Umbrella companies





Increasingly, employment agencies and businesses use umbrella company arrangements to pay the workers they supply, instead of paying them direct. Workers rarely get the choice whether to be paid in this way. Instead, arrangements are presented on a take-it-or-leave-it basis. 


The umbrella company “slots in” between the worker and the employment agency or business, becoming the worker’s “employer”. As the employer, the umbrella company deducts from the worker’s pay packet PAYE tax, employee and employer National Insurance contributions (NICs), holiday pay and employer and employee auto-enrolment pension contributions, as well as a fee for providing its services (which can be as much as £30 a week). 


It is not against the law for an employment agency or business to use an umbrella company in this way but unions have voiced concerns about serious abuses in this sector. 


A particular issue for unions is the lack of transparency in arrangements of this type. Umbrella companies can be extremely confusing and opaque, especially for low-paid workers, some of whom do not speak English as a first language. Payslips tend to be very complex. It can be very difficult to understand the hours worked, the rate of pay any deductions, and even who the employer is and how to enforce their rights. Construction union UCATT (now part of Unite) says that the worst offenders often combine their use with zero hours contracts and other precarious contracting arrangements.


The rate charged to the end user and transferred by the agency to the umbrella company must be high enough to allow for the deduction of all the costs associated with employing the worker (see above) before paying the balance to the worker as wages. Otherwise, the worker will lose out financially. In particular, there are concerns about how these arrangements will be adjusted to take account of the rise in auto-enrolment pension contributions from April 2019 — see Chapter 4. 


Workers are often encouraged to believe their take-home pay will increase under this kind of arrangement but this is not the case, especially following a clampdown in April 2016 on the tax rules for claiming tax relief on travel and subsistence expenses. HMRC has produced online guidance warning of this risk: www.gov.uk/guidance/umbrella-companies-offering-to-increase-your-take-home-pay-spotlight-45.


A further problem is that statutory employment rights, for example, the right to the National Minimum Wage and holiday pay or statutory redundancy pay, are owed by the umbrella company, not by the organisation that engages the employee. 


Another concern is that umbrella companies often roll holiday pay into the hourly pay rate in breach of the Working Time Directive (see Chapter 4). This means that workers get a small amount of money on a weekly basis but are unpaid when they actually take holiday, deterring them from taking a break, in breach of the rules on working time. 


In an attempt to address some of these concerns, the government will be expanding the remit of the Employment Agency Standards Inspectorate to cover umbrella companies. The government’s new “Key Facts Page (see box on page 59) will also impose new obligations on these companies to provide transparent information about pay and deductions. 


General union Unite campaigns against the use of umbrella companies, which it sees as creating misery for thousands of UK workers. The practice has spread beyond construction into other sectors and is a particular problem for supply teachers. Workers in the NHS, local government, road haulage and warehouse/logistics are also affected. 


Union campaigning has secured some victories. Collective agreements ban the use of umbrella companies on some major projects, including Hinkley Point. In addition, following union lobbying, the Scottish and Welsh governments and a growing number of local authorities have introduced measures to outlaw umbrella companies on public sector contracts.


A good source of information for low paid workers struggling to understand their pay is the tax charity The Low Income Tax Reform Group (www.litrg.org.uk). The charity’s website contains guidance for low paid workers on tax and employment status and publishes an advice sheet: Working through an umbrella company.


Agency workers engaged through an intermediary such as an umbrella company have equality rights under the Agency Worker Regulations 2010. See page 56.