Umbrella companies – what good should look like

There is more to being a ‘good’ umbrella company than merely dealing with pay and taxes compliantly, although, of course, both of those are key, writes Meredith McCammond, technical tax officer at LITRG (the Low Incomes Tax Reform Group).

With regulation still some way off, it’s over to ‘best-practice’

We’ve just updated our own resource to help workers check if compliant is something they can call their umbrella but here, exclusive to ContractorUK, I want to reveal the hallmarks of best-practice when it comes to umbrella companies.

Such hallmarks are needed partly because the government’s next steps on “tackling non-compliance in the umbrella market” are seemingly still some way off.

The onus therefore remains on contractors to be well-advised and protect themselves when working through an umbrella company.

Perfect storm

At the same time, we know that working through an umbrella company can be complicated. This can make it difficult to know what to expect, and tricky to tell if you are being paid correctly. It’s a bit of a perfect storm!

One thing which might help here is a ‘ready reckoner’ -- our updated resource contains this (on page 4/5) to help workers understand whether what they are being offered to work through an umbrella company is roughly equivalent to what they might have otherwise received, once the various deductions which the umbrella company has to lawfully make have been considered.

But let’s now explore beyond mere compliance as an umbrella company and into wider best-practice, including what it should look like or entail in practice.

To come up with these traits, we asked ourselves: ‘What other things would we like to see from umbrella companies, in an ideal world?’ Put another way, here are:

Five traits of a not just a compliant, but a good, best-practice umbrella company

N.B. All of the following suggestions are aimed at improving transparency and to aid umbrella contractors’ understanding of their position, rights and way of working.

1. Corporate openness

It is a legal requirement for a limited company to display their Companies House registration number, which allows you to check things like whether the business is financially strong and stable, whether filings are up to date, and who the directors are.

But to build trust and promote a sense of honesty and integrity, umbrella companies should also consider providing other key information.

For example, what insurance, registrations, memberships are held by the brolly? The displaying of each of these can help workers undertake research and carry out their own ‘due diligence.’

2. Day-to-day clarity

While there are some basic payslip requirements set out in law, going one step further, umbrellas should provide clear and detailed payslips to workers, which include items such as tax codes and ‘year to date’ figures.

Then, a best-practice umbrella company should assist its employees with maintaining easy access to payslips, if the payslips are stored online or in a system.

Similarly, a best-practice umbrella should provide contractor reconciliation statements on top of payslips, which show how the gross pay is carved out the ‘assignment rate.’

Ideally, this should include a full breakdown of all deductions made from the assignment rate - typically margin, employer’s National Insurance and Apprenticeship Levy and employer pension contributions (where relevant).

3. Communication

Best-practice umbrella companies should maintain open and consistent communication with workers regarding their pay, processes, policies, and any changes.

This should mean good customer service and quick response times. It should also mean proactive updates should day-to-day business be disrupted for whatever reason. For example, a cyber-attack (which as a disruptor to a business appears to be on the increase) is when timely and responsive communication is vital to achieve.

But effective and reliable communication is a must for a best-practice brolly in another serious matter -- that of workers being transferred between umbrella companies. For example, after a merger, potentially without workers’ full knowledge or understanding of the merger. This carries huge risks for workers, particularly as we have heard of cases where the new entity is using disguised remuneration to pay the workers.

4. Accuracy

Umbrella companies adhering to best-practice should ensure that all payments to workers are accurate and timely. If any discrepancies or errors do crop up, these should be addressed promptly.

We are aware that most umbrella companies contractually structure their contractors’ pay in the form of a minimum wage element and a (taxable) ‘discretionary’ bonus element to make up the wage to match the value of the work.

One function of this, is to help protect the umbrella in the event of non-payment by the agency or end-client. In the vast majority of cases however, the ‘discretionary’ bonus element is routinely paid. As such, any non-payment should be treated as exceptional, and should be accompanied by a fulsome explanation. For example, a statement that the agency or end-client have defaulted on paying the umbrella company.

5. Respect, fair treatment and accountability/responsiveness

Workers using umbrella companies should be treated fairly and ethically, meaning umbrellas should be ensuring that such contractors receive the appropriate rights and protections as employees.

This isn’t just about the perennial issue of umbrella workers being denied holiday entitlement and pay (although to this end, it is important to be aware of some recent reforms to the holiday entitlement and pay regime for irregular hours or part-year workers). It’s also about umbrella companies making workers feel comfortable to approach them with questions, feedback, or concerns.

Indeed, we believe a good umbrella company should have an openly published ‘complaints procedure,’ further to providing a ‘bricks and mortar’ UK address on their website where complaints can be posted and actively responded to.

Lastly, my invitation to you to speak up as an umbrella contractor

There are of course more traits a good umbrella might have, but alongside fair and transparent payments, with tax and HMRC compliance to boot, these five are the key traits of a contractor umbrella company adhering to best-practice.

Finally, a question or two for you. If you are an umbrella company contractor, what matters to you over and above compliance with the minimum standards set out in law? And furthermore as a brolly worker, which aspects of how an umbrella company operates should be regulated? It hopefully won’t be long before we will get a chance to see government proposals in this area and to feedback on those. We would be interested to hear your thoughts and experiences to input into our work. In the meantime, look out for brollies bearing these five hallmarks -- you could do a lot worse!

Thursday 16th May 2024
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Written by Meredith McCammond

Meredith is a Chartered Tax Adviser. She has been a technical officer with LITRG, part of the CIOT, for seven years. She leads on their work on labour market issues including agency workers/intermediaries and the gig economy.

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