Is the use of umbrella companies at odds with business values?

Rebecca Seeley Harris and James Poyser examine how off-payroll compliance can help HR directors differentiate their employees from contractors

The absence of an Employment Bill in May’s Queen’s Speech put professional bodies from the TUC through to the Low Income Tax Reform Group on high alert. It was a renege on promises the government had made to protect employment rights, especially those in low paid work. 

Running parallel to this story has been the unfolding exposé into umbrella company practice. 

While umbrella companies have been a feature of the labour supply chain for more than 20 years, the recent private sector off-payroll reforms have brought with them unintended consequences. In a bid to de-risk their compliance exposure, end clients decided to avoid status determinations altogether and either go PAYE, pay for flexible skill through an intermediary umbrella or ban the use of professional services companies (PSC).

Or so they think. It’s come to light through recent tax and accounting case work, that more and more employers are in the dark about the practices of umbrella firms their supply chain has diverted to. In some cases, HR directors we’ve spoken to didn’t realise a decision had been made to use an intermediary payment model. 

But more than that, by the time a case reaches the desk of a tax lawyer there’s a bigger problem. Generally it’s exposed unethical practices such as skimming pay or withholding holiday entitlement, through to complex tax avoidance schemes. 

A conservative estimate of the value of unpaid holiday pay to umbrella company workers in 2016 was at least £1.8bn, which has only been exacerbated by the pandemic. It is also estimated that £4.5bn is misappropriated mainly from workers, but also from HMRC by employment agencies and intermediaries. 

These numbers alone should seed a question on labour supply chain compliance in the boardroom. The use of umbrellas is in many cases at direct odds with company employee brand values and stated ESG pledges. 

There’s also a preconception that umbrella companies are only used by high paid workers but in fact, some 600,000 people, cutting right through every strata in society are affected. Many, such as supply teachers, nurses to GPs and vets are dealing with an agency or recruiter rather than their perceived employer. 

These numbers are likely to grow as Britain progresses its economic recovery. Looking back over the last 20 years or so, after every major economic shock there is a significant uptick on the number of temporary workers needed for growth. From warehouse teams moving stock, to IT consultants helping companies get the infrastructure in place to pivot their business model – temporary and flexible skill is essential to scale.  

So, what’s to be done? 

The first thing to say is that there are some very well-run umbrella companies who act as a template for success. However, accreditation in the industry isn’t necessarily a fool proof way of finding them. Some end clients have already identified this and run weekly audits to verify payslips match and everything remains above board at their chosen intermediary.

However, it’s not addressing the bigger issue of having a licence to operate in the market. Until regulation is in place, rogue umbrellas will exploit the system and take every step they can to hide the truth. There isn’t a quick fix.  

Far from it. What’s needed is a forward looking outlook that revises the perception that a job is for life. Regulation must instead consider the employment and tax laws needed to offer the flexibility people want from work, the flexible way employers need and want to hire, and it must be enforceable.

Until that time, HR directors must look to best practice hiring examples that have risen out of the ashes of IR35 – numerous businesses have found ways to manage flexible skills ethically and fairly. It hasn’t always been easy for them, but it’s clear that those companies that have achieved a win-win for their business and temporary workers, have a strong set of employment values at their core and have manoeuvred into a position where they can compete for the best skill on the market and stay compliant.

Rebecca Seeley Harris is chair of the Employment Status Forum and author of CEST Explained, and James Poyser is CEO of inniAccounts and founder of offpayroll.org.uk. They recently submitted a draft policy to regulate the umbrella industry to the Treasury and BEIS.