Unpaid by an umbrella company? Here’s what contractors should know

It’s the nature of beast with contracting that you will, over the course of your independent career, encounter numerous different working arrangements. Especially during lean times, you take work how and where you can find it!

Navigating this myriad of different contractual arrangements can be confusing, however. It’s important for contractors to be right on top of what their legal rights are to combat tricky situations, notably not getting paid. But this isn’t easy if you switch between different types of agreement on a regular basis.

Unpaid via a brolly? Here’s where you stand, legally

One situation that causes a lot of confusion for contractors is their legal standing if they work through an umbrella company and find themselves unpaid, and this challenging situation  -- unfortunately – appeared to be the order of October, writes Adam Home of Safe Collections.

The reason for this is that working for an umbrella company actually means taking a step into employment and PAYE rules. Your options for recovering what you are owed are therefore very different compared to those available if you are contracted directly by a client or even work through a recruitment agency.

Here’s what you need to know (as a minimum):

Why you need to know how an umbrella company differs

Umbrella companies provide labour services, typically to recruitment agencies and on a temporary basis. Particularly when asked to find a large group of workers for a project, rather than having to find individual contractors themselves to fill the positions, agencies will go to an umbrella company and hope to find a job lot of workers in one go.

But for a contractor, joining an umbrella company is very different to accepting a contract of work directly from an agency or a client. Umbrella companies employ people on temporary contracts. The umbrella company gets paid by the end client for whatever the project happens to be, the contractor gets paid by the umbrella company via PAYE.

This means that, as a contractor employed by an umbrella company, you have no direct relationship with the end-client. This fundamental fact has a big impact on your rights and options should the client decide not to pay for work you have completed on the client’s behalf.

What happens if umbrella contractors don’t get paid?

Different umbrella companies have different policies about paying staff if they themselves don’t get paid by the end-client, so it is worth checking the small print of your contract or speaking directly to the umbrella.

The good news is, your umbrella company is legally obliged to pay you something regardless of what the end-client does, because the umbrella is bound by employment law. The bad news is that this obligation only extends as far as paying you the statutory minimum wage.

So technically, it’s probably not ever accurate to talk about being ‘unpaid’ through an umbrella company because, to reiterate, even if the end-client doesn’t pay up, you will be paid something. Yet that ‘something’ could be significantly less than the value of the work you did.

How can a contractors take action, or what can they do in this situation?

Unfortunately, not very much.

You can’t chase the debt from the end-client directly because it’s not legally speaking your debt. It is the umbrella company that has the contractual relationship with the end-client and the umbrella who has the unpaid invoice to chase.

But surely, contractors often ask us, umbrella companies have a vested interest in chasing payments to recover their cut?! And if they are proactive about getting their invoice paid, there’s a good chance that me – the contractor – will eventually get owed money too, right?

You certainly might think so! But in our experience, umbrella companies have limited desire to go ‘hard’ after unpaid invoices. Their key relationships tend to be with recruitment agencies, and their exposure to non-payment is having to pay their employed contractors minimum wage for hours worked - in other words, not very much exposure at all.

What about assigning or transferring debts?

If you were absolutely determined to chase the debt yourself as an umbrella contractor, you could look to have it assigned or transferred -- from the umbrella, to you. But be aware -- this can be difficult and expensive to do properly, because debts have to be assigned in their entirety.

So it may be possible that you need to organise a ‘group action’ with all the other unpaid contractors (and possibly the umbrella company for their cut), to make a case for recovering the full amount. Even if you don’t, the assignment of the debt adds an additional layer of complexity and therefor costs to any potential legal action.

Final thoughts

We share in the frustration umbrella contractors out-of-pocket can feel here. We tend to have to reject engagements from contractors engaged via an umbrella company for a few reasons – including the fact that brolly is the client and never seems to want to chase the debts. To repeat a phrase I used at the outset, it’s the nature of the beast that it’s no major loss to the umbrella when contractors go unpaid, beyond their minimum wage obligation. But if we can help, or where we can help, we will. Find out more about how Safe Collections can help here.

Thursday 4th Nov 2021
Profile picture for user Adam Home

Written by Adam Home

Adam Home is Managing Director of UK & International Debt Recovery Specialists Safe Collections. The company, founded in 1984, has more than three decades of experience in recovering unpaid invoices and contractual arrears anywhere in the world.
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