Evidence submitted to the Treasury on the umbrella company market

Together with Rebecca Seeley Harris we have submitted detailed evidence and recommendations to the Treasury’s consultation “Call for evidence: umbrella company market”.

Why does this matter to contractors?

The Treasury requested evidence from inniAccounts’ CEO, James Poyser, and employment status expert, Rebecca Seeley Harris, following their previous engagements with BEIS campaigning for the regulation of the umbrella company market and for the protection of the workers.

The call for evidence is likely a run up to a consultation, then the regulation of umbrella companies and it explicitly seeks feedback from umbrella company workers and stakeholders. Essentially, it’s a real opportunity to influence regulation of the market.

Our submission

Under the Fair Umbrella campaign, James and Rebecca have submitted detailed evidence on how the umbrella company market operates and the impact on its workers to the consultation.

“We believe there is a dire need for the regulation of umbrella companies. The UK needs a flexible labour market that can react to fluctuations in the economy and umbrella companies are part of the supply chain that provides that.

“We are pleased that the government has appointed a Director in Labour Market Enforcement and has committed to fund the Single Enforcement Body – a new workers watchdog that will be taking a smarter approach to the enforcement of employment law. We would, however, like to see a timeline for the creation of this new SEB. It is hoped that the Single Enforcement Body will both licence or regulate the umbrella company market and provide protection for umbrella workers.”

The 24-page joint response covers the following areas in detail with recommendations for fairer treatment of workers:

Stop holiday pay abuses:

Holiday pay is an area of substantial abuse for umbrella company workers. Many umbrella companies profit by keeping holiday pay that is lost to the worker at the end of the holiday year. Hopefully, recent case law (Smith v Pimlico Plumbers) has helped to clarify the position for both workers and umbrella companies. 

Our recommendations:

  • The government should reconsider the way that holiday pay is calculated in the umbrella industry. 
  • If the ‘accrued’ method is used, umbrella companies should do more to ensure workers are notified of their allowance, limiting the impact of “use it or lose it” policies
  • The ‘rolled-up’ method is more practical for many, but its legal status needs clarifying.  

Prioritise pay transparency:

There are many skims and scams but the main priority for the government needs to be transparency of the payslip and policing the use of the new Key Information Document (KID). 

Umbrella company pay and payslips are complicated by the fact that there are two different pay structures: a contract or assignment rate and the wages. 

  • The contract rate is the rate paid to the umbrella company by the client or agency under their contract. 
  • The umbrella company then deducts the employer’s costs and the margin from the contract rate and what is left is paid to the umbrella company worker as wages (sometimes this is split into wages and commission or a bonus).

This complicated structure is little understood and fraught with misunderstandings; often contractors are told the contract rate by the agent and have a nasty surprise when paid a much lower wage by the umbrella. 

A Key Information Document should be given to all new agency workers, describing how their pay is structured, including holiday pay entitlement. Anecdotal evidence suggests that KIDs are not being routinely given to workers and when they are, many contain sample information instead of accurate figures.

Our recommendations: 

  • Payslips should be very clear as to what the separate pay elements are and should show the costs and holiday pay separately.
  • Employers’ NICs should not be deducted from the worker’s wages; any employment costs and umbrella fees should be paid by the agency, not the worker.
  • The Employment Agency Standards should follow up on the implementation of the KID to see how it is working in practice.

Clarify employment status of umbrella workers:

The employment status of the worker needs to be clarified, so the worker knows

their rights. 

Technically, the worker is supposed to be an employee of the umbrella company with employee rights and benefits. However, there are many misunderstandings and abuses by umbrella companies in this area. There needs to be clarity over whether the individual is an employee or a worker under employment law.

Our recommendations: 

  • Provide a statutory definition and/or statutory entitlements; or
  • Guidance on the status of an umbrella company worker.

Make PSLs and kickback incentives illegal:

There are many incentives that are offered or expected between the recruitment company and the umbrella company. Incentives are a catalyst for rogue practices. The worker not only ‘pays to get paid’ by being charged the umbrella company’s margin, but also provides additional income for the agency. If an umbrella company commits to incentives, they often have very little choice but to extract additional profits from workers, beyond their fee/margin. 

Preferred Supplier Lists (PSLs) are lists of umbrella companies that the agency mandates workers must engage with. While it is reasonable to consider that PSLs at one point were well-meaning, today they are an aggressive and unfair barrier to competition. The PSL presents a revenue opportunity for recruitment agencies and denies workers the ability to freely choose their own umbrella – essentially their own employer. 

Our recommendations: 

  • Licence umbrella companies, so permission is required to operate
  • All incentives should be made illegal.
  • Preferred Supplier Lists should be monitored and their usage restricted where based on commercial gain.
  • Ban assignment rates and force agencies to fund umbrella costs

State enforcement and regulation of umbrella companies:

The government has stated that they are planning on utilising the framework of the Conduct

of Employment Agencies and Employment Business Regulations 2003 for umbrella  companies. We are not opposed to this per se but would advise caution as to whether this existing legislation is fit for purpose.

We agree that all parties involved in the labour supply chain have a responsibility to ensure good compliance with tax and rights obligations and to prevent exploitation. 

Our recommendations:

  • Provide support to help umbrellas comply
  • Name and shame non-compliant umbrellas
  • Use more severe penalties to fund enforcement activities

Read more about Rebecca and James’s Umbrella Regulation Policy