Direct sourcing is becoming a popular strategy for many companies looking to establish their own talent pool of contingent staff. There are several reasons why. It can deliver faster recruitment times and better retention, with pre-vetted candidates who are attracted to the company brand. Direct sourcing can also deliver immediate savings by avoiding the fees of an external recruitment service.

However, there are also risks in foregoing the services of a staffing agency or other intermediary. After all, the activities involved in recruitment and hiring staff are the same whoever carries them out. Left unaddressed — whether the higher-profile risks that capture the attention of legal staff or those that fly under the radar — these risks can have costly consequences. This article focuses on risks pertaining to the UK, though companies elsewhere may contend with similar issues.

Expertise. Staffing and recruitment agencies specialize in this activity and are therefore the experts when it comes to sourcing and hiring. No matter how experienced internal HR and recruitment staff are, they may not be able to devote as much time to the exercise as external service providers. And even if they are dedicated to the endeavor, they may not have the tools available to them to achieve the speed and cost savings that a staffing firm can deliver. For example, staffing firms will be able to negotiate volume discounts with job boards, background screening companies and payroll suppliers that may not be offered to an in-house recruitment team.

The GDPR and Privacy. The European Union’s General Data Protection Regulation (GDPR), coming into force on May 25, introduces an obligation to notify individuals that you have their data, at the time it is collected or within one month of receipt, if obtained from a third party. Any company established outside of the European Union but offering goods or services to customers within the EU, or monitoring the behavior of EU citizens, will have to apply the same rules.

Receiving personal data from an online job application form, or loading contact details, obtained from social media platforms or company websites, onto your own database will trigger the need to send a privacy notice. All organizations are required to do this, but staffing firms will be fully aware of this obligation and will have systems set up to do this automatically.

Failure to comply with the GDPR can have financial and reputational consequences for any company that does not correctly process personal data. As your brand is front and center in a direct sourcing scenario, you will be liable for any breach.

Subconscious bias and discrimination. In the past, when looking for new staff, it was common practice to ask employees to refer their friends and acquaintances. In the Belfast dockyards in the early 1900s, the only way to land an entry-level job to the Titanic shipbuilders, Harland and Wolff, was by apprenticeship, and you could only be accepted by recommendation. This meant that trades stayed within families; it was a closed shop.

Although the world has moved on, and there are laws protecting candidates against blatant discrimination, there is still a risk of subconscious bias. An individual’s background, personal experiences, societal stereotypes and cultural context can have an impact on their decisions and actions without them realizing.

An in-house recruiter may be influenced by a company culture, which is a product of its past, rather than focusing in a dispassionate way on the skills and attributes of the candidate in front of them. The possibility of ignoring candidates who do not fit the company “profile” may open a company up to the risk of discrimination claims from minorities who are under-represented in the existing workforce.

Misclassification and employment rights. Engaging workers directly on contracts for services as either casual staff or self-employed independent contractors carries with it a much greater risk of misclassification than where the engagement occurs via an intermediary. To be clear, this is not an issue if the company is seeking to hire contingent workers as fixed-term contract employees because the employment relationship is settled from the outset. It is also generally not an issue if the contractor is supplied through a personal service company (but see the “Tax” section, below) or an umbrella company. But where staff are temporary or casual, and the employer engages them as “workers,” or as self-employed contractors, on a contract for services there are risks for the business.

The first is that the contract may be invalid or viewed as a sham contract i.e. an attempt to avoid an employment relationship. Zero hours contracts requiring a worker to be available for work are banned in the UK and many other countries. But a “worker” engaged on a contract for services is entitled to refuse work or to stop working at any time without incurring a penalty. Where workers are directly engaged by an employer who expects them to work normal working hours on a full-time basis may find they are opening the door to claims by “workers” seeking employment rights such as notice of termination, unfair dismissal and redundancy compensation.

In the UK, the 2006 case of James v Greenwich Council established that a worker engaged by a staffing agency on a written contract for services, could not claim an implied contract of employment with the client to whom they were assigned. Using a staffing agency as an intermediary employer therefore provides a guarantee against employment status claims.

Tax. Employment tax liability is another risk a company may encounter with a self-employed contractor and, if the employing organization is a public body in the UK, a PSC (personal service company) contractor. If a directly employed contractor is not genuinely self-employed, the tax authorities may force the employer to account for income, or “PAYE,” tax and social security contributions on fees paid to the contractor, notwithstanding the payment of tax by the contractor.

In the UK, a public-sector body that engages a PSC contractor is required to assess the tax status of the contractor in respect of the assignment. If the assessment is that during the course of the assignment, the contractor is not acting in business on their own account (i.e., the relationship is not one of genuine self-employment), the employer is liable for employment taxes under a rule known as IR35.

The liability for the tax rests with the person paying the contractor. Although a staffing agency may have a defense against a client employer making the wrong assessment, there is the possibility of sharing the liability through indemnities by using a staffing supplier as an intermediary in engaging the contractor.

Direct sourcing may be the right strategy for the business, but these issues outlined should be considered carefully when evaluating whether to bring the recruitment service in-house.