Umbrella companies




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.