Contractors' Questions: Are my agent and umbrella acting legally?

Contractor’s Question: I have just started for an agency that insists on all contractors who use it going through a certain payroll firm. Is this mandated use of this one payroll firm, let alone its set-up which I'm suspicious of, legal?

I’m using one of the payroll firm’s three models, which charges about 5% for usage. I’m concerned about how my wage will turn out, but am more worked up about them holding back about £40 of it for my holiday pay.

I don’t understand how this works; is such a withholding legal or a normal function of reputable umbrellas? Why do they take my own cash to pay for my holiday pay? They also said I don’t have an option to cancel this; I can only claim it back weekly. This is absurd, isn’t it?

Expert’s Answer: Firstly, it’s impossible to advise on the legality or otherwise of the company that your agency has insisted you use without seeing the Contract of Employment that you are working under and having full knowledge of its working practices.

Secondly, it is fairly common for recruitment agencies to have what’s called a Preferred Suppliers List (PSL). The agencies will check umbrella companies’ practices and procedures; select a number that they feel are compliant and choose to recommend only those. However, it is quite unusual for an agency to work with only a single umbrella company as there are potential financial risks for both sides. Legally, the agency cannot force you to work with its preferred umbrella companies (or company) but it is also not legally obliged to offer you the contract!

Regarding holiday pay, under the EC Working Time Directives all employers must pay holiday pay at the point when holiday is taken. This means that it cannot be paid as part of your earnings each week/month. 

The statutory holiday entitlement is 28 days per year which would be pro-rated if you did not work a complete 12-month period. When you are employed by an umbrella company, they will have a business-to-business contract with the agency which will contain a rate that has been agreed with the agency for your services. This is all the money that the umbrella company receives.

From this amount, they will retain a margin (typically this is a fixed amount rather than a percentage); they will pay Employer’s National Insurance contributions to HM Revenue & Customs, they will pay your salary and expenses and they will deduct and pay to HMRC your Employee’s National Insurance contributions and Income Tax. And typically your Contract of Employment will be split between national living wage (or minimum wage) and a profit-related bonus, which will be dependent on the umbrella receiving payment for the work that you, their employee, undertakes.

As you can see, all the money from ‘the pot’ has been allocated but the umbrella company, as with any other employer, still has an obligation to pay holiday pay. When the EC working Time Directives were introduced in 2010, there was great debate between the industry and a number of government departments as it seemed to be a problem that was impossible to resolve. However, resolve it we did! A small amount is deducted each week/month based on the living wage (or minimum wage) element of the contract which is then paid back when the employee takes holiday -- this satisfies the statutory requirement.

I realise that it may seem “absurd” but as umbrella companies are employers, employment law applies to them and they have to comply with it. So, the umbrella company you’re working with are correct in their procedures if they are paying the money retained for holiday pay to you when you take holiday, but not if it is being paid to you as a portion of your weekly/monthly salary.

The expert was ‘Roger the retired taxman,’ an adviser to industry trade body All Umbrella Companies Are Equal.

Editor’s Note: Related Reading –

Freelancers who are really ‘workers’ can now claim holiday pay

Contractors’ Questions: What’s an overarching contract of employment?

Wednesday 7th January 2015