Umbrella companies


The basic aim of an umbrella company arrangement is to shift responsibility for tax, national insurance and employee rights from the employment business to the worker. These arrangements are often combined with the use of zero hours contracts (see below). Workers are often encouraged to believe that their take-home pay will be higher under this kind of arrangement, but in reality, any gains are usually illusory.


Under this type of arrangement, the “umbrella company” is slotted between the worker and the organisation they work for. The umbrella company formally contracts with the organisation to provide work and “employs” the worker to do it. As the “employer”, the umbrella company deducts PAYE tax and both employee and employer national insurance contributions from the worker’s pay packet (25% of eligible earnings). The umbrella company typically charges a fee, which is often as much as £30 a week.


The arrangement has many abusive features. UCATT investigations have shown that many affected workers are paid only the national minimum wage. Their earnings are then boosted artificially, using mechanisms aimed at reducing liabilities to HMRC such as false “expenses” or “performance related pay”. Holiday pay (again, often paid only at the rate of the national minimum wage) is often “rolled up” in breach of the Working Time Directive. Pension contributions are lower because of the under-recording of wages, so that workers can end up with much smaller pension pots than they were expecting. They may also fail to qualify for earnings-related benefits such as SSP. The addition of zero hours contracting into this mix makes working hours irregular and unpredictable. Payslips can be so complex that it becomes very difficult to understand the deductions from the pay the worker receives. 


Umbrella workers are “employees” with statutory employment rights, but these rights are worthless because they are owed to themselves as “employer”.