Time to drag umbrella companies out of the Wild West

It is rare for those in the contractor marketplace to call for new rules to be imposed on themselves. It is also potentially unpopular to want the market to adjust to fresh shackles at a time of economic recovery.

But the government should live up to its oft-repeated pledge to take tough but not necessarily popular decisions and introduce UK-wide regulation of umbrella companies. Such regulation should protect contractors and curb the excesses of unethical and offshore payroll providers who treat the market like it’s the Wild West, writes Derek Kelly, managing director of employment services firm Parasol.

Missed opportunity?

The market has now had time to digest and reflect on the government’s response to the 12-week consultation on reforming the recruitment sector’s legal framework.

Tom Hadley, of the Recruitment & Employment Confederation (REC), was amongst those to express disappointment that umbrella providers did not feature more prominently in the government’s proposals.

I agree with Mr Hadley’s broader point that the umbrella market should not be allowed to continue to operate without any regulatory oversight.

In fact, widespread non-compliance and malpractice amongst cowboy providers at the less reputable end of the employment services market is threatening to tar all providers with the same brush, and must be addressed as a matter of urgency.

Maintaining the status-quo is not an option. Independent, forthright and stringent regulation is both inevitable and desirable. It is the way forward, and any providers who argue otherwise should be forced to answer the awkward question: ‘what are you trying to hide?’ 

Gross unfairness for contractors

Allowing unethical practices to persist would be grossly unfair to contractors, recruiters and their clients – not to mention those providers that behave ethically and responsibly. 

Umbrella company contractors, having made a conscious decision to adopt a more flexible way of working, place their trust in their employment provider of choice – and as such are entitled to expect transparency, honesty and professionalism. 

My company and its competitors look after the livelihoods of tens of thousands of skilled professionals every year, and yet there are very few barriers to entry into the umbrella or employment services market.

Compare this to banking, financial services and other tightly-regulated sectors that also play a key role in the financial wellbeing of individuals. I firmly believe that we should be subject to the same stringent rules and regulations. Why should umbrellas be exempt?   

Right regrets, wrong means

However, I’m not entirely convinced that the incoming framework for the recruitment sector was the means by which regulation should have been introduced.

Instead, I’d prefer to see a separate consultation that focuses purely on the umbrella and professional employment organisation sector. The size of the industry, and the challenges it faces in terms of standards and ethics, means it warrants a dedicated conversation.

HM Revenue & Customs’ recently announced crackdown on offshore umbrella providers is welcome, and represents a step in the right direction, but again, I would prefer to see a holistic, wide-ranging approach to raising standards.

How to separate the rogue from the reputable umbrella companies

Now, a few words for contractors on what those standards should and shouldn’t look like. The best umbrella providers operate in an ethical, transparent and compliant manner, in contrast to those unscrupulous providers – the cowboys – who don’t or only claim to.

Reform of the kind that is necessary - and which I am calling for - takes time, however. So, in the absence of regulation for umbrella companies, how are contractors expected to spot a cowboy, so that they can steer clear of non-compliance by an umbrella company?

We think arming contractors with the following checklist of questions should help. But please note, these questions should be fired at payroll providers, and especially suspected cowboys, BEFORE you engage them:

  • Do you have robust, independent accreditations from external bodies?  Some accreditations are barely worth the paper they’re written on, but if a provider has a stamp of approval from an independent external body, such as the FCSA, then this should be taken as a positive sign. Membership of such an organisation demonstrates that a provider has met qualifying criteria and operates to certain ethical standards.
  • Do you offer a full contract of employment?  Some providers simply offer payroll services. A contract of employment guarantees you all the rights and benefits associated with employment, including – in light of auto-enrolment legislation – access to a workplace pension. Your umbrella provider should also offer full HR support in the event of a grievance with the client or agency.
  • Are you based in the UK, and do you pay all relevant tax and employer National Insurance Contributions (NICs)?  If the answer to this question is ‘no’, then we recommend you steer clear. Offshore payroll providers are coming under increasing scrutiny from HMRC, and any contractors who use them risk becoming embroiled in controversy as attempts are made to reclaim unpaid tax and employer NICs. Using a UK-based provider that pays its dues will give you peace of mind that everything is being done by the book.
  • How do you check that expenses claims submitted by your contractors are legitimate, and do you encourage contractors to keep hold of receipts for business expenses?  Some unscrupulous providers abuse their dispensations by encouraging contractors to claim for un-receipted expenses that may not have been incurred. This is extremely bad practice and could land you in hot water with HMRC further down the line. Any good umbrella service provider will do all it can to ensure that contractors can claim only for genuine expenses, and encourage you to keep all your receipts, regardless of any dispensation. You should be able to produce all receipts in the event that HMRC requests them.
  • Do you offer guaranteed hours of work?  So-called ‘zero-hours contracts’ have been the subject of intense debate in recent months. A responsible umbrella provider will offer guaranteed hours of work, as well as holiday pay – just as with any ‘traditional’ contract of employment.
  • Are you ‘HMRC-approved’ or ‘IR35 compliant’? Beware of any provider that makes claims such as these. HMRC does not approve or accredit umbrella companies, so such a statement is meaningless – not to mention misleading. Claims of IR35 compliance by umbrella providers should also set alarm bells ringing, because as an employee of an umbrella company you will be taxed under normal PAYE as an employee, so IR35 is not relevant.

The mere fact that posing half a dozen questions to a prospective umbrella company is what it takes to reduce your exposure to non-compliance reinforces my belief that contractors, and others in the marketplace, deserve regulation.

Regulation would enable those new to contracting to make more informed decisions with greater peace of mind when it comes to choosing an employment services provider. It would also force those providers who don’t currently play by the rules to raise their game or be forced out of existence.