents a clear acknowledgement of the nature of triangular relationships which underpin agency work.

Singapore introduced penalties for hosts in 2011, and the first advertised prosecution under their new regulations involved a penalty imposed on the host for using an unlicensed agent. In South Korea, hosts have been subject to penalties since licensing began in 1998, however amendments enacted in 2010 introduced a new penalty whereby the host is deemed to be the employer of an agency worker on a permanent basis (subject to the agreement of the worker) when the agency employer has breached licensing requirements. One outcome of this it that the agency worker can then take action against the host if discriminated against or terminated unfairly.

A similar trend is evidence in the EU where a substantial number of countries have introduced fines for hosts when a placement breaches labour laws, although whether this is based in the licensing system is unknown. Belgium, for example, has introduced the same arrangement as South Korea whereby the host becomes the employer and the employment contract becomes open-ended when an agency breaches employment laws. The agency worker can then seek compensation from the host employer (Schomann & Guedes, 2012).

3. PRINCIPLES OF LICENSING ARRANGEMENTS, AS PROMOTED BY THE ILO

3.1 Benefits of licensing arrangements

The ILO Convention 181 promotes the licencing or certification of temporary agency to mitigate the risk of “malpractice and abuse of clients” (ILO, 2007, 14). A number of benefits associated with licensing have been identified by the ILO.

First, governments can maintain records of temporary agency businesses, including contact details, but also information about the type of services offered by agencies such as occupational, industry or regional specialisations. Maintaining this information means government agencies can target training, and information such as legislative changes, to the specific needs of agency employers. Requiring agencies to continually inform the licencing agency of changes in ownership structures, businesses addresses, the opening of new branches and the like are commonly implemented to ensure effective monitoring of agencies (ILO, 2007, 22).

Second, the licencing process enables pre-screening of applicants for the relevant skills and capabilities, and their experience in the job placement field (ILO, 2007, 14). Some licensing arrangements, such as in Singapore, require agency staff to complete training before a license will be issued. In Singapore, this requirement was introduced to lift the quality and standard of agency operations in order to support Singapore’s reputation in the global labour market. Most countries (and at least one State in the USA) also refuse applications from those with criminal records.

Third, when registers of licenced agencies are publicly available, users of agencies (both workers and hosts/clients) can be assured they are using a legitimate agency (ILO, 2007). This is especially important when host companies can be prosecuted for using non-licensed agencies, such as in Singapore and South Korea.

Fourth, it facilitates transparency in the sector by identifying businesses operating in the sector and their overall activities, such as number of placements (ILO 2007, 140). It should be noted, however, there has been strong employer resistance (based on concerns of undermining competitive positions) to a high level of information, such as number of placements, being publicly available (DBIS, 2013, 19-20).