LRD guides and handbook June 2016

Law at Work 2016

Chapter 2

Umbrella companies


[ch 2: pages 43-44]

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. 


UCATT in umbrella company tribunal victory 


In November 2015, a UCATT member won a significant employment tribunal victory against umbrella company Paystream My Max Limited. The employment judge ruled that Paystream “were not open and transparent”. The member was awarded just under £4,000 for unlawful deductions from wages, as the judge assessed that the member had not agreed to deductions for employer’s national insurance contributions, employer’s pension contributions or a margin payment (the umbrella company’s fee), and that holiday pay was unlawfully rolled up into the rate paid.


UCATT described the victory as “highly significant” and courageous, but “far from a magic bullet” against a multi-million-pound industry that aims to legitimise umbrella companies and false self-employment in the construction sector. 


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


UCATT report: The Umbrella Company Con-trick, 2014, available from its website (https://www.ucatt.org.uk/files/publications/141023%20Umbrella%20Company%20Con-Trick%20Report.pdf).