Umbrella companies
[ch 2: pages 40-41]Umbrella companies work by shifting responsibility for tax, National Insurance and statutory employment rights (such as paid holiday) from the organisation for which work is done onto the individual worker. These arrangements are often combined with the use of zero hours contracts and other precarious contracting arrangements (see page 42). 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, especially following a clampdown in April 2016 on the tax rules for claiming tax relief on travel and subsistence expenses.
According to construction union UCATT (now part of Unite), the use of umbrella companies increased significantly when the government changed the tax rules to make it much harder for employment businesses to supply labour to hirers on the basis of false self-employment (see box on page 40). UCATT campaigns against the use of umbrella companies, which it describes as a “con-trick”. The practice has spread beyond construction into other sectors and is a particular problem for supply teachers.
Under an umbrella company arrangement, the “umbrella company” is slotted between the worker and the organisation they work for. The umbrella company is the worker’s “employer”. It formally contracts with the organisation to provide work and “employs” the worker to do it. As the “employer”, the umbrella company deducts from the worker’s pay packet PAYE tax, both employee and employer National Insurance contributions, holiday pay and both employer and employee auto-enrolment pension contributions. In addition, the umbrella company charges a fee, which is often as much as £30 a week, says UCATT. Payslips for these companies can be so complex that it can be very difficult to understand the worker’s hours and the basis for pay deductions.
Statutory employment rights, such as the right to claim unfair dismissal or a redundancy payment become worthless when they are owed by the umbrella company, and not by the organisation the individual works for.
In its response to the Taylor review, the government has agreed to extend the remit of the Employment Agencies Standards Inspectorate, to regulate umbrella companies and other supply chain intermediaries.
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 he had not agreed to deductions for employer NICs, 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.
Campaigns by UCATT (now Unite) have secured several further tribunal victories, as well as political change such as a commitment by the Welsh government not to permit the use of umbrella company arrangements in public procurement.
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