The shrinking freelancer pool
Freelancers have always offered convenience for agencies in all disciplines due to the flexibility offered in being able to bring them in when required and with no long-term commitment. Typically more expensive than having permanent staff and therefore diluting project profit margins, hiring freelancers can be better for the bottom line. This is because freelancers are often needed where there is a temporary resource gap, perhaps during busy spells or where specialist expertise is required for a specific piece of work. Freelancers can also be brought in when an agency is growing but hasn't yet recruited staff to service the additional work.
However, post-pandemic, those with a contacts book of freelancers have found themselves crossing lines through many of the names due to them not freelancing anymore. According to the ONS, at the end of 2019, just before the outbreak of Covid, there was a record high of just over 5 million self-employed people in the UK. At the time of writing that has fallen to 4.2 million, the lowest number of people in self-employment since 2012. These statistics reflect the trend in the fall of agency freelancers.
At the start of the first lockdown in March 2020, clients cancelled or deferred work causing agencies to go into survival mode and turn the freelance taps off. Many freelancers suddenly found themselves with no income and those that were relatively new to self-employment or working through their own limited company received little or no Governmental financial support.
To complicate matters further, changes to off-payroll working tax legislation (better known as IR35) from April 2021, meant that businesses not meeting the definition of small* had to determine whether those working for them through their own limited companies should ordinarily be deemed employees. If they were found to be deemed employees, tax and national insurance would have to be deducted from their invoice payments. Whilst this meant that smaller independent agencies had a competitive advantage in attracting freelancers, it was the larger independent and group agencies that had the majority of work on offer to them.
Since 2016, the tax efficiency for someone working through their own limited company has been eroding due to changes in the way dividends are taxed. The changes to IR35 have effectively meant that for many freelancers, there is no longer any benefit to freelancing anymore. The impact of the pandemic along with the changes to IR35 has caused many to jump ship from freelancing to the safety and security of agency employment. This trend is confirmed by the latest HMRC and ONS figures which show that the number of people payrolled is half a million more than just before the pandemic.
The trouble for agencies isn't just that it is more difficult to find freelancers, those that still freelance can be more selective where they work and command higher rates. For agencies having to comply with IR35, there is usually more of a premium to pay, at least in part to make up for tax and NI deductions but also incurring the additional cost of employer national insurance and often the apprenticeship levy too (where the annual wage roll is £3m or more).
For agencies which had heavily relied on the convenience and flexibility that hiring freelancers offered but are struggling to find freelance talent, the solution is to understand the resourcing requirements further in advance to hire permanent or fixed-term staff. This involves the fine balancing act of knowing when there is enough predicted future work to start the recruitment process to find the right candidate, for them to serve their notice period and be in place by the time they are needed.
Carrying out regular forecasting allows future revenue to be predicted and resourcing to be modelled, allowing agencies to determine the appropriate time to add to the headcount. Please get in touch if you would like to explore how we can help you with your forecasting and modelling.
*Agencies with a turnover of more than £10.2m and having more than 50 employees for two consecutive years or agencies which are part of a group would generally not meet the definition of small.