Recruitment agency checklist for compliant umbrella companies

As an agency contractor, you might find yourself in the unfortunate position of the recruitment agency you've secured a contract through only allowing you to work with one of their approved umbrella companies -- and your umbrella isn’t one of them, writes Matt Collingwood, managing director of IT staffing firm VIQU.

Why an agency checklist for umbrella compliance is needed...

I’ve called out recruitment agencies in the past for only pushing their umbrellas on the sole basis that they get a nice little kickback! You might assume this is what’s happening, when you’re told that your umbrella isn’t featured on their PSL.

But the reality is recruiters must protect their contractors and own interests from dodgy umbrellas, so much so that a ‘Recruitment Agency Checklist for Compliant Umbrella Companies' is, well, a ‘thing’ many staffing firms have in their offices.

For you as a contractor to be ‘in the know’ about such a checklist, we’ve put 10 factors and checks below that any agency worth their salt will be looking at; looking for, or looking to tick off, before they work with or recommend an umbrella. Let’s start with three fundamentals.

1. Accreditation

An agency should certainly be looking to tick off every single element of the following checklist for umbrella compliance, but a brolly showing an in-date and valid FCSA or Professional Passport accreditation should be where they start. It’s not a guarantee, but it’s a good starting sign that the umbrella is legitimate.

2. UK-based with a nominated UK bank account?

As an agency that takes compliance seriously, we say the umbrella must be registered on Companies House in the UK.

If the umbrella company is based elsewhere in the world, the agency could be leaving contractors open to tax evasion, by engaging it.

3. Do the payslips give a complete breakdown of earnings?

Your agency should be aware of the importance of umbrellas giving proper breakdowns of deductions in payslips to ensure ‘skimming’ is not taking place.

And skimming has been defined quite comprehensively by compliance organisation Professional Passport as:

“Where a company is not being entirely transparent with its workers on the charges that it applies.

“They market a charge to a worker – which most would assume to be the total cost to them for using that service, while at the same time applying other ‘hidden’ costs that effectively amount to profit for the provider.”

In practice, this means unassuming contractors get a few pennies or pounds taken off their payslips, here and there, in a way which isn’t easily noticed -- without a proper breakdown.

But fortunately, there are more and more ‘due diligence’ tools coming to the market, allowing agencies (and umbrellas) to protect their contractors if they invest in them.

To highlight the importance of agencies protecting their contractors from skimming, Sebastien Sauca of SafeRec, a real-time auditing tool we recommend, told us that over 20% of umbrella payslips have anomalies and pay disparities.

I’m sure you can now pre-empt the next few points that ought to be on any good recruitment agency’s checklist for umbrella company compliance.

4. Is real-time auditing, AI-driven payslip checks, or another ‘due diligence’ tool in use?

A bit like accreditation badges, the umbrella using such a tool is not a 100% cast-iron guarantee of compliance -- but it’s a great sign that getting things right, and doing things transparently, is important to the organisation.

5. Weekly costs

If your agency is introducing you to an umbrella they partner with, I would expect their weekly charge to be in the region of £15-20. However, it can be higher if there isn’t an existing or good relationship in place.

6. Is the umbrella transparent with the contractor regarding deductions?

There is an obligation on the agency to provide the Key Information Doc (KID) to contractors like you, but it’s also standard good practice for the umbrella to fully explain the deductions.

7. Credit checks

Financial stability is important. If the umbrella goes bust, you won’t get paid. Therefore, it’s crucial for agencies to conduct regular credit checks on their umbrellas.

For your reference, we had a home counties-based brolly looking to establish itself as one of our agency’s umbrella partners. I ran a standard credit check and they failed it badly. All conversations immediately ended and we never worked with them.

Our preference is to run credit checks on ‘our’ umbrellas every six months to ensure our contractors are continually protected.

Related to checks, we also look to the conduct of umbrella directors as a good indicator of how they do business. If they have a record of putting companies into administration, we will avoid working with them.

8. Insurances

Expect a good agency to check that the umbrella has £10 million worth of cover for each of these -- Professional Indemnity, Employer Liability, and Public Liability.

9. Disaster recovery and business continuity plan; is there one?

Not too long ago, the contractor sector saw two high-profile umbrella companies suffer from cyber-attacks, which left their contractors not getting paid or if they did get paid, they got paid inaccurately. Others had to wait many, many months, simply to get what they were owed.

In the event of a problem like premises being inaccessible, or IT systems coming under attack or even just going offline due to a glitch, what plan does the brolly have in place, so it can keep functioning and pay its contractors?

The umbrella’s plan should include methods of communication with contractors, and procedures for how they can ensure contractors will be paid in a timely fashion.

10. Do a mystery shopper (a.k.a. a customer-service and compliance probe)

It might sound extreme, but a high-quality agency should only recommend partners that they’ve properly tested out.

In our case, before we partner-up with an umbrella, I phone up pretending to be a first-time contractor -- just to see what they say.

Using either this ‘mystery shopper’ exercise, or another means if preferred, a good agency should find out the umbrella’s standard level of customer service. Do they explain everything properly? Do their explanations raise red flags? A red flag should be hoisted if they pitch loans for ‘tax purposes,’ for example or have other ‘arrangements’ that they claim can boost take-home pay more so than standard PAYE umbrellas.

This is a checklist for brolly compliance -- just as a framework for brolly compliance looms…

The ‘Tackling non-compliance in the umbrella company market’ consultation being conducted by HM Treasury closes on August 29th 2023.

There are some fantastic umbrella companies in the industry but some do need closing down, and hopefully, this consultation will lead to new regulation that closes the ‘bad apples’ and curbs these anomalies.

However, from what I hear, not all umbrellas are taking the consultation seriously. In fact, just 4 people turned up to one of the consultation roundtables which could have hosted 25 participants. Unfortunately, I’m not massively surprised. Many umbrellas seem more bothered about bashing one another, than lifting the standards and practices which they are all governed by.

Final fears

My fear is that this consultation will become a lost opportunity to make a positive change for all parties. The only change which we currently see government making is implementing the consultation’s proposal for a 3rd party debt transfer mechanism – with the effect HMRC will transfer responsibility from umbrellas to agencies. In this scenario, more than ever, agencies and contractors need to be taking accountability and acting responsibly when selecting umbrella partners. Hopefully this recruitment agency’s checklist for umbrella company compliance will go some way towards achieving that goal -- right now.

Profile picture for user Matt Collingwood

Written by Matt Collingwood

Matt Collingwood is the Managing Director of VIQU Ltd. an IT recruitment and project-based consultancy company with offices in Birmingham and Southampton. Matt is also the co-founder of the Recruitment Canaries, a network of West Midlands based recruitment agencies who encourage collaboration, best practice and upholding the standards and ethics of the recruitment industry.

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