Sheltering from the rain: the use of 'umbrella' employees and agency workers
Published on 7th Jul 2021
What are the rights of contingent workforces, the obligations of their engagers and the best way to mitigate supply chain risk?
The growth of the contingent workforce comes amid increasing complexity surrounding employment status, which makes it essential to understand the legal status and the rights of these workers. "Contingent workforces" take many forms and are not limited to those supplied by staffing agencies or direct contractors and consultants. For example, many talent and people-service platforms engage and supply the services of gig workers, with some engaged on an employed or PAYE basis and others on a freelance or self-employed basis.
As with many technology-led market disrupters, compliance challenges and obligations issues are sometimes overlooked or regarded as "inconvenient barriers to business", particularly by start-ups and software-led offerings. However, most people-service platforms have some elements of workplace tax, recruitment regulation and payment-services regulation that need to be complied with. For example, any platform that introduces talent is likely to be regulated under the Employment Agencies Act – a fact that's not always understood or accepted.
There are many different types of platform models operating in recruitment and talent matching and each will have different legal compliance issues. Consultancy businesses are also less likely to identify themselves as suppliers of people even though, in practice, many supply consultants on a time-spent basis (which is why a large number of consultancies need advice on their IR35 strategies). Staff augmentation is staffing under a different name. The legal issues are the same regardless of whether these businesses badge themselves as consultancies or otherwise.
And this is why consultancies and platforms are increasingly engaging with "umbrella" companies as payroll partners who can ensure that gig workers and consultants are paid compliantly. It's important for end users, platforms, consultancies and staffing companies to understand what a compliant umbrella looks like – and the difference between compliant and non-complaint offerings in the market.
This all raises broad questions about the current law on employment, the legal status and rights of these workers, the roles of umbrella and professional employer organisation (PEO) companies, "employer costs" and where legal responsibilities sit, and how businesses can de-risk staffing supply chains and maximise the benefits of contingent working.
These were some of the questions raised in a recent webinar co-hosted by Osborne Clarke's Workforce Solutions group and giant, the workforce management specialist. David Hopkins, a workforce management consultant with giant, chaired the discussion, which included Dan Haslam, giant's group sales director, who is also a member of the board at the FCSA – the UK’s membership body for umbrella companies, limited company accountants and CIS payroll providers.
What is the broad legal status of agency and umbrella workers?
Terminology in the recruitment sector can be confusing. Broadly speaking, staffing agencies that engage and pay individuals and umbrella companies that engage, employ and pay individuals are "employment businesses" as defined under the Employment Agencies Act 1973.
Under the legislation, an "employment business" is one that "employs" individuals for supply and work for and under the control of third parties. This is often referred to as a temp model. An "employment agency", on the other hand, is a business that finds work for individuals and supplies individuals for employment by an end user – usually referred to as the "client".
Staffing agencies operate as employment businesses where they engage and pay individuals – this is often referred to as a PAYE temp payroll. These PAYE temps have the status of agency workers (under the Agency Workers Regulations and the agency worker tax rules). They are also workers for the purposes of the: Equality Act, Working Time Regulations, Pensions Act (jobholders), Apprenticeship Levy, National Minimum Wage (NWC), and Agency Workers Regulations (AWR).
Both staffing agencies and umbrella companies pay employer's National Insurance contributions (ER's NICs) on payments to their agency workers or employees. The funding of this ER's NICs is often a source of confusion for contractors, especially where contractors have moved from a personal service company (PSC) to umbrella company.
Umbrella companies typically employ or engage individuals. Umbrella workers have the same rights as agency workers. If they are employed by the umbrella company under an employment contract then they have full employment rights (as against the umbrella employer) as well.
In terms of legal rights, there is little difference between "workers" and "employees" – although differences include rights around unfair dismissal, statutory redundancy and statutory minimum notice. The main difference, in terms of recruitment regulation (under the Conduct Regulations), between staffing companies and umbrella companies, is that staffing companies offer and supply work-finding services and umbrella companies (usually) don't.
For the purposes of the Conduct Regulations, an umbrella company is often regarded as a limited company work-seeker along with the contractor. This is why umbrella company contractor can, arguably, opt out of the Conduct Regulations, although that remains to be tested in a court.
Workers engaged by agencies and umbrella company workers will (or should) have "worker" or "employment" status for employment law purposes, employment business status for Employment Agency Act purposes, and agency worker status for AWR purposes.
This means that agency and umbrella workers have a statutory right to: the NMW; paid annual leave, pensions automatic enrolment; (after 12 weeks) comparable pay and basic terms to perm equivalent; Statutory Maternity Pay and Statutory Sick Pay; and, in certain circumstances, and TUPE.
They will also be paid subject to PAYE and NICs. Anything that deviates from this or claims to reduce tax liability/maximise take home pay should be viewed with caution. The basic position is that agency and umbrella works should be paid and taxed at comparable rates as end user equivalents.
Any schemes offering to reduce tax or NIC liability or to split or otherwise complicate the way in which the worker is paid may be tax avoidance schemes and should be avoided.
What are umbrella companies and PEOs, and what are their roles in managing a contingent workforce?
There is currently no UK legal definition of an umbrella company, despite recent calls to regulate the industry. One of the challenges is that the term umbrella company covers a range of different business models – some of which are compliant and others which are not . For example, the term umbrella company is used to cover all of the following offerings even though they operate very different business models:
- PAYE umbrella
- PEO – this term covers a type of UK payment model but is also used by US companies to describe an employer-of-record service across a number of different countries – they are different offerings although they're both involved in the engagement and payment of workers who work for end users (not the company that engages them)
- CIS umbrella – this is a misnomer because it is a company which purports to act as a Construction Industry Scheme (CIS) subcontractor and then pays construction contractors as sole traders under the CIS. This is not the same as a PAYE umbrella. A lot of end users are not aware that these are not full PAYE umbrellas – this has come to light in IR35 reviews in recent months. The use of the term "umbrella" in this context is misleading because it suggests that payments to contractors are subject to full PAYE and NICs and that ER's NICs are paid. The tax risk is that the agency worker tax rules will apply unless the sole traders are not subject to supervision, direction and control (SDC) – this could lead to a large tax assessment, which could make the umbrella or the top agency insolvent. This is a commercial risk for end users.
- Small umbrella companies – these have been in the news recently. They rely on using the NICs employment allowance and the VAT flat rate scheme, usually with offshore directors. HMRC has said that they are tax avoidance schemes.
- Umbrella with payment of tax free travel and subsistence expenses – these are unlawful in all but a small number of cases. Any umbrella contract that includes a clause stating that the employee is not supervised, directed or controlled (SDC) as to how they work (or words to that effect) should be challenged if this is not the case. Inclusion of such clauses is often a way for umbrellas to justify paying travel and subsistence expenses on a tax-free basis. Where workers are subject to SDC then payment of expenses will be unlawful and potentially fraudulent.
- Sole trader pay and bill arrangements – the tax risk is that the agency worker tax rules will apply unless the sole traders are not subject to SDC. This could lead to a large tax assessment, which could make the umbrella or the top agency insolvent. This is a commercial risk for end users.
- UK shop window for offshore employment/payroll schemes – an onshore staffing agency or its client could be liable for underpayment of tax and NICs.
It's not straightforward to define an umbrella company. But, given the growth in the use of gig workers and the opening up of geographical access to talent in new jurisdictions, there is a need for organisations to have a way of compliantly engaging and paying contingent workers.
This presents a huge opportunity for compliant umbrella companies and their role is set to expand, even if regulation is eventually introduced. Compliant and well-run umbrellas will have nothing to fear from this – in fact, they will welcome this development, especially if it stops tax avoidance schemes from operating and makes end users wary about using such schemes.