Contractors, this is NOT a dodgy umbrella company

The UK’s National Payroll Week has been and (almost is) gone, but the problem of contractors suspecting their umbrella company to be operating illegally lingers.

Where brollies, and contractors, could step up

More often than not, this feeling of unlawful activity by the umbrella is because the brolly is guilty of not many things – as unions like the TUC would have you believe -- but one thing: not explaining everything to the contractor from the outset.

As for contractors, if they are guilty of anything (perish the thought!) it’s not asking absolutely everything that will likely concern or worry them about working via their chosen brolly before they sign up with that brolly.

And usually contractors, what worries the employees of umbrellas the most is aspects around pay -- like rates, deductions, tax and benefits, writes Lucy Smith, managing director of Clarity Umbrella.

Based on the unfortunate, quite heart-breaking experience of a contractor who, having been left in the dark from day one by his brolly came forward to ContractorUK insistent that the umbrella is breaking the law, here’s some timely guidance to reassure, or just clarify, in honour to the week that was.

1. Payments

Umbrella Contractor’s Complaint: ‘My brolly never pays BOTH on time and in full.’

Be aware that your umbrella company should receive a business-to-business contract from the agency or the end-client as part of the contractual chain.

And within this contract (of which you, the contractor, should see sight of) it will specify the payment terms to the umbrella. Payment is usually based on submission of an approved timesheet and corresponding invoice.

Client-approval

In some contracts, it may be the case that there must be ‘client-approval’ provided to the agency (where there is an agency in the chain), before payment will even be considered.

So always make sure that you get this ‘client-approval’ to ensure there is no delay with the payment being released by the agency.

Next, let’s look at some standard terms. On a weekly payment term, we may see “7 days,” so that would mean you, the contractor, works the first week, then you submit a timesheet, then the brolly raises the invoice, and then finally, payment should be received “7 days” later.

Monthly term?

With a monthly term (“30 days”), the above process could be even more prolonged.

Let’s say you, the contractor, starts at the start of a month, submits a timesheet, then the brolly invoices, and then finally, payment can be received -- 30 days later.

So always, always ensure you are aware of what the payment terms are to the brolly, as it is likely that this is how you will be paid, in terms of timeframe.

In addition, working as a contractor, payments are not going to be as regular as a permanent employee in conventional employment, as there are many factors which could affect the payment date.

The legal position, plus practical tips for contractors

From a legal perspective, most umbrella companies will have an obligation to make payment to you at the “basic pay” level. Even if funds are not received from the agency after the invoice falls due, then when the funds are received, the remainder of the payment should be released to you. However, sometimes this can look even more confusing, as it can lead to two payments in one tax period!

To contractors, we recommend always checking how often the brolly runs their payroll. Ask the umbrella company -- is it every day, or once a week? Again, this may affect how often you are paid. But most traditional brollies will run at least one payroll a day. Ultimately though as a contractor, it’s always advisable to ensure you have a contingency fund to allow for these fluctuations.

2. Pensions

Umbrella Contractor’s Complaint:  ‘The contributions seem dodgy – swiped off my gross pay.’

As the umbrella company is your employer as an umbrella contractor, they have a legal obligation to ensure that you are auto-enrolled into their group pension scheme.

Many umbrellas use the three-month postponement period for contractors, but they should also allow the ability for the contractor to ‘opt in’ from the start. Every business has the ability to defer employees for up to the 3 month period, which means that for those contractors with shorter assignments or more temporary staff, then they do have this added complication unless they choose specifically to auto-enrol from the start of the assignment.

Salary Sacrifice

If an umbrella company is using the ‘salary sacrifice’ pension model, then any pension contribution should be taken from the gross invoice rate, thus reducing the worker’s taxable salary, and giving the contractor that ‘sacrifice’ element.

Contractors, remember -- your day rate is likely to be the gross invoice value / or assignment rate if you are asked to work via a brolly. This is unlikely to be the taxable salary or gross pay which is reached once employment costs have been met.

3. Employer’s National Insurance Contributions

 Umbrella Contractor’s Complaint: ‘I’m an employee so I pay Employee NI but why on earth is Employer NI being paid to HMRC too?’

As a fellow umbrella boss put it perfectly last week on LinkedIn:

‘Many umbrella employees also still don’t understand that Employer’s NI is a legal deduction umbrella companies have to make.

And in turn, us umbrellas pay the Employer NI to HMRC. ‘Hence the importance,’ the boss continued, addressing contractors, ‘of understanding whether ‘employment costs’ are inclusive of your agreed rate or not? Umbrella companies do not charge -- as someone said to me last night – Employer’s NI to our umbrella employees, we legally have to pay it!’

The age-old complaint (continued)

Well, the issue of NICs is indeed asked about repeatedly and the news this week that 1.25% is being added onto to both employer NICs and employee NICs will, effectively, sting umbrella contractors twice.

To recap the position, an umbrella company is an employer and, as with any other UK employer, the umbrella company has a legal obligation to pay Employer’s National Insurance Contributions to HMRC.

Umbrellas are employers, and employers’ have legal duties

As a contractor, you are employed by the umbrella company under an over-arching contract of employment. The umbrella then enters into a business-to-business contract with the recruitment agency or client.

An invoice is raised by the umbrella for the hours/days you work; this is then issued to the agency/client. Finally, payment is made to the umbrella for the value of the invoice and they (the umbrella) then pay the employer’s national insurance contribution from the contract amount received. This forms part of the ‘employment costs’ (including the Apprenticeship Levy, the Employer’s Pension contribution and the umbrella’s margin).

How to avoid nasty surprises if new to brolly working

With so much hype thanks to unions, and many contradicting articles online, it is very difficult to ensure that you, the worker, always have the right information in front of you when choosing an umbrella company.

Then, when the umbrella you go with (potentially before asking as many questions as you could have) fails to outline aspects of working with them very clearly, many contractors quite understandable end up believing their umbrella must be ‘dodgy.’

What is illegal, is any deduction of Employer’s NI from your taxable salary. But allocating it as part of the employment costs from the agreed gross invoice rate or ‘assignment rate’ is not illegal. Unfortunately, this lawful activity is not regularly explained enough -- by the agency when advertising the rate, or the brolly when providing introductory information. So confusion over what it is right and what is wrong often ensues.

Want to avoid any nasty surprises? Good idea contractors -- always, always get a take-home pay calculation in advance, and make sure that you are happy with the agreed rate before you sign up!

Friday 10th Sep 2021
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Written by Lucy Smith

Lucy has over 9 years extensive experience in the umbrella market, much of this time spent managing one of the most reputable umbrella companies in the market and now, Clarity Umbrella.
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