The UK has a large proportion of temporary workers. According to Guy Bailey, senior policy adviser at the Confederation of British Industry (CBI), the reason temporary working is so important is that it allows organisations to match their resources to meet demand. The challenge for employers is to balance the need to reward temporary workers with the requirement to distinguish clearly between permanent and temporary staff for tax and legal purposes. Legally, all temporary workers are entitled to some rights under discrimination legislation, health and safety laws, and working time regulations in relation to holidays, breaks and how many hours they work. Perks such as flexible benefits schemes and pensions are unlikely to be offered to temporary workers because most plans enable choices to be made only once a year, and the cost of managing the administration could be too high for employers. But voluntary benefits plans and instant rewards, such as vouchers, can be effective incentives, says Andy Philpott, marketing director at Capital Incentives and Motivation. Offering such benefits might seem a way to make this group feel more valued and motivated at work, but firms must be careful not to blur the line between temporary worker and permanent employee. Employers that rely on agency staff, in particular, will need to review their HR and benefits policies in the light of the forthcoming EU Temporary (Agency) Workers Directive.

How should temporary staff be treated when it comes to reward? Victoria Furness looks at the moral and legal considerations

The UK is recognised as having one of the most flexible labour markets in Europe, which many business leaders attribute to the large proportion of temporary workers in the country.

The government estimates there are currently 1.3 million agency workers in the UK - nearly 5% of the entire working population. Guy Bailey, senior policy adviser at the Confederation of British Industry (CBI), says: "In other European countries, like France and Germany, that figure is nearer 1%. The reason temporary working is so important is that it allows organisations to match their resources to meet demand. By doing so, they can marshal their resources more effectively."

Apart from the difference in their working status, most temporary workers are like any other member of the workforce in wanting to be recognised for their achievements and motivated to perform better. The challenge for employers is to balance the need to reward temporary workers with the requirement to distinguish clearly between permanent and temporary staff for tax and legal purposes. Complicating matters further is the huge disparity among this group, because a temporary worker could be anything from an interim HR manager to a specialist IT contractor, an agency worker in a food manufacturer or a freelance journalist.

Legal rights

Legally, all temporary workers are entitled to some rights under discrimination legislation, health and safety laws, and working time regulations in relation to holidays, breaks and how many hours they work. Agency workers may also receive some benefits from their agency. For example, recruitment firm Randstad offers temporary workers holiday accrual, training, access to a pension scheme and discounted rates to a sick leave plan. Jane Fielding, a partner at law firm Wragge and Co, says: "What they do not receive - because they are not an employee in the traditional master/servant role - are the lifestyle rights, such as maternity leave, adoption leave and paternity leave."

Most temporary workers receive a higher salary to compensate for the lack of benefits, but this is less evident at the lower end of the market. Some employers also extend the benefits received by permanent workers to their temporary workforce, such as access to an on-site gym, creche, canteen or car parking. Many also invite temporary workers to their Christmas party, company social activities and training.

Perks such as flexible benefits schemes and pensions are unlikely to be offered to temporary workers because most plans enable choices to be made only once a year, and the cost of managing the administration could be too high for employers. But voluntary benefits plans and instant rewards, such as vouchers, can be effective incentives, says Andy Philpott, marketing director at Capital Incentives and Motivation. "Things like multi-store vouchers or luncheon vouchers have some perception of value attached to them," he explains. "They can be handed out quickly and there is no administration as such [for employers]."

Offering such benefits might seem a way to make this group feel more valued and motivated at work, but firms must be careful not to blur the line between temporary worker and permanent employee. John Brazier, managing director of the Professional Contractors Group (PCG), which supports freelancers, contractors and consultants, says: "Freelancers and contractors are not employees, and to treat them in a similar way would be highly problematic. For tax purposes at least, offering employee-style benefits would be anathema for a freelancer. Doing so contradicts their employment status and makes life difficult when demonstrating they are outside the IR35 tax legislation."

IR35 (or intermediaries legislation) was introduced in 2000 to crack down on contractors avoiding tax and national insurance contributions (NICs) by setting up an intermediary one-man company and paying themselves a dividend instead of salary (dividends are not liable to NICs) when such contractors would otherwise be considered an employee of the company to which they provided services.

But it is not just the tax authorities that employers must be concerned about. Most employment tribunal cases deal with the question of employment status - often from disgruntled temporary workers claiming to be an employee and, therefore, entitled to the same employment rights as permanent staff.

Clear framework

Unfortunately, case law is fairly inconsistent in this area, so there is no clear precedent for employers. The best strategy for creating a clear reward framework is to segment the workforce, says Nich Crowson, reward specialist at HR consultancy Independent. "Look at who your core workers are and who your peripherals are. If you are [using] a temporary workforce to meet seasonal needs, then be very clear and set yourself timeframes to review, after so many months, whether they are still a temporary or permanent employee."

Employers that rely on agency staff, in particular, will need to review their HR and benefits policies in the light of the forthcoming EU Temporary (Agency) Workers Directive. This will affect agency staff working more than 12 weeks at an organisation. The self-employed and anyone who does not use an agency are excluded from the bill, as are agency staff who spend less than 12 weeks on an assignment.

The main thrust of the legislation is to give agency workers the same rights to pay and employment conditions as permanent staff. But there are some aspects of the legislation that will affect all temporary workers, such as the right to equal treatment on job opportunities, training and amenities on site, for example canteens, childcare facilities and transport services. What is excluded is their entitlement to occupational social security schemes, such as an occupational pension.

The problem with the government's proposals as they stand is that they raise more questions than they answer. First up is the definition of pay. Chris Wellham, senior associate at law firm Lovells, says: "There is uncertainty about how the equal treatment legislation will be applied. Are they going to look at each element of pay and benefits individually, which is what they do for equal pay, or are they going to compare everything as a total package?"

Concerns have also been raised about paying bonuses to temporary workers. "Where do those start and end?" says Wellham. "What is [an organisation] going to do to monitor that? Give appraisals to agency workers to understand how their performance has improved?"

Another issue is holiday entitlement for agency workers in cases where an employer offers enhanced contractual holiday entitlement for permanent staff. Fielding explains: "It is proposed that agency workers should be able to take that as a one-off payment at the end of their assignment, whereas a permanent employee can only have payment in lieu of holiday, so it appears to be more beneficial for agency workers."

There is also a possible problem in ascertaining the correct salary level for a temporary worker. The CBI is lobbying for this to be a real-life comparator rather than a hypothetical one, which it thinks will prove highly problematic. Ann Bevitt, a partner at law firm Morrison Foerster, also questions what will happen with the comparisons over time. "For instance, if, when an agency worker joined, there was nobody in that position, what happens six months later when the company recruits someone at a higher level and the agency worker says they are at that level too?" she says. "It may not just need to be an initial assessment but an ongoing review to ensure they are at the correct level."

Pension schemes

Although pensions are specifically excluded from the temporary workers directive, the government has made it clear that all agency workers will be covered by the Pensions Act 2008. This means that when the legislation come into effect in 2012, agency workers will be automatically enrolled into a qualifying pension scheme from day one of an assignment, and the employer will have to make a contribution to their fund.

Employers have until 2012 to prepare for this legislation, but the temporary workers directive becomes law before then - the consultation period ended on 31 July. The CBI would like to see the legislation delayed until the end of next year (the directive must be implemented before December 2011) in view of the economic situation and the likely impact on employment businesses, which are already seeing reduced demand for their services and could see business fall off further if, as expected, the directive makes it more expensive to recruit temporary labour.

In the short term, the most likely outcome is a boom in business for employment tribunals. Lovells' Wellham says: "I was speaking to a judge of a tribunal and she said claims were already up 50% this year - I assume this is because everyone is being made redundant - so the legislation could add to an already groaning tribunal system."

For employers that were nonplussed by the legislation until now, that could be the wake-up call they need.

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