(Long answer but I recommend you reading in full to avoid risk of pain later)
I have contracted under my UK Company since 1994... I have signed (and thus always opted out)...
Employee/Employer Relationships are complicated! The client AND the agency both want protection. There is no one test to determine if employee/employer relationship exists - instead, the score of multiple questions helps build an argument and the rest is open to interpretation
If sufficient safe guards are not in place, client or agency risk being held responsible for your pension, national insurance contributions, sick/holiday pay, taxes and there are other possible insurance liabilities involved.
The agency use this letter to contribute towards arguments proving you are a service provider, not an employee. Service providers are responsible for their own taxes, insurances, sick pay etc. You work for your Ltd, and your Ltd is contracted to provide a service to the agency, who subcontracts you to a client. Never loose sight of that.
Besides taxes/insurances, the opt-out helps protect agency if the client holds you responsible for malpractice. If you read your contract in full, you'll notice it demands you have liability insurance - few contractors get the insurance, few even know the clause/requirement is there (many I have worked with just sign the contract without reading). I recommend the insurance, its not expensive, under $500 (about 350GBP) per year for me/my UK company per year.
There are several different tests that the IR (Inland Revenue) use to determine if your relationship qualifies as employee/employer or not.
- Does client provide you with a cell phone/car/fuel for personal use?
- Is it Project related work? (thus it has a clear start/end) or are
you working as a temporary employee (working shifts at helpdesk for
The difference between temporary employee and a contractor is, a temporary employee is temporary replacing a full time function - a contractor is bringing in a temporary needed skill that is not available at that time for a defined period of time.
The opt-out was required because a number of temporary workers within Europe were abused by some companies. I know of two big tech companies who would purposely end relationship between employee/employer every 23months as EU law said that a temp for 2 years or more win's the same rights as a full timer. The laws were changed again, to protect the employee from this sort of abuse and basically, re-employing the same person within six months of their departure could imply a continuation of service (meaning their prior 23months of service counts towards any additional time they spend with the company, if they got back in within six months).
Another court case related to several hundred temps, under contract for 9years. They managed to sue successfully for unpaid holiday/sick pay and benefits like pension as it was proven that despite only working 20+ hours a week, they performed tasks just like a full time employee would.
So... if you ever do not get invited to team events with a client, its not just that they are being tight with cash - it is also because legally, you could use that invite as one of your arguments to insist that an employee/employer relationship existed and that you qualify for unpaid benefits and/or that you are also entitled to redundancy.
Also indirectly related... Contracting in the UK has changed tremendously since the last budget. When IR35 (Inland Revenue rule 35) was created about ten years ago, there was a storm of protest saying the rule was open to wide interpretation that could make a contractor more liable to higher taxes (basically, the IR35 meant your invoice was your salary, and thus, taxed accordingly). The Inland Revenue did not change the law but basically played down many of the fears that were raised in part because the law impacted contractors from IT to builders to electricians to plumbers. Depending on how the law was read, it meant that the toolkit/hardhat/boots/overalls for a contracting builder/carpenter/plumber was either a personal expense (and thus, not vat reclaimable) or a business expense (vat reclaimable). Replace toolkit with your laptop or hotel or travel expenses and ask yourself how much of a vat refund you had last year and you'll see how loud the alarm bells rang.
For ten years, the taxman failed to chase anyone based on the worst case reading of IR35.
Then Osbourne got in and hell broke loose.
Basically Osbourne asked the tax man to review the past ten years and expenses are getting a second look. One friend of mine had the past five years reviewed and has been asked to cough up 125,000GBP because some of his expenditure was deemed personal, not business related. A recent law change says that any disputes can be handled in court, but the tax payer must pay first, argue later. Fair or unfair, thats the law.
What has this to do with your EEA opt-out? If Osbourne failed to collect the money from the contractor, he could chase the agency or the client saying they were the employer and thus they should cough up the unpaid tax. Belgium and Holland have "chain" laws for example, so that if you avoid paying their taxes, they can (based on their law) chase the agency or the client.
Thus - your contract, the work schedule, the letter you are asked to sign are different levels of protection.
I hope that helps!