Employment rights at the fore with review of umbrella companies market

The government is publishing a call for evidence to ensure it has an up-to-date and well-informed view of how the umbrella company market operates. It is seeking views from stakeholders on the role that umbrella companies play in the labour market, and how they interact with the tax and employment rights systems. 

This might sound familiar. This call for evidence follows a previous one dating back to July 2020 which was looking specifically into disguised employment and the use of umbrella company structures as a means of avoiding tax. This one has a different focus. It’s looking at the role that umbrella companies play in the labour market, and how they interact with the tax and employment rights systems. It sets out the concerns that have been raised by some stakeholders, as well as government action already taken to tackle tax non-compliance and improve protection for workers. 

Key to this is understanding where the umbrella company sits in a typical labour supply chain and, helpfully, that is illustrated very well in the government’s consultation paper at paragraph 2.3. 

So, a work-seeker approaches an employment business so that work can be found for them. The employment business may, at this point, require the work-seeker to be engaged through an umbrella company, potentially from their own preferred supplier list, or one suggested by the work-seeker. The umbrella company enters into a contract with an employment business to employ workers the employment business has agreed to provide to an end-client business. The umbrella company will be the worker’s employer for the duration of the engagement between the worker and the end client. 

So that is the typical arrangement and, in many ways, it works well, offering a lot of flexibility and advantages to the end-user, but there are concerns about tax avoidance – which we will look at separately in another programme – and employment rights. So, let’s look at the employment rights angle. Emma Johnston from our Edinburgh office has been following developments in this area closely. I phoned Emma to discuss the issues raised by this consultation:

Emma Johnston: “Yes so umbrella companies, they play a relatively unique role in the UK labour market, They arrange engagement of temporary workers but usually the umbrella companies actually employ those workers and they pay their Pay As You Earn, they apply the employment taxes, and then the umbrella company engages, potentially, an agency intermediary who then in turn provides those workers to an end user. So the relatively unusual aspect of this arrangement is that umbrella companies employ workers but the workers don't provide those services to that company, but to another business further up the contractual chain. So, as most umbrellas employ the individuals they are required to provide those employees with employment rights just in the same way as any other employer would. This means that the employees are therefore entitled to the usual statutory payments, statutory sick pay, maternity pay where applicable, holidays, pension contributions, and so on. Umbrella companies are being used more and more to provide that flexible resourcing model that a lot of end users are requiring. They are attractive, as I say, because they carry that administrative payroll burden - they apply the tax and national insurance contributions at source - which means that the end user and the intermediaries don't need to worry about it.”

Joe Glavina: “Tell me about the government’s call for evidence, Emma” 

Emma Johnston: “Yes, so the government has released paper calling for evidence from relevant stakeholders - the workers themselves, the umbrella companies, agencies, end users - just basically asking for their experiences of working under this umbrella arrangement. This call for evidence has arisen as a result of a huge increase in the number of individuals being engaged by these umbrella companies but that, combined with a growing concern about the potential for exploitation of workers under those arrangements. The call for evidence identifies a few concerns and the main one, or one of the main ones, is non-compliance with employment law rights. There is a concern about a lack of transparency in terms of pay and holiday entitlements, and so on. The concern that's identified is that this is leading to unfair practices where certain, probably a smaller number of non-compliant umbrella companies, are then able to undercut and charge less than the more compliant companies and gain an unfair advantage. That creates a bit of an issue for end users because they may be able to offer a cheaper service, but the idea then being that those cheaper services, potentially, are arising from exploitation of individuals which is not usually what an end client is going to want to have to deal with in their supply chain. So, it's something that's of interest not only to umbrella companies, and individuals, but also to the end clients from the perspective of knowing what their supply chain looks like.”

Joe Glavina: “Is there any action that end-users should be taking now, Emma, or is it a case of waiting until the government reports back which is likely to be well into next year at the earliest?” 

Emma Johnston: “I think for end users there’s nothing there's no immediate action that needs to be taken at this point. It's very much a watching brief to see what the outcome of that call for evidence is but, generally speaking, this is part of an attempt by the government to hold organisations in general accountable for these employment rights and so it should be of interest to end users in that respect. There is scope for reputational issues, of course if, for example, a group of workers that were engaged for work in a particular end user were being mistreated by the umbrella companies and quite often in these circumstances what you find is that the memorable name will potentially be the end user name and although the end user is not necessarily responsible for the way that these individuals are treated by an umbrella company, that is the name that would potentially hit the headlines and so it is it should be of interest to end users to ensure that their supply chain is as compliant as possible.”

The government’s call for evidence on the umbrella company market is now open and will be running until 11:45pm on 22 February 2022. If you want to respond you can – the government’s website has an email address to use for that purpose.

LINKS

- Link to Call for Evidence: umbrella company market