Umbrella companies are contractors’ Hobson’s Choice -- not that brollies have an alternative either

More contractors than ever are now being engaged via umbrella companies, and our report last week put beyond doubt that the off-payroll working legislation has driven this change over and above any other factor, writes Julia Kermode, the chief executive of PayePass.

Here's the controversial bit...

Even a quick glance at the average umbrella worker wage confirms this sea change, given it has doubled from £30,300 in 2018-19 to £61,600 in 2021-22. And that doubling proves to me -- and here’s the controversial bit that will make some click off from reading this article -- that limited company contractors have been FORCED into umbrella companies.

I have occasionally been criticised by legal eagles for saying this -- that contractors have been forced into umbrella-working. And yes of course, there is always a ‘choice,’ technically. But for contractors, it’s a Hobson’s Choice. If you want the work, you must be paid by an umbrella company. So if a contractor doesn’t want an umbrella, the only other option is to not accept the work.   

Introducing a second Hobson's Choice

And it doesn’t end there. The lack of genuine choice continues, as the specific umbrella via the agency is not usually a contractor’s first or free choice either. Despite the fact that umbrella companies are responsible for contractors’ hard-earned cash, this fails to grant contractors the right to choose their own umbrella; their own employer.

Instead, the recruitment agency in the chain will usually have a preferred supplier list (‘PSL’) of umbrellas, and the contractor’s ‘choice’ is confined within the agency’s choice. So it’s a case of the agency essentially saying to the contractor, ‘we’ve made a choice,’ and ‘even if you don’t like our choice, within it, you get a choice.’ Or if not, as per above the contractor can refuse and be jobless. Another Hobson’s Choice.

The PSL predicament

But next, is where my sympathies split. From a human standpoint and empowerment perspective, I very much believe contractors should be able to use whatever umbrella company they wish, particularly when you consider that the contractor is trusting the umbrella with their money. I certainly would not want just any old company dealing with my means to feed myself in a cost-of-living crisis!  

Yet from the agency perspective, there are serious concerns about working with umbrella companies, not least whether or not their agency could be criminally liable for failing to prevent tax evasion, if they recommended an umbrella which turned out to be a scheme. This and other legal or compliance concerns should be the rationale behind having a PSL in place.

However it is widely known that umbrellas often pay agencies rebates, commissions, or incentives, in exchange for being recommended by that agency. Not only does this cloud the rationale for PSLs, it often undermines it with deals being done which are far from legal. These deals certainly fall foul of the Bribery Act.

Umbrella companies have their very own Hobson's Choice

Don’t misunderstand the situation. Umbrella companies are not making these payments through ‘choice.’ Ok, again, technically it is a choice but also again, it’s a Hobson’s Choice. Without paying an incentive, they would be without any income stream.

This model is now so rife, though, that some agencies automatically expect kickbacks as standard, regarding it as a well-established income-generator. Arguably, it’s more acceptable if there is a B2B commercial agreement in place so that everything is properly declared (and taxed), through the financial accounts of both businesses.

When back-scratching gets out of hand

But it’s when this ‘back-scratching’ goes off the books that it gets, well; to continue the theme, ‘out of hand!' How about bribing agency staff directly using cash? Yes, that happens. Or how about some other ‘gifts’ to directors, like those fitted kitchens which MPs uncovered?

In my experience, it’s only the dodgy schemes masquerading as compliant umbrella companies that can afford to throw the kitchen sink at such incentives, literally. You only have to look at the average umbrella margin, a slim 3%, (which has actually recently halved to a wafer-thin 1.4%), to know that eye-watering incentives are not affordable to compliant umbrella companies. And so they should (should), be a red flag to agencies.

My message to contractors…

To ContractorUK readers I say this -- ultimately you, the contractor, is paying for these incentives. It all has to be covered within the umbrella margin and occasionally, umbrellas are forced to increase their margins simply to pay the agency’s demands. This of course cuts into your take-home pay. But a bit like the two Hobson’s Choices you made which got you this far down this road, the umbrella company sometimes has no option if they want the business.

This is why in Shifting Sands, published by us last week, we state that the balance of power is now too far in the hands of recruitment agencies, and, in some instances, it’s being abused.

Next up is an area that’s mentioned in the report but I hesitate to get started on -- holiday pay!

In the worst-case scenario, your umbrella company and recruitment agency have been in cahoots to unfairly withhold holiday pay from you and between them, sharing the spoils.

Legislation says no (issue)

This type of profiteering can (maddeningly) be lawful, depending on the detail of the arrangements. However, just because something is legal, doesn’t make it ethical or even morally acceptable. HMRC takes this stance on avoidance; I take it on contractor holiday pay withholding!

To my mind, the legalese behind holiday pay is plain wrong and the ‘legislation doesn’t say it isn’t okay’ excuse you’ll hear from some, facilitates the profiteering. Full disclosure -- I have lawyer friends who are the very legal advisers that thought up these excuses, and no doubt they’ll be along to tell me how wrong I am. The outcry from hard-working contractors, potentially docked holiday pay? Not so much I bet.

The government's rolled-up holiday pay decision is welcome

Fortunately, yesterday we saw a common-sense decision by the government which could end the practice of holiday pay being unfairly withheld. In fact, from next year, rolled-up holiday pay will be legal (instead of its current status of ‘unlawful’). This decision paves the way for contractors to receive holiday pay on top of earnings, with the effect holiday pay won’t be left accruing and at risk of never being paid to you but lining someone else’s pocket instead.

The decision’s downside? You won’t get paid when you take time off – and that’s the basis for its (current) unlawfulness -- as it goes against the idea of receiving a paid break. That’s why taking holiday pay on a ‘rolled-up’ basis must be an informed choice; which the other ‘choices’ I’ve explored in this article aren't always. For a significant chunk of contractors, I’m pretty sure that’s exactly what taking rolled-up will be -- an informed choice, if it isn’t already. Legislating to permit rolled-up holiday pay is something I’ve been campaigning for alongside many others, and it’s fantastic to finally get this through for the contractor workforce.

Are you an irregular hours worker?

Please note though, just because rolled up holiday pay will be an acceptable practice; it doesn’t mean that your umbrella or agency will be obliged to offer it to you. In addition, rolled-up holiday pay is only set to be paid to “irregular hours workers” and “part-year workers” (see the specifics here on page 24), so you will need to check the precise detail of your contractual arrangements.

Unfortunately, it’s not just holiday pay violations, ethical or otherwise, that damage the umbrella sector. In recent years there has been a surge in seemingly ‘compliant’ umbrella companies getting away with misconduct or dubious practices -- entirely unchallenged. Some of it is perfectly legal but again, that doesn’t really make it okay. Almost all this underhandedness comes at a financial cost to you, the very contractors for whom the umbrella (and agency) exists.

But to be clear and for the record. There are many more good umbrella companies that genuinely care about the contracting sector than those who are dodgy and don’t.

Top 5 tips for umbrella company protection

There are some obvious things you can do, as an umbrella contractor, to protect yourself when you feel like uttering under your breath, ‘Choice; what choice?’

1. Read your contracts and make sure you know how your pay will be calculated.

2. Be wary of an umbrella promising you higher take-home pay than other umbrellas.

3. Cross-reference potential umbrellas with HMRC’s published list of named tax avoidance schemes. But remember, the ‘blacklist’ isn’t fully comprehensive as there are schemes operating that are not listed.

4. Check your personal tax account with HMRC to make sure they are receiving the tax payments that they should.

5. If you want to obtain a guarantee that your umbrella calculates pay properly, with no skimming, mini-umbrella company fraud, tax avoidance/evasion or holiday pay misconduct, use an umbrella with a PayePass Verify Award.

Finally, the redundant choice I won't shed a tear for...

Lastly, while I’ve already shared with ContractorUK my belief that the prospects for umbrella regulation at Autumn Statement 2023 are poor, there is now a sense that umbrellas can no longer simply claim to be compliant, or just say they’re all about raising standards. Paying lip service to operating lawfully, ethically, and transparently doesn’t cut it as 2024 comes into sight; it needs to be proven and so the once easy option on compliance -- feigning it -- is pleasingly one choice that contractors appear to have deprived umbrellas from having anymore.

Profile picture for user Julia Kermode

Written by Julia Kermode

Julia is Chief Executive at compliance specialist PayePass, which specialises in auditing umbrella companies. By forensically scrutinising everything relating to worker payments PayePass protects the supply chain from the financial risks of tax avoidance, tax evasion, mini-umbrella company fraud, payroll skimming, and holiday pay misconduct.
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