Contractors' Questions: Is my umbrella in breach of contract?

Contractor's Question: I have recently been given notice from my employer after being on a rolling contract for three years through an agency (PAYE Umbrella). They gave me notice on the 15th December, and my contract states I have a four-week notice period. The email I received from the employer made certain stipulations for me to be available to answer any questions over the four-week period as necessary, but I was able to work from home. This
has now been completed. However they are saying they will not be paying me until 15th February although my contract pay cycle is weekly. This means I will not have been paid since 19th December, causing me to default on financial obligations and leaving me penniless. Can they legally do this as it does seem to go against the contractual obligations. Does this form a breach of contract?

Expert's Answer This question illustrates one of the key disadvantages of using an umbrella company. When a contractor uses an umbrella, the contractor's only contract is with the umbrella company. The umbrella company has a separate contract with the agency or direct with the client. The agency or client will pay the umbrella; the umbrella in turn pays the individual/worker. This means that if the agency or client misbehaves, the party that has the contractual right to object is not the individual/worker but the umbrella.

I would expect any reputable umbrella to cooperate with any genuine complaint that one of its workers has toward an agency or client who acts inappropriately, but the fact is that, legally, any action taken against the agency or client would have to be taken by the umbrella, not by the worker/individual. It is not unknown for an umbrella not to pursue a legitimate complaint from the worker against an agency or client because the umbrella does not wish to put its own relationship with those parties in jeopardy.

The other weakness affecting the worker here is intrinsic to how umbrella companies operate. In the main, umbrellas are no longer straight payroll companies. A lot of workers use umbrellas to maximise opportunities available under current legislation for legitimately claiming expenses. To achieve this, the umbrella will often work with a structure whereby the actual amount they are contractually committed to paying the worker for a period will not be the same as the amount that is contractually due from the agency to the umbrella, even leaving aside the umbrella's own commission. The reason for this is that to allow for the tax-efficient payment of expenses there needs to be an ongoing and flexible salary sacrifice-type of arrangement operated by the umbrellas which will generally result in the worker receiving from the umbrella a fairly low basic wage, and then after tax-free expenses have been paid, the balance asa taxable bonus. So if the worker fell out with the umbrella the amount the worker would be able to claim against the umbrella would be the amount which the contractor was, strictly speaking, legally entitled. That amount may be not much and may be far removed from the amount due to the agency. All of this reinforces that a worker in the asked about situation needs to get the umbrella on their side because any action taken will need to be in the umbrella's name.

As to whether there is possible breach of contract, each contract needs to be looked at. Generally speaking, if there was a 4-week notice period, the agency should give that notice to the umbrella. Assuming this notice was honoured, it would be reasonable to expect the agency to set out what their proposal is directly to the worker, and 'copy-in' the umbrella in the same notification.

What complicates the position is the declaration by the agency/client that they will not be paying until February 15. We have assumed that the contract between the umbrella and the agency allows the agency to terminate on 4 weeks' notice. In as much as the agency is giving notice, the agency is simply acting within the terms of the contract. However, the contract will also stipulate when and on what date payment is due, typically within a period after submission of invoice. They are now saying they won't be paying until February 15. Well, it is extremely unlikely that the contract contains a provision to say that the agency can change payment terms on a whim. Unless the contract expresses something different, the strict contractual position will be that the umbrella should continue to submit its invoices in respect of the notice period as normal and is entitled to have those invoices paid as normal.

This is money due from the agency to the umbrella, and the latter working as they do will not generally expect to fund contractors out of their own pocket, rather they will expect to operate on a pay when paid basis. Technically, this may therefore be a breach of the Conduct of Employment Agencies and Employment Business Regulations 2003, if the umbrella falls within the definition of an employment business for the purposes of those regulations. Of course the umbrella is likely to argue that it does not fall within that definition. But even if the umbrella is in breach of its obligations towards the individual, that breach is only going to extend to the amount paid to which the individual is entitled.

If the agency pays late, then the umbrella can, if it chooses, take appropriate action - though there is a limit to the effectiveness of action that can be taken if a party delays payment by a relatively short period of time, and sadly one would generally not expect to be able to recover additional expenses that follow from the delay; all one could expect to recover for non-payment, normally, would be either interest under the contract – if the contract makes an express provision for interest – or if it doesn't, interest and the fixed payment under the Late Payment and Commercial Debt (Interest) Act 1998. This is not a fortune: for an amount between £1,000 and £10,000, the fixed payment is £70 and the interest rate at the moment is 10% on the amount due from the date it became overdue until the date it is actually paid. So, taking the date of December 15 – 4 weeks' notice would have ended on January 12. Assuming that payment was due within 14 days of invoice, that would mean payment was due on January 26, so it would only be on this date that the entitlement to the fixed payment and the 10% interest rate comes into force.

As told to CUK by Roger Sinclair, a legal consultant at Egos, an IT contractor advisory.