Umbrella Companies (and other complex intermediaries)

Labour Market Intermediaries report.

There have been calls, particularly from the education unions, to have some kind of licencing scheme to make sure that ‘Umbrella’ companies (and other intermediaries that sit between a worker and an employer) to be properly regulated. Some unions are even calling for them to be banned outright.

This is an issue that is likely in increasingly impact on freelance areas in the entertainment industries and we should be preparing a position on this now.

The TUC have been circulating a very useful report from the Low Incomes Tax Reform Group on Labour Market Intermediaries [PDF].

Thoughts on this: (this is thinking out loud on my part at this stage, so please don’t treat any of it as being particularly authoratitve – let me know if you think I’ve got any of this wrong).

My own perception here is that the term ‘Umbrella Companies’ is used as a bit of a catch-all term for “complex intermediaries who damage workers’ rights and income” and I’ll be posting more on this in future.

We;ve seen examples of people being given options to work directly for £x or through an complex intermediary company for £y.

In the past, there were examples of people being encouraged into being employed through a payroll supplier who loads costs onto them. In theory, they are employees for the purposes of employment rights (though it is not clear that they are ever exercised).

We’ve seen other examples of people being encouraged to set up a very thin version of their own company that employs them.

The options are that these intermediaries either act as

  1. simply the payroll provider for an employment agency
  2. a full employer of people employed by their payroll company (so an employment agency finds work for a worker, takes a commission, but gets the payroll company to become the employer)
  3. making workers set up a small ‘mini-umbrella’ Limited Company that acts as their employer – the worker is a director and the payroll company also put one of their staff on the books as a director as well.

This gives them an ability to avoid some tax (i.e. the difference between a Self Employed Sole Trader and someone who is working through a limited company) may be something that we will see less of as it is increasingly be seen as being fraudulent.

Broadly, these arrangements tend to load costs and risks onto workers including…

  • Paying employer NICs
  • Paying employer pension contributions
  • Paying their own holiday pay
  • Paying the Apprenticeship Levy
  • The costs related to managing payroll – the transactional costs

This last point is particularly interesting because these often seem to me to be higher than they should be (a decent accountant should run payroll cheaply but these companies don’t seem to me to keep the costs down as much as they could do).

These seem a bit parasitical – there is often a suspicion that these are inflated by a ‘kick back’ that the payroll company gives to the agency that referred the worker!!

These intermediaries…

  • also charge for other services – payslips, confirmation of employment letters etc
  • may operate tax devices and loan arrangements that could even be fraudulent and non-compliant
  • may be taking a slice of ‘expensible’ business costs – travel etc (I’d like to see more evidence of this…)

Workers end up being taxed as an employee but they don’t really get any employment rights. Our big concern is that this is a redesign of employment relationships that could significantly reduce freelancers’ ability to bargain with engagers.

We are hearing allegations of various strategies that involve moving payment into discretionary bonuses to protect employers from breakdown of relationships when there are NMW-type claims.

It will be interesting to see if IR35 changes will result in people moving over from their own company and into an umbrella / payroll company. Remember, employers don’t have to pay Employer NICs when engaging a self employed sole traders.

I’d wonder if the fact that moving to an intermediary arrangement that turns a self-employed sole trader into an employee because it will add the cost of Employers NICs to the cost of employment and therefore discourage engagers from doing this. It either effectively increases costs to employers or reduces take-home incomes to workers.

Which leads us to a question that we should ask our members about:

  • Are there upsides? Are there any continuity of service benefits from people establishing their own payroll / umbrella company?

To be continued…



This entry was posted in Employment intermediaries, Employment Law and Rights, Tax and tagged , , . Bookmark the permalink.

Leave a Reply