The EDM, or hybrid model, is set to do a brisk business in 2025 — much to the potential damage of agencies, clients and contractors.
In the complex world of temporary and contract work, one particular engagement model is stirring up concern — the Elective Deduction Model.
But you may know it by a different name.
In fact, the ‘EDM’ is also known as ‘the Hybrid Model.’
Elective Deduction Model (EDM) aka Hybrid Model = Trouble
Either way, the model is notorious for its complex structure.
However, it seemingly offers a workaround for engagers by separating workers’ tax and employment law status.
Crucially, the model designates workers as employees for tax purposes while treating them as self-employed for employment rights.
Here, exclusively for ITContracting.com, I want to explain why the EDM is fundamentally flawed and increasingly risky — for recruitment agencies and contractors alike.
Furthermore, writes Sebastien Sauca, CEO of SafeRec, the risks of the Elective Deduction or Hybrid Model are only going to magnify in 2025, due to the planned increases in both employer National Insurance (rising to 15% from April 6th) and the National Minimum Wage (rising to £12.21 from April 6th).
Understanding the Elective Deduction Model (EDM)
The EDM is intended for low-paid, temporary workers and relies on a loophole between employment and tax law — that status can be different for each.
Generally, employment status determines not only a worker’s tax obligations but also the employment rights they are entitled to. For instance, an “employee” in tax terms would typically be an employee for employment law and qualify for benefits like holiday pay, sick pay, and maternity benefits, some of which are associated with Pay As You Earn (PAYE) deductions in any case.
However, the EDM contradicts this.
EDM contracts: what they tend to state
In EDM contracts, workers are hired under a “contract for services” (synonymous with self-employment), yet PAYE is operated on their behalf. The contract explicitly states that they are not employees for statutory employment rights, and it may say they are not entitled to sick pay or other statutory payments. That’s despite the fact they are to be taxed under PAYE!
This approach leaves them without basic protections like paid holiday, sick pay, and the National Minimum Wage.
While this model may meet HMRC’s basic expectations, it fails to deliver the employment rights expected of a PAYE relationship, resulting in what is essentially ‘false self-employment.’
Why the Elective Deduction Model doesn’t work
The primary issue with EDM is that it’s largely based on a legal fiction.
Employment law stipulates that status labels — such as self-employed, ‘worker’ or employee — are only valid if they reflect the worker’s actual role and responsibilities.
Case law has repeatedly shown that the nature of the working relationship takes precedence over contractual labels, meaning that workers can’t simply be labelled “self-employed” if they’re functionally not self-employed.
In practice, very few agency workers can be genuinely self-employed for employment law purposes, because they are not autonomous and rely on agencies for work, rather than operating as independent businesses. Indeed, government guidance expressly mentions agency workers having at least “worker” status.
The EDM’s ‘self-employed for employment law but employed for tax law’-approach is therefore incompatible with the true working nature of agency labour. Not only does this model exploit workers, but it also places agencies at legal and reputational risk.
Rising costs: How the National Minimum Wage increases drive EDM adoption
With the recent increase in the National Minimum Wage (from £10.42 to £11.44 on April 1st 2024), and the increase in employer National Insurance Contributions from April 6th 2025, agencies face rising employment costs, including statutory holiday pay, pension contributions, and National Insurance.
As a result, the ‘gross assignment rate’ — i.e. the total amount received by the company that runs the payroll and employs the worker — must increase to cover these costs.
However, many businesses in competitive, cost-sensitive sectors may find it difficult to secure higher assignment rates, leaving them to consider models like EDM that seemingly offer a cheaper alternative.
Under the EDM, the company that runs the model avoids setting aside funds for holiday pay or full employer costs, allowing it to lower the gross rate. But this reduction only benefits the company running the model while denying workers their rightful pay and protections. So as the National Minimum Wage rises, so too does the likelihood of such models becoming widespread, thereby adding to the urgency of the situation.
Why the Hybrid ModeL (aka EDM) harms workers
Workers in the EDM or Hybrid Model often lose access to basic protections, including holiday pay, sick pay, and pension auto-enrolment, even though they are being taxed as employees.
Additionally, workers may be unwittingly pulled into complex self-assessment tax procedures, believing themselves to be self-employed.
This can lead to costly tax mistakes and non-compliance — both with HMRC — further penalising already vulnerable workers.
The Elective Deduction/Hybrid Model: A financial risk to workers/contractors and agencies
Although EDM adheres to PAYE on paper, its structure indirectly suppresses taxable pay.
Each worker under an EDM could potentially lose out on essential (taxable) employment protections and statutory payments over the year.
For agencies and clients, the HMRC liability risk of participating in or enabling non-compliant practices is growing, particularly as awareness of such models spreads within the labour market.
Furthermore, EDM’s appearance of compliance with tax rules may inadvertently open the door to additional, more aggressive models that similarly exploit regulatory gaps and endanger worker rights.
With every EDM worker denied holiday pay or minimum wage, the payroll industry’s overall compliance is undermined, further eroding trust among both workers and businesses.
What practical steps can agencies take against EDM/Hybrid contracts from spreading?
As more businesses evaluate their engagement models, it’s crucial to address EDM-related risks head-on. Reviewing contracts and conducting real-time auditing is key. This could involve shifting workers to more transparent, compliant structures.
For agencies and companies, clearly communicating engagement models and ensuring that workers are fairly compensated is essential for building trust and reducing legal risks.
Staying compliant protects all parties involved and ensures that the industry as a whole moves towards more equitable practices, where fairness and not flagrant practices flourish.
