· 6 min read · Features

Umbrella firms trigger storm warnings

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Umbrella firms take the regulatory strain out of using contractors, but while they can offer gig workers better protection, many in the sector think they exacerbate transparency issues, finds Peter Crush.

When Cheryl Thompson, a successful freelance operations director at KPMG, was told in 2020 that her continued employment would now be dependent on her working through an umbrella company (UC), that was the final straw. “I quit,” she says emphatically. 

“KPMG was effectively saying ‘turn up every day, like you’re my employee’, and yet it wasn’t prepared to put me on their books.” She adds: “As for umbrellas themselves – they’re corrupt; they’re the next big scam waiting to be exposed. I had to refuse on principle.” 

Thompson isn’t alone in her vitriol of umbrella organisations, which are companies that employ temporary workers on behalf of an employment agency.

Since changes to IR35 last April, which made employers themselves liable if they incorrectly judged a contractor’s in or out status, umbrellas have exploded in use. 


IR35 and umbrella companies:

The UK needs a legal definition of self-employment

TUC calls for umbrella company ban

Employers warned not to shirk responsibility for contractors


Instantly, they take IR35 determination out of the equation: contractors become employees of the umbrella, not the end hirer and, in theory, also handle all their tax and National Insurance (NI) contributions.

Such has been their expansion, that according to the Trades Union Congress (TUC) up to half of agency workers are now employed through umbrella companies. 

And yet all is not good. The TUC finds 94% of workers it asked said they were forced to work through UCs. Rather than have any choice in the matter, they were shoehorned into them as a condition of getting any work at all. 

Added to this have been many high-profile cases of UCs leaving workers with huge tax bills, by over-promising the take-home day rates they can still achieve via them. All-told, the TUC wants them banned

The government, meanwhile, has announced it is now consulting on them, with specific reference to their impact on tax and employment rights. “It’s a mess,” argues Dave Chaplin, founder of consultancy IR35 Shield. So why are HRDs still using them?

“UCs offer the ‘get-out’ employers want,” says HR consultant, and former BT business manager Laura Trendall Morrison. “They ensure workers are pushed into PAYE – satisfying the government’s desire to clamp down on disguised workers.” 

She adds: “IR35 has also spooked HRDs, so UCs appear to take away risk. With the costs of employing direct 60% higher, this way also lets employers outsource all their obligations, but retain all the benefits.” 

HR consultant Guy Pink adds: “HR doesn’t understand IR35; they need arrangements to get away from it.”

Pink however, is supportive to a point. “You can see why it happens,” he says. 

“They need to get bums on seats, and so the arrangement helps them get the skilled workers they need – and without finance director intervention – by insisting contractors go through umbrellas.” 

But where he has problems with UCs is with the type of employee-worker relationship they force. 

“Experienced and skilled consultants generally don’t want to become employees, so it leaves an instant bad taste,” says Pink. 

Chris Bryce, CEO at the Freelancer & Contractor Services Association (FCSA), adds: “It’s an undesirable outcome, but the way it’s presented to contractors is that they have to acquiesce. It’s the blanket nature of it that irks, and it fails to recognise that these people are freelancers.”

 


What is an umbrella company?

Umbrella companies are intermediaries that employ workers who would otherwise be independent contractors or temporary agency workers. They manage the way workers get paid by their recruitment agencies or by end-clients by billing an agency or individual clients and paying the employee through Pay As You Earn (PAYE), deducting tax and NI contributions.


 

Umbrella firms, in their defence, argue it’s the ‘bad eggs’ that spoil the reputation for the rest of the sector, and if HRDs use FCSA-accredited ones, they don’t have anything to worry about. 

“UCs give contractors paternity, maternity, holiday and even furlough rights that they would never have had as pure contractors,” argues Clarke Bowles, director of the UK’s largest umbrella, Parasol, which has more than 120,000 contractors on its books and pays 20,000 a week. 

An often-mentioned criticism is that contractors are left to foot the bill for employer and employee NI contributions, but Bowles insists this isn’t the case – it’s just that employers often haven’t increased their day rates to compensate for the deductions umbrellas take, giving the impression workers take home less. This, he suggests, is for employers to rectify.

But others aren’t convinced. Some say HRDs have too willingly (and conveniently) bowed to recruitment agencies’ terms and conditions insisting hires through them use UCs.

And in doing so, this makes them complicit in a practice getting lots of bad press: UCs and agencies seemingly working together because some recruitment agencies earn kickbacks from UCs for making them their preferred supplier and handling PAYE for them. 

“Two things are pushing untoward behaviour,” says Crawford Temple, CEO at Professional Passport, an independent assessor for umbrellas and payment intermediaries. 

“Agencies are making money pushing people through umbrellas; this then pushes contractors to find umbrellas seemingly giving better returns – meaning we’re seeing a boom in more disguised income – the very practice HMRC sought to stop with IR35.”

Of course, not all agencies operate like this, and those who do use preferred UCs say they make the necessary checks. “The only UCs we use are those that pass our due diligence,” says Ricky Martin, the former Apprentice winner, and founder of Hyper Recruitment Solutions. 

“Compliance has to be uppermost,” he adds. “Sure, very few [contractors] will ever say they desperately want to use a UC, but at the same time, they will have to choose if they want a job or not.”


Pros and cons of umbrella companies

Pros:

  • Employers avoid the risk of misclassifying self-employed contractors.
  • Contractors get access to benefits they wouldn’t otherwise get if they were employed on a typical freelance basis. These include paid leave, and sometimes health insurance and pension schemes.
  • Workers exempt themselves of the responsibility for handling their own tax affairs, and by becoming an ‘employee’ (of the UC), they may find it easier to apply for things like mortgages than if they were a freelance contractor.

Cons:

  • Experts argue UCs are not suitable for employers who want talent to work for them exclusively and for an indefinite period.
  • Contractors working through UCs are still not the same as direct employees and so employers cannot expect to be able to manage them in the same way.
  • End-hirers (employers) are technically liable for checking the UC they work with is legitimate. The direction of travel seems to indicate HMRC will extend its powers to fining employers for unpaid tax.

But should employers and agencies really force them to make this choice? One thing is certain, experts are unanimous in saying that rather than UCs relieving them of employment responsibilities, the reputational costs of working with those deemed to be bending the rules should be significant enough to make them think twice before going down the UC route. 

“There are UCs that claim to be compliant but are not,” claims Chaplin, “with them ‘skimming’ money away – such as holiday pay if it doesn’t get used.” 

Temple adds: “So far HMRC has tended to go after contractors themselves to recover unpaid taxes, but what isn’t widely known is that it is also end-employers’ responsibility to ensure their PAYE is done properly. So, employers need to be on their guard.” 

The Criminal Finance Act also stipulates that all parties in the staffing supply chain have equal due diligence responsibility, meaning employers could soon be the focus of the government.

Lee McIntyre Hamilton, partner at Keystone Law says: “Companies engaging workers via UCs should take care to ensure they are working under a compliant arrangement.” 

He adds: “The end-client is already technically liable for failing to allow proper PAYE and NI. I sense that although HMRC hasn’t tested this yet, it’s only a matter of time till it does.”

An obvious solution is for HRDs to directly employ the talent, rather than have them as ‘umbrella employees’.

“Employers don’t also need to have a blanket ban on employing people who run limited companies,” argues Bryce. “This would enable those people who still want to operate as freelancers to do so.” 

Julia Kermode, founder of independent working advocate IWork, adds: “While some knowledge workers will have decided for themselves not to have certain benefits that being employed direct will bring them, for others this is not a choice, and I believe these people are much better off being employed direct rather than through an UC.” 

Pink, who himself re-launched his services under a limited company basis last year (so he could operate outside UCs), adds: “HRDs should want to deal with contractors more on their own terms.” 

The sticky problem behind all of this is that lots of contractors often don’t want to be direct employees either – they enjoy the independence they have from office politics. So maybe HRDs really have no choice but to use recruiters who will at least insist on this form of employment.

It’s a complex situation. Whether or not the positives of using UCs still outweigh the benefits will seemingly continue to be a hot topic. “We believe this model still works,” argues Nick Adams, VP EMEA of Globalization Partners, which describes itself as an ‘employer platform’ placing and paying contractors rather than an umbrella company. 

He adds: “The fact is, employers still worry whether workers do or don’t fit the conditions of being a contractor.” 

Adds Bryce: “I can understand why HRDs won’t want to have people to their own payroll if the work they have is temporary. But intermediaries that don’t do their tax properly need to be stamped out. They’ve duped employers and they’ve duped contractors. Now’s the time for everyone in the chain to take responsibility for compliance.” 

This piece appears in the January/February 2022 print issue. Subscribe today to have all our latest articles delivered right to your desk.