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New stats: Umbrella contractors are getting swindled on pay, rights and pensions and the government has known it for years

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After reading this article, umbrella company contractors should have a clearer idea of what is required of any umbrella company, their recruitment agency and whether they may have been swindled

A survey that included 520 freelancers and contractors has uncovered alarming levels of non-compliance and lack of worker protections within the umbrella industry, the common mechanism through which contractors and temp workers are paid. The findings paint a bleak picture of “systemic abuse, neglect and confusion” around umbrella working, says the report’s publisher.

Call to action

After reading this article, you should have a clearer idea of what is required of any umbrella company and whether you have been swindled out of what you deserve and are owed. If you do find yourself in such a position and do not get far with your hiring company or umbrella when highlighting to them the facts, write to The Freelance Informer and we can highlight your case in our publication and guide you to an expert: write to editor@freelanceinformer.com

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Widespread confusion

The survey found that most contractors are “forced into umbrellas against their will,” with restricted choices and promotions of “dubious schemes”. Most umbrella workers and contractors, the survey found, are unaware of basic legal rights and compliance requirements regarding pay, pensions, and regulations. There is also widespread confusion and lack of transparency around pay rates, payslips, holiday pay accruals, and deductions, with less than half able to determine if they are being paid correctly.

Why are umbrella workers less informed than salaried employees you might ask. Well, that comes down to a lack of professionalism and compliance by some recruitment agencies and umbrella companies.

“The government was warned about unregulated umbrellas before IR35 came into effect but failed to act,” says Dave Chaplin, an IR35 specialist and CEO of ContractorCaluclator, the company that carried out the research. “They’ve sat on data that could have prevented abuse yet done nothing. And they haven’t educated workers enough to protect themselves. The statistics speak for themselves,” he says.

Shockingly, 24% of those surveyed who work through an umbrella company have not been auto-enrolled into a pension, and 14% are unlawfully told they cannot even have one.

“Worryingly,” says Chaplin, “half don’t know how to check their pension contributions are correct.”

One way is to log onto the government’s system to find out if you have been paid correctly. For guidance, you can find out more here.

The key findings: is your umbrella company being non-compliant?

Some 80% of contractors are told “umbrella only” when hired “Inside IR35”, demonstrating that the IR35 Reforms are directly responsible for the considerable rise in umbrella use.

Of those pushed towards an umbrella, 63% are given a restricted list, 27% are allowed to select their umbrella, and 10% are only given one choice.

It makes no sense for contractors to forfeit rights.

Mandating agencies to offer payroll options, not just the umbrella way of working, would also help give contractors a choice and bolster competition and quality of service.

Dave Chaplin, CEO, ContractorCalculator
  • 85% are told they must use an umbrella because the role is “Inside IR35”, but only 17% are given a Status Determination Statement as legally required under the Off-payroll legislation. If you haven’t been given one ask for one. If there is hesitancy, then ask the hiring company how they came to the conclusion that this was an inside or outside IR35 role. If they, too are none the wiser, then it may be time to move on or request an SDS for your own records and peace of mind.
  • On holiday pay, just 54% understand accrued versus rollover structures. 19% have had holiday pay problems, and 11% have been unlawfully withheld. Holiday pay should be paid for the time when annual leave is taken. An employer cannot include an amount for holiday pay in the hourly rate (known as ‘rolled-up holiday pay’). If they are doing this, then this needs to be renegotiated as per government rules. Any issues, call HMRC. Here is a guide for workers who are not on fixed hours or pay. If a current contract still includes rolled-up pay, it needs to be re-negotiated.
  • Half the respondents are confused over pay, with only 49% understanding the difference between an assignment and PAYE rate. Just 40% say they can determine if their payslip is accurate. Only 45% receive the legally required Key Information Document.
  • 37% don’t understand Conduct Regulations, provisions in place to protect agency workers. 87% say agencies and umbrellas have never explained these to them. 49% don’t know if they have opted out of them, while 14% have been (unlawfully) told they can only get the work if they opt out.

Contractor exploitation

“Our survey paints a picture of an industry rife with non-compliance and contractor exploitation,” says Chaplin. “This is unacceptable, and urgent reform is needed. The onus is now on regulators and the government to crack down on umbrella malpractice.”

Crawford Temple, CEO of Professional Passport, an independent assessor of payment intermediaries, says because the umbrella industry is not regulated no rules apply making working through umbrellas unnecessarily complicated: “The survey was responded to by seasoned contractors and if they are struggling to get to grips with umbrella working then what chance do new contractors stand in navigating what has become a minefield in recent years.” 

He continues, “These findings are concerning but they are not surprising, and it is now critical that policymakers listen to stakeholders and experts to find a way forward for everyone in the supply chain so that umbrella workers know they can rely on those umbrellas they are working with.  Again, we would urge HMRC to take us up on our suggestion to form a working group so that together we can help move the industry forward for the better”

Short-term fixes are better than nothing

Chaplin has doubts whether legislation will come before 2025 and could come even later. “A General Election could also stall matters,” he says.

He says some short-term fixes could help, like removing the ability to opt out of the conduct of employment regulations with umbrellas.

“It makes no sense for contractors to forfeit rights,” says Chaplin. “Mandating agencies to offer payroll options, not just the umbrella way of working, would also help give contractors a choice and bolster competition and quality of service,” he suggests.

Chaplin predicts that once reforms are enacted, the umbrella market will likely shrink as dodgy operators leave, leaving the quality providers to thrive. This could mean more contractors may end up on the agency payroll. The result may be that some agencies run their own payroll or use properly audited umbrellas where every penny is scrutinised independently.

“In short, the umbrella mess has festered for years under a government that does not care about the flexible workforce,” says Chaplin.

He says now is the time for reform and accountability. “Workers deserve better than more broken promises and inaction from the government. The umbrella industry needs intervention and regulation urgently, else a race to the bottom will ensue,” says Chaplin.

Is recruitment payroll the solution?

“All agencies should provide payroll services so there is no need for an umbrella company,” says Nick Woodward, an IT contractor turned entrepreneur who has launched several SaaS recruitment back office solutions. The Founder and CEO of ETZ, says “Payroll software is so cheap these days that recruitment firms can run the payroll management offshore to keep their overheads down.”

Woodward says his company uses payroll software from Shape. The business runs the software with the help of its offshore accounting team in Pakistan. “It’s the most cost-effective solution on the planet,” he says.

“There is really is no excuse,” he adds. “Everything is on the cloud these days. By running your own payroll you can offer contractors the flexibility to invoice through their own company or through PAYE. There is no way that an Umbrella company can compete on cost compared to running your own payroll,” says Woodward.

The IT specialist says the lack of motivation to run payroll for some recruitment agencies has been “kickbacks” or rather the loss of them should they run their own payroll. For years, Woodward says some recruitment agencies have been funnelling candidates through unscrupulous umbrella companies so that they can get a cut of the umbrella company fees charged to the candidates for handling their payments.

“It’s a ridiculous situation,” he says, “where the agency can’t charge employees the cost to payroll them, which is negligible anyway. So high-value contractors are forced to work through Umbrella companies which then charge them between £25 and £150 pounds per month to payroll them. That leaves Umbrella companies with huge profits which are spent on ‘marketing’ fees in order to be on the PSL of the agency.”

“It’s criminal and illegal,” he says, “but it has been going on for more than 20 years or as long as I have been contracting,” he tells The Freelance Informer

We encourage readers to leave their constructive comments and share this article

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  1. Robert Sharp says

    I think this article is very lopsided. I agree with the comments of Dave Chaplin and also Crawford Temple, and they are correct that HMRC have had this data for many, many years. The problem however is that HMRC employees do not have the expertise to understand or action the data that they are sitting on. That is why they are constantly asking those of us who run compliant umbrella companies for assistance in stakeholder meetings. They haven’t got a clue what to look for, how most of it works and the mechanics employed by umbrella companies who are exploiting contractors.

    We also need to stop commentating this is just an umbrella problem, the very same abuses that contractors are facing using some umbrella companies is just the same on PAYE Bureau payroll as well, I know this because I have audited many, many PAYE Payroll Bureau companies and have found skimming abuses, pension abuses, holiday pay abuses as well as NMW abuses, So to think that by simply moving everyone from umbrella to PAYE payroll will change anything is just categorically wrong, This is a fundamental issue with PAYROLL and it is the whole payroll industry that needs to be regulated and there needs be laws that are specifically made law for the temporary labour market.

    The final comments from Nick Woodward are also just factually incorrect, The margins charged by umbrella companies do not result in huge profits at all. Actually when you run a compliant umbrella company the margins are actually very small when all overheads are paid. The huge sums of monies or profits have arisen from the scams, exploitation or manipulation rouge umbrellas have employed which means they are retaining far higher levels of revenue then they should be, which is in turn funnelled to agencies in return for PSL positions and this is the primary problem that needs addressing.

    If Government can shut these avenues of exploitation down then it will automatically start addressing the balance of the playing field. Last but not least there is now technology that guarantees umbrella companies are payrolling their workers, compliantly, ethically and morally, 100% of the time, best of all this is always in real-time, so protection for workers is already live and being used as we speak.

    1. Nick Woodward says

      Robert, you have missed my point. If recruitment agencies offered PAYE payroll services, which all of the temp agencies do by the way, then there would not be Umbrella companies. The cost to process payroll in house is negligible, about $1 per weekly payslip or $5 per month per employee. The cost is the same for an Umbrella company, yet they charge up to $120 per month, that’s a huge margin! I would be happy to go through the costs with you if you like, just DM me.

  2. Raj says

    Nice long winded rebuttal from an HMRC man in a grey suit and comfy shoes… nobody believes you by the way! My umbrella company has broken some of the rules mentioned in the original article! So you know where you can go! Or maybe you’re one of the few ethical umbrella company reps that is in denial that there are a load of cowboys out there?

    1. Tony says

      Simple solution to all of this

      Get rid of IR35 like Liz Truss was going to do

      No need for umbrellas or PAYE bureaus or all of these dodgy kickbacks and scams

  3. James Egan says

    the biggest scam for me was not being told, or having the issue hidden of me.having to pay the employer national insurance contribution as well as my own national insurance contribution, alongside agency fees this was denting my pocket to the tune of thousands a month.

  4. JackR says

    I do not understand the point of holiday pay. As a contractor, I have no annual leave, I do not get paid for holidays. As a result of this, there is no technical limit to the amount of holidays that I can take as the contract does not specify a limit. Yet, my umbrella company still does this silly accounting trick with holiday pay and they have not been able to explain to me why that is, now they say I have to advise them when I take annual leave for compliance reasons. As far as I understand it, I am under no obligation to tell them when I am on holiday vs sick or if I am working for another client. I do my timesheets weekly and for days I am not working I don’t specify I am working simple as that.

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