New regime for 'umbrellas', agencies and intermediaries could pose problems for the UK staffing industry

The intention of the consultation, among other things, is that umbrella companies will have to be more transparent about how they pay workers and will have little or no legal grounds for not paying them fully and promptly.

The consultation, which was published on 6 February, considers whether the new Fair Work Agency can close umbrella companies down and ban named directors. It also suggests that the regime will be extended so that, for example, referral fees from umbrellas may be outlawed. At the same time, it questions whether wider changes to the existing regime are needed to amend certain complicated bureaucratic requirements on employment businesses agencies in light of technological advances since the regime was introduced 23 years ago.

All involved in labour supply arrangements, users and suppliers, will want to review these proposals because they will affect how they can use contingent workforce arrangements in the future. The period for responses to the consultation closes on 1 May.

Government's stated objective

The consultation looks at the Conduct of Employment Agencies and Employment Businesses Regulations 2003 – known as the "Conduct Regulations" – and the Agency Workers Regulations 2010. The stated ultimate aim of the consultation is to arrive at an effective, more streamlined regulatory environment that is simpler to navigate, creates a level playing field for suppliers by rewarding good practice and ensures both fairness to workers and costs to business are proportionate.

There is also express recognition that the flexibility agency work plays a crucial part in the UK economy while acknowledging that market developments, particularly in how technology is used, mean the Conduct Regulations no longer reflect the sector's characteristics and practices or the needs of workers and end clients. This is undoubtedly correct and is a point Osborne Clarke have discussed with the government since 2011.  

Misunderstandings about how umbrellas operate?

It is laudable that these long-standing problems are finally being addressed. However, the specific consultation questions and the preambles suggest that policymakers are misinformed about how UK labour supply chains currently operate. The consultation also fails to deal with a wide range of important issues that require government attention including how this regime will interact with the proposed 2027 guaranteed hours rights regime in the ERA 2025.

As a result, the new regimes suggested by the consultation and the ERA could increase rather than reduce complexity (adversely affecting the job market and economy generally). In particular, they could also cause confusion about what is and is not intended to be regulated by the new regime, leaving end users and suppliers unsure of where they stand in relation to a wide range of increasingly common but non-standard workforce arrangements. Worse still, they could leave some of the most egregious umbrella company practices unchallenged. 

Unhelpfully, the meaning of "umbrella company" given in the consultation t is different to the new ERA 2025 definition of "employment business". This is surprising given that the government's reason for expanding the definition of employment business was to ensure that umbrella companies would be brought into the regulatory scope. A third definition of "umbrella company" in the new umbrella tax legislation adds to the confusion and signals an apparent lack of joined-up thinking amongst policymakers.

Further confusion is created by a consultation which describes umbrella companies as acting "on behalf of" agencies rather than as suppliers or employers in their own right and in doing so appears to disregard established contractual arrangements and the role umbrella companies play in staffing supply chains. 

This lawyer-speak is important. If the logic of the "on behalf of" terminology is followed to its conclusion, it operates to sidestep the contractual supply chain entirely. If that terminology was to be reflected in legislation it would embed further complexity and create spin-off consequences which would, in all likelihood, end in the conclusion by various regulators and courts that the entire labour supply chain was undertaken "on behalf of" the end-client hirer and that, therefore, the end-client hirer was the ultimate employer. 

That conclusion would ignore existing case law and deny the legitimacy of the contracts between all the parties in the chain. This would significantly inhibit the supply and use of agency workers in the future, not to mention cause havoc with various types of consultancy and secondments arrangements operated by, for example, professional services companies and government departments.

Umbrella 'kickbacks', referral fees and volume discounts

The proposals about prohibition of umbrella "kickbacks" may also lead to confusion. Clearly kickbacks funded from unlawful tax avoidance schemes operated by "dodgy" umbrellas are a very bad thing. They have allowed dodgy umbrellas and the types of staffing company and end user who tolerate them to undercut umbrella companies and staffing companies and users who try to do the right thing.

However, this problem should be dealt with via chain liability measures in tax legislation (rather than employment regulation), – and it is hoped the Criminal Finances Act 2017 and the 2026 umbrella tax legislation will achieve this if visibly enforced. It may be that kickbacks funded by unlawful tax avoidance arrangements are, therefore, already on the way out.  

Some kickbacks that reduce a worker's pay below what he or she had been offered are already unlawful as a matter of employment law, anti-fraud law and anti-bribery law. However, all that is needed to support all these measures is greater obligation on all in the supply chain relating to clarity about what the worker is entitled to be paid (as the consultation touches on). To drift from this into a broad prohibition of kickbacks (which is arguably just a pejorative term for the widespread practice of negotiated volume discount arrangements funded from margin and, perhaps, automation savings) would be to outlaw completely normal commercial supply-chain practices.   

Freedom to choose umbrellas?

The proposals place in doubt the extent to which preferred supplier lists and "approved" umbrella arrangements will work in the future. This will cause a major rethink at many major recruitment agencies and end users.

And some good news

There are also some very welcome suggestions. The consultation is seeking views on how the distinction between the activities undertaken by employment businesses and agencies can be kept clearly defined in the modern world – where workers introduced by an employment agency may be paid via a tech solution such as a platform.

There is hope in the market that this will lead to changes to the current challenges posed by regulation 8 of the Conduct Regulations which prohibit an employment agency from paying, making arrangements to pay or introducing a hirer to anyone to pay, a worker they have introduced to a hirer. A large number of hirers, employment agencies and gig-worker platforms to call for the removal of the current prohibition on "employment agencies" and gig platforms making arrangements to pay workers, particularly where these arrangements are needed to make sure that tax is applied correctly to payments to introduced workers.

There is also a suggestion that the over complex (and very little used as well as  generally misunderstood) "extended hire period" obligations in the Conduct Regulations will be removed such that temp to perm introduction fees will just be a matter of straight commercial negotiation.

Generally, this new regime, with likely enforcement by a beefed-up regulator in the form of the new Fair Work Agency, will be good news for larger and more sophisticated recruitment agencies, umbrellas and other larger labour intermediaries.

Whatever regime flows from this consultation, it will likely be hard for many to comprehend, let alone comply with. This may push end users and managed service providers further towards only dealing with larger recruitment agencies and umbrella companies that seem to be on top of all their regulatory (as well as tax) obligations.

The way forward?

If the government wishes to regulate the conduct of umbrella companies, it will be important to recognise the legitimacy of the bulk of contractual arrangements throughout the typical labour supply chain and to find some consistency in the definitions used across employment law and tax law.

Although not mentioned in the consultation, any amendments to the Conduct Regulations intended to bring umbrella companies into scope will require changes to the concepts and definitions of "work-finding services" and "work-seeker" – including umbrella companies within the definition of "umbrella company" will not be enough to bring umbrella companies into scope. If this is missed or misunderstood, any attempt to govern the conduct of umbrella companies under amended regulations will fail.

Osborne Clarke comment

How does this relate to the Employment Rights Act 2025  and guaranteed hours for agency workers? All this is merely a precursor, in terms of regulatory upheaval, to what end users and recruitment agencies (and umbrella companies) face in terms of the proposed 2027 guaranteed hours rights for agency workers under the ERA.

The relevant provisions of the ERA suggest that after a relevant qualification period (yet to be determined) "regular" agency workers will be entitled to be offered guaranteed hours contracts by end users. In many cases  this will mean that agency workers will, once the guarantee cuts in, satisfy classic "personal service" and "mutuality of obligation" requirements under employment law. The result will be that agency workers who accept such guaranteed hours contracts will be employees of the end user (at least as a matter of law), with full employment rights.

This seems likely to increase, not decrease, attractiveness of umbrella-style employment models because many end users might not want the relevant workers to come on to their direct payroll or to increase their headcount – they will want to continue to outsource the employment relationship and associated risk. When that possible avalanche of new employment rights comes into the staffing supply chain, end users and recruitment agencies and umbrellas will need to have a very clear view of how they all fit into this new regulatory regime.

It seems to us that policymakers have received some information that may have distorted their view of the market and how it should be regulated effectively and have not taken into account how these proposals will work alongside other new and proposed legislation. It is important that the government gets a full and fair picture of how labour supply arrangements work and may be affected by these measures during the period for responses before the consultation closes at the start of May. 

If you wish to craft a response to the consultation and would like support in that please do get in touch with our experts.