What HR needs to know about umbrellas

While most are compliant, Julia Kermode shares why employers need to be savvy about too-good-to-be-true umbrella companies

The government has recently issued some guidance alerting contractors to be wary of any ‘umbrella’ firm that offers 80 per cent or more in net take-home pay. While we at the Freelancer & Contractor Services Association welcome the guidance, we would argue that such arrangements are not true umbrella set-ups but disguised remuneration schemes. There are a few things we think HR ought to know if it finds itself engaging with recruiters who work with umbrella companies. 

While it is good to see HM Revenue & Customs (HMRC) issuing a steer on umbrellas, we are concerned that it could put people off working with them entirely. Many umbrella employers operate in a compliant fashion and provide a valued service with many benefits for the contractor, agencies and end-clients. We warned HMRC that we would see a proliferation of tax avoidance schemes as a direct result of the 2017 off-payroll reforms and our prediction has become a reality. Good communication is key and hirers must check that those in their supply chain are not facilitating tax avoidance – otherwise they risk a corporate criminal offence under the Criminal Finances Act

A true umbrella is an employer of contractors, providing them with all the benefits of permanent employment along with the flexibility of working as a contractor. It is also true that an umbrella employer will process 100 per cent of gross pay through a real time information payroll, so contractors are not at risk of a high tax bill at a later date. They work just like any other employer.

Compliant umbrellas are a valuable part of the supply chain and a relationship between contractors, umbrellas, recruiters and end-hirers should be seen as a teamwork so that clients benefit from the workforce they need without any misunderstandings. 

Employers and HR directors should consider how they assure themselves that employment practices are appropriate throughout the whole supply chain. Large organisations that outsource business functions could be forgiven for thinking they are unaffected by their suppliers’ practices, but that is not the case. Ask questions of your recruiters to find out if the umbrella companies they work with are:

1. A member of an accredited professional body. This will give you some comfort that some compliance checks have been conducted, but make sure you know what the accreditation means in practice as standards can vary.  

2. Operating within the law and providing:

  • An overarching employment contract with guaranteed hours (not zero-hours)
  • National minimum wage payments that are in line with legislation. Expenses should be made in line with legislation and HMRC guidance. If expenses allowances sound too good to be true, this should raise alarm bells.
  • Holiday and statutory payments such as sick pay, maternity pay and paternity pay
  • Access to a workplace pension
  • All 84 statutory employment rights and benefits 

Any compliant professional employment company will offer the above as a minimum.

While there are some cases of bad practice among a minority of businesses which have grabbed the headlines, there are also many compliant organisations working ethically and correctly to provide a high level of service for their clients and contractors. The challenge comes in identifying a compliant company you can trust. One could argue that a symbiotic relationship between all parties is obligate; they all rely on each other and it is vital that they all work together to foster a good working relationship for the benefit of all.

Julia Kermode is chief executive of The Freelancer & Contractor Services Association