Why do businesses use umbrella companies to supply their agency workers, and what are the risks for workers if they are engaged via an umbrella company?
Many years ago, as a student, I learned to type and worked as a temporary secretary during my summer holidays. It was all fairly straightforward: an agency gave me a typing test, then took me onto their books and offered me available assignments on a weekly basis. I was paid by the agency, which operated PAYE and NICs in the usual way.
Now life is more complicated. Most employment agencies no longer run payroll schemes. Instead, they focus on matching workers to those businesses that need temporary labour and outsource the payroll function to an umbrella company. In theory, the umbrella company should work just as my temp agency used to do: the worker is an employee of the umbrella company and receives a weekly payslip. But it’s not that easy, and sadly there has been a proliferation of umbrella companies that exploit workers and fail to comply with their legal obligations – and, in some cases, actively seek to defraud the tax system.
For example, HMRC recently announced an investigation into ‘mini umbrella companies’, where multiple small umbrella companies are being used in order to exploit the entitlement to the employment allowance, intended for use by smaller employers.
Even at a more basic level, it is really difficult for a low paid worker to work out whether they are being exploited. The tax system itself is complex and the general level of understanding is low. My daughter recently received her first P60 and had no idea what it meant. She could just ask ‘What’s this, mum?’ but most are not so fortunate. And low paid workers have little or no bargaining power: if they want the work, they have to accept the terms offered, which may include using a particular umbrella company.
The organisation that has done most to explain the facts and pitfalls is the Low Incomes Tax Reform Group (LITRG). Its excellent factsheet sets out how an umbrella company should work, and explains the key warning signs to look out for.
But even when an umbrella company is used properly, the interaction between the various fees being charged (by the agency company as well as the umbrella) makes it hard for all but the most financially literate to work out whether or not the numbers are correct. Most workers, particularly the lower paid, are interested in what their take home pay is, and are unlikely to be able to understand – or even particularly care – what the arrangements are between the ultimate engager and the umbrella company.
So what should be done?
Apart from the perennial call to simplify the tax system, I wholeheartedly agree with calls from Rebecca Seeley Harris for the market to be regulated (as reported in The Guardian) – a call strongly supported by LITRG, which has also done valuable research setting out in more detail how this market operates (see their report).
Some have even questioned whether umbrella companies should be permitted at all. But workers will have little or no choice, and umbrella companies perform a useful consolidation function for agencies and engagers: we are unlikely to be able to turn back the tide of outsourcing non-core functions.
I do, however, think that greater obligations should be placed on the larger engagers in particular – many of which are government departments or bodies such as the NHS. The obvious step would be to make the end user responsible for ensuring that they have reasonable procedures to check the compliance of their supply chain – in the same way that companies carry out anti-money laundering checks and ensure that their suppliers are not breaching health and safety or other requirements.
But we could go further.
Why shouldn’t there be a government umbrella company, through which all public sector engagements are channeled (and which could provide the same service to the private sector for a non-profit fee, perhaps)?
For regular engagers of temporary workers, should best practice be for the workers to become employees, albeit perhaps on zero hours contracts? We are already seeing this in some fields, such as the supply of lawyers on temporary contracts. Some of the larger legal firms have set up what is in effect an in-house agency company, doing the employee vetting themselves and covering the workers by the firm’s professional indemnity cover.
Why do businesses use umbrella companies to supply their agency workers, and what are the risks for workers if they are engaged via an umbrella company?
Many years ago, as a student, I learned to type and worked as a temporary secretary during my summer holidays. It was all fairly straightforward: an agency gave me a typing test, then took me onto their books and offered me available assignments on a weekly basis. I was paid by the agency, which operated PAYE and NICs in the usual way.
Now life is more complicated. Most employment agencies no longer run payroll schemes. Instead, they focus on matching workers to those businesses that need temporary labour and outsource the payroll function to an umbrella company. In theory, the umbrella company should work just as my temp agency used to do: the worker is an employee of the umbrella company and receives a weekly payslip. But it’s not that easy, and sadly there has been a proliferation of umbrella companies that exploit workers and fail to comply with their legal obligations – and, in some cases, actively seek to defraud the tax system.
For example, HMRC recently announced an investigation into ‘mini umbrella companies’, where multiple small umbrella companies are being used in order to exploit the entitlement to the employment allowance, intended for use by smaller employers.
Even at a more basic level, it is really difficult for a low paid worker to work out whether they are being exploited. The tax system itself is complex and the general level of understanding is low. My daughter recently received her first P60 and had no idea what it meant. She could just ask ‘What’s this, mum?’ but most are not so fortunate. And low paid workers have little or no bargaining power: if they want the work, they have to accept the terms offered, which may include using a particular umbrella company.
The organisation that has done most to explain the facts and pitfalls is the Low Incomes Tax Reform Group (LITRG). Its excellent factsheet sets out how an umbrella company should work, and explains the key warning signs to look out for.
But even when an umbrella company is used properly, the interaction between the various fees being charged (by the agency company as well as the umbrella) makes it hard for all but the most financially literate to work out whether or not the numbers are correct. Most workers, particularly the lower paid, are interested in what their take home pay is, and are unlikely to be able to understand – or even particularly care – what the arrangements are between the ultimate engager and the umbrella company.
So what should be done?
Apart from the perennial call to simplify the tax system, I wholeheartedly agree with calls from Rebecca Seeley Harris for the market to be regulated (as reported in The Guardian) – a call strongly supported by LITRG, which has also done valuable research setting out in more detail how this market operates (see their report).
Some have even questioned whether umbrella companies should be permitted at all. But workers will have little or no choice, and umbrella companies perform a useful consolidation function for agencies and engagers: we are unlikely to be able to turn back the tide of outsourcing non-core functions.
I do, however, think that greater obligations should be placed on the larger engagers in particular – many of which are government departments or bodies such as the NHS. The obvious step would be to make the end user responsible for ensuring that they have reasonable procedures to check the compliance of their supply chain – in the same way that companies carry out anti-money laundering checks and ensure that their suppliers are not breaching health and safety or other requirements.
But we could go further.
Why shouldn’t there be a government umbrella company, through which all public sector engagements are channeled (and which could provide the same service to the private sector for a non-profit fee, perhaps)?
For regular engagers of temporary workers, should best practice be for the workers to become employees, albeit perhaps on zero hours contracts? We are already seeing this in some fields, such as the supply of lawyers on temporary contracts. Some of the larger legal firms have set up what is in effect an in-house agency company, doing the employee vetting themselves and covering the workers by the firm’s professional indemnity cover.
