The Cheapest Agency Isn't Always the Cheapest Option
Why cutting costs on your recruitment partner can expose your business to serious legal, financial, and reputational risk - and what to do about it.
We get it. Margins are tight, headcount is under scrutiny, and when two agencies are offering the same service, choosing the one with the lower rate feels like a straightforward win. But when it comes to recruitment - especially temporary and contract labour - the cheapest rate on paper can quickly become the most expensive decision you ever make.
We talk to businesses every week who have switched to a lower-cost agency and are only now beginning to understand the exposure they've taken on. The risks aren't always obvious, they don't always show up immediately, and by the time they do, the consequences can be severe.
This isn't a sales pitch. It's a plain-English guide to what you're actually buying when you choose a recruitment agency - and what you might be unknowingly signing up for when you choose purely on price
What Makes Temp Labour Compliance So Complex?
When you engage a worker through a recruitment agency, a chain of legal and financial responsibility is created. The agency employs or engages the worker. The worker is placed with you, the hirer. But, and this is the critical part, HMRC and employment law have their own views on who ultimately carries the risk if something goes wrong
Cheap agencies cut their margins somewhere. That “somewhere” is almost always in the areas you can't immediately see: payroll infrastructure, compliance checks, insurance, employment contracts, and the way workers are paid. And when those areas collapse, the liability doesn't always stay with the agency. It can land directly on your desk.
⚠ THE KEY RISK Under the Criminal Finances Act 2017 and HMRC's transfer of debt provisions, hirers can be held liable for unpaid tax and National Insurance if their agency is found to be non-compliant - even if the hirer had no direct knowledge of the issue. |
Mini Umbrella Company Fraud: The Hidden Time Bomb
One of the most serious and widespread risks in the temporary staffing market right now is mini umbrella company (MUC) fraud. If you haven't heard of it, you need to.
Mini umbrella companies are small, often short-lived limited companies set up specifically to employ temporary workers. Fraudulent schemes use dozens or even hundreds of these entities simultaneously, rotating workers between them to fraudulently claim the Employment Allowance (which reduces employer National Insurance contributions) and sometimes VAT reliefs - multiple times over, across multiple companies.
The result? Workers may be employed and paid in a technically legal-looking way on the surface. But the agency is artificially reducing its costs through systematic tax fraud. That lower rate they're offering you? It's partly funded by money that should be going to HMRC.
⚠ WHAT THIS MEANS FOR YOU HMRC has made clear that businesses who use labour supplied through fraudulent MUC schemes may be liable for the unpaid tax - even if they were unaware. “We didn't know” is not a complete defence if HMRC can show you failed to carry out reasonable due diligence on your supply chain. |
HMRC published specific guidance on mini umbrella company fraud in 2021 and has continued to ramp up investigations. Businesses found to have used labour through these schemes have faced significant back-tax demands, penalties, and in some cases, reputational damage that proved very difficult to recover from.
Other Payroll Risks to Know About
Mini umbrella fraud is the most serious, but it's far from the only risk hiding inside a low-cost agency model. Here's what else can go wrong:
💸Holiday Pay Suppression Some agencies bundle holiday pay into an hourly “rolled up” rate without making it clear to workers - or don't pay it at all. Under the Working Time Regulations, workers are entitled to 5.6 weeks' paid holiday. If it hasn't been paid correctly, workers can make backdated claims, and you as the hirer can be drawn into Employment Tribunal proceedings. |
📋AWR Non-Compliance (Agency Workers Regulations) After 12 weeks in the same role, agency workers are entitled to the same basic pay and conditions as comparable permanent employees. Cheap agencies don't always track this. If a worker qualifies and hasn't been given equal treatment, both the agency and the hirer can face claims. |
🏥Inadequate Insurance Employers' Liability and Public Liability insurance aren't optional - they're legal requirements. Some smaller or newer agencies carry insufficient cover, or fail to keep it up to date. If a worker is injured on your site and the agency's insurance doesn't cover it properly, the consequences for you can be significant. |
🔍Right-to-Work Failures Agencies are legally required to carry out Right to Work checks on every worker before they start. Shortcuts here - especially with overseas workers or those on time-limited visas - can expose hirers to civil penalties of up to £60,000 per illegal worker under the latest government guidance. |
📊Incorrect Employment Status Misclassifying workers as self-employed when they should be employed (or vice versa) is a classic cost-cutting mechanism. HMRC's IR35 rules and employment status case law have tightened considerably. If a worker's status is wrong, backdated NI and income tax can follow - and the liability may not stay entirely with the agency. |
🏦Umbrella Company Non-Compliance Not all umbrella companies are equal. Some legitimate-looking umbrellas operate non-compliant tax avoidance schemes - offering workers “loans” or “advances” instead of proper salary to reduce tax deductions. HMRC's Loan Charge legislation has shown that workers in these schemes face devastating tax bills, and hirers can be investigated for facilitating them. |
A Word on CIS – This One's Construction-Specific
Unlike most of the risks above, this one is unique to construction: it doesn't apply to industrial or FM placements, because the Construction Industry Scheme (CIS) only exists in this sector.
Some agencies keep their charge rates low by supplying workers through CIS rather than PAYE or a compliant umbrella, treating them as self-employed subcontractors. CIS itself is a legitimate tax mechanism, but it only works properly where a worker is genuinely self-employed: running their own business, controlling how and when they work, and carrying real financial risk. A worker who is told what to do, when to start, and how to do it, and who works under your site's supervision, looks far more like an employee than a subcontractor - regardless of what their paperwork says.
⚠ WHAT THIS MEANS FOR YOU Placing workers on CIS when they should be employed is known as false self-employment. It lets an agency avoid employer's National Insurance (13.8%), holiday pay, and other employment costs - savings that show up to you as a lower rate. HMRC and employment tribunals increasingly look past the CIS paperwork to how the work is actually carried out. If the arrangement is reclassified, the exposure doesn't stop at the agency: backdated PAYE and NI, holiday pay claims, and - with new rules shifting PAYE liability for umbrella arrangements onto hirers and agencies from April 2026 - a more direct path for that risk to reach you. |
Workers placed this way also have no holiday pay, sick pay, or notice rights - which creates its own site-level and reputational problems if it ever surfaces.
If a rate looks unusually competitive, it's worth asking plainly: which workers are on PAYE, which are through a compliant umbrella, and which are on CIS - and on what basis has genuine self-employment been assessed for the CIS workers?
What to Check Before Choosing an Agency
Due diligence on your recruitment supply chain doesn't need to be complicated, but it does need to be real. Asking “are you compliant?” and accepting “yes” as the answer isn't enough. Here are the questions that actually matter:
Your Agency Due Diligence Checklist
☑ How do you pay your workers? Ask for a clear breakdown - PAYE, umbrella, or self-employed - and understand which umbrella companies they work with. If they use umbrellas, ask how those are vetted and audited.
☑ Can you provide evidence of your insurance cover? Request copies of their Employers' Liability and Public Liability certificates and check the levels of cover are appropriate for your industry.
☑ Are you accredited or audited by a third party? Membership of bodies like the REC (Recruitment & Employment Confederation) or GLAA licensing (for relevant sectors) gives you independent verification of standards.
☑ How do you handle AWR compliance? Ask specifically how they track the 12-week qualifying period and what their process is when a worker qualifies for equal treatment.
☑ What is your Right to Work checking process? They should have a documented, consistent process. For roles involving workers from overseas, ask about their understanding of visa categories and expiry monitoring.
☑ Can I see your payslip format? A payslip from a legitimate agency should clearly show gross pay, holiday pay, tax, National Insurance, and net pay - with no unusual deductions or vague entries.
☑ How many legal entities does your payroll run through? This is the mini umbrella question, asked plainly. A legitimate agency will have a straightforward answer. Evasion or confusion here is a red flag.
☑ What happens if HMRC raises a query? Find out how they handle tax investigations and what records they maintain. You want an agency that is transparent and has robust documentation.
☑ If you place workers via CIS, how do you assess genuine self-employment for each one, and can you show your reasoning in writing?
💡 A USEFUL RULE OF THUMB If you can't get clear, confident answers to these questions in writing, that tells you something. Reputable agencies have nothing to hide and are used to being asked. If an agency becomes defensive, vague, or slow to respond to compliance questions, treat that as a significant warning sign. |
The Real Cost Calculation
Let's be honest about what a compliance failure actually costs. This isn't theoretical - these are real outcomes we've seen businesses face:
HMRC back-tax demands, often covering multiple years, that run to tens or hundreds of thousands of pounds.
Employment Tribunal awards for holiday pay or AWR breaches, which can cover years of underpayment across multiple workers.
Civil penalties for illegal working, currently up to £60,000 per worker under the government's increased civil penalty regime.
Management time - weeks or months spent dealing with investigations, audits, and legal proceedings. Reputational damage with your own workforce, customers, and the wider market.
Compare that to the saving you made on your agency rate. In almost every case, the maths doesn't work out in your favour.
💡 THE HONEST COMPARISON A 50p per hour rate difference on 20 temporary workers saves you roughly £400 per week. A single HMRC investigation or Employment Tribunal case can cost that many times over - and that's before you factor in the management time and legal fees involved. |
THORN BAKER GROUP'S POSITION We'll be competitive but we'll never be the cheapest agency on the market, and we're comfortable with that. Our rates reflect the cost of doing things properly: full payroll through a single, transparent entity; thorough right-to-work and compliance checks on every worker; correct holiday pay, AWR tracking, and employment contracts; and robust insurance cover across everything we do. We're REC members and hold ourselves to a standard that means when HMRC, APSCO, a tribunal, or your own legal team looks at our paperwork, everything holds up. We don't use mini umbrella structures. We don't cut corners on worker entitlements. And we don't offer rates that are only possible because someone somewhere isn't getting what they're legally owed. What we do offer is peace of mind that the workers on your site are employed legally, paid correctly, and that your business isn't being quietly exposed to risk by the people you've trusted to help you. When a client comes to us having spent a year with a cheaper agency, the conversation we most often have isn't about how much they saved - it's about how to manage the risk they've unknowingly taken on. We'd rather have that conversation before it happens. |
The recruitment market has become increasingly competitive, and we understand the commercial pressure to reduce costs wherever possible. But the labour supply chain is one area where the risks of getting it wrong are simply too significant to ignore.
Our advice is simple: before you make a decision based on rate alone, ask the questions in the checklist above. Understand what you're actually buying. And if an agency can't or won't give you straight answers, that's your answer.
If you'd like to talk through your current agency arrangements - with no obligation - our team is happy to review what you have in place and give you an honest assessment of where any risks might lie.
This article is intended for general guidance only and does not constitute legal or financial advice. For specific advice about your circumstances, please consult a qualified legal or tax professional.