6 things UK employment agencies need to know when doing business in the US

Bouwen currently represents over a half dozen UK based employment agencies, each of which is engaged in the recruitment and permanent placement of staff in niche US markets. The US market is attractive for our clients because of: (1) the size of the US market; (2) generally higher salaries upon which fees can be calculated; and (3) perceived greater willingness of US workers to switch jobs. Some of our clients operate in the US through US employees and a formal US office; others serve candidates and clients solely from their UK office.

In contrast to the UK, the US employment agency market is dominated by large corporate entities, rather than the smaller, niche agencies prevalent in the UK. This can create competitive advantages in the US for smaller UK companies capable of servicing highly specialized needs.

If you plan to offer employment agency services in the US, here are 6 things you need to know:

1. Operating via a subsidiary is not required but has advantages. Under US tax law, services are sourced to where they are physically performed. Thus, it is possible for a UK company, with no physical presence in the US, to perform all client development, candidate recruitment, and placement services via the UK company’s UK based employees, without incurring any US tax obligations. In any event, our clients find that operating in the US via a US subsidiary makes the service more attractive to both clients and candidates. If a subsidiary is used, intercompany transfer pricing agreements are implemented so that services rendered in the UK are cross charged to the US entity.

2. US federal, state, and local laws will apply to your activities. Federal, state, and local laws apply to your recruitment and placement of US candidates, including your screening and referral processes. This is true even if all of your activities are performed in the UK. Relevant laws include: (a) non-discrimination laws; (b) laws regulating what you can ask a candidate (e.g., some state or local jurisdictions restrict inquiries into criminal history or pay history); and (c) laws regulating what you must reveal in job adverts. If you are conducting certain types of background checks on candidates, you may also be subject to the requirements of the Fair Credit Reporting Act and similar state or local laws.

3. You may need to register or obtain a license. Some states and localities require employment agencies to be licensed or registered. These laws generally apply to UK companies, if candidates or clients are within their jurisdiction. Unfortunately, these laws are a hodgepodge of provisions. Many apply only if the candidate is being charged a fee. Some apply only to specific industries (e.g., in the case of California, artists in the entertainment field). Some, however, are broader and apply whenever an employment agency is engaged in recruitment or placement of candidates within the jurisdiction.

4. You don’t need to charge US sales tax. Unlike VAT in the UK, sales tax is not charged in the US on the fee earned through permanent placement. (Although it is outside the scope of this article, temporary staffing services may be subject to sales tax, depending on the state in which the worker is working.)

5. Your contract should be tailored to the US. It is certainly possible for a UK employment agency to use its standard UK permanent placement agreement when contracting with US clients. As a practical matter, US clients will resist any contract that is governed by UK law or that contains a UK choice of forum clause. Although it is tempting to simply change the governing law in your agreement and carry on, resist the temptation. Your form agreement won’t operate in the same manner once US law applies. For example, because in the UK the prevailing party typically recovers its legal fees as a matter of UK law, UK contracts rarely include a clause that awards legal fees to the prevailing party. US law generally requires the contract to include such a clause if legal fees are to be recovered.

6. Your UK insurer may not cover your US activities. Some UK insurers will not provide professional indemnity cover for US claims, either generally or when US customer revenue exceeds certain thresholds. Consult with your insurer to determine if you are covered. In addition, some large US clients may insist that you have cover issued by an insurer licensed in their state. Often the need to procure cover for US activities is a catalyst for creating a US subsidiary through which placement services are offered.