Umbrella company regulation and ‘deemed employer’ aren’t the same thing

Ahead of today’s Spring Statement 2025, there seems to be a slight confusion between the umbrella company regulation and the policy of ‘deemed employment’.

These are two separate government initiatives -- distinct in purpose, scope, and legislative track. This is despite both being outlined on March 4th 2025 in “Tackling non-compliance in the umbrella company market: Government response.”

Both measures are part of the same overarching effort to address issues in the umbrella market, and both are championed by the current Labour government.

But that’s where the overlap ends, writes Rebecca Seeley Harris, founder of ReLegal Consulting.

1. Umbrella company regulation – A matter of employment law

Regulation of umbrella companies is being led by the Department for Business and Trade (DBT).

It focuses on amending the Employment Rights Bill (ERB) to define umbrella companies in law and bring them under the jurisdiction of the Employment Agency Standards (EAS) Inspectorate. Over time, regulatory oversight is expected to shift to the Fair Work Agency.

The aim is to provide legal clarity and enforceable standards for umbrella companies, ensuring better protections for workers.

This regulatory track is widely supported across the industry and is seen as a necessary step toward improving accountability and fairness in the labour supply chain.

2. ‘Deemed Employer’ proposal – A tax policy shift

Completely separate from the regulatory framework is HMRC’s ‘deemed employment’ policy – “Option 3” from the June 2023 consultation.

This HMRC measure shifts the responsibility for operating PAYE from the umbrella company to the recruitment agency that supplies the worker to the end client.

Outlined in HMRC’s October 2024 policy paper, this is a tax policy designed to tackle non-compliance and reduce the tax gap caused by rogue umbrella operators.

It is not part of the Employment Rights Bill and is being pursued through separate legislation. While regulation has broad support, this ‘deemed employer’ policy has raised significant concerns across the industry, particularly around feasibility, liability, and unintended consequences.

It's worth noting that the 2023 consultation document was a joint initiative from HMT, HMRC and DBT.  The October 2024 policy paper on ‘deemed employment’ was from HMRC alone, which is further evidence of the divide.

Clarity from government – if you know where to look

The government could do more to clearly communicate the separation between these two government proposals.

However, their own language reveals the divide. On March 4th, the Treasury stated:

“The Government considers that timely action in the umbrella company market is imperative to protect the most vulnerable workers. Informed by the responses to this consultation, the government is therefore legislating to define umbrella companies, to allow for their regulation and to bring them within scope of the Employment Agency Standards Inspectorate’s (and subsequently, the Fair Work Agency’s) remit, through an amendment to the Employment Rights Bill.

The government is also committed to closing the tax gap… the government will bring forward legislation to move the responsibility to account for PAYE from the umbrella company that employs the worker, to the recruitment agency that supplies the worker to the end client.”

Note the separation -- two initiatives, two justifications, and two legislative paths.

Further evidence lies in the consultation outcome itself.

Chapter 2 is entitled "Regulating umbrella companies for employment rights," and outlines plans for defining umbrellas and bringing them under EAS oversight. Chapter 3 is entitled "Tackling tax non-compliance…," and deals solely with PAYE and the deemed employer model.

Why this distinction matters

Confusing these two reforms risks undermining legitimate support for one (regulation) due to opposition to the other (deemed employment).

Many stakeholders back the DBT’s efforts to regulate umbrella companies but have strong reservations about HMRC’s policy. It's crucial that these views are communicated accurately during consultation and feedback periods.

Mislabelling or conflating the two could result in unintended opposition to regulatory measures that the sector broadly welcomes.

At the same time, the draft legislation for deemed employment is yet to be published and is expected in the summer. This leaves a narrow window for review and adjustment before its proposed implementation from April 6th 2026. Similarly, the final text of the amended Employment Rights Bill is unlikely to emerge before the autumn, providing just five months before umbrella regulation becomes law.

Final thought

The bottom line is this -- umbrella regulation and the deemed employer proposal are not the same. They serve different purposes, are being developed by different departments, and will be enacted through separate legislation. As implementation deadlines draw closer, clarity -- not conflation -- is essential