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Help! I think my umbrella company is going bust

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Welcome to The Freelance Informer’s Tax Clinic where freelancers write in to get their tax questions and dilemmas addressed. This week a reader writes in about what to do if they have unpaid wages and they think their umbrella company may be going bust.

Q: I have a strong feeling my umbrella company is going to shut down/go into administration. I am owed salary and holiday pay. They aren’t responding to my emails. As I am an ‘employee’ of the umbrella company isn’t the company legally obligated to make all outstanding employee salary and holiday payments before paying suppliers, company loans, etc.? Is there anything I can do to expedite payment for what I am owed? And what do I need to show as proof of what I am owed and to whom? Should I get the end-client involved?

A: There are many different ways a company can cease trading, but assuming your umbrella is insolvent and can no longer pay its debts, it is most likely that the umbrella will be the subject of a winding-up order and enter compulsory liquidation.

In this situation, a liquidator will be appointed whose role is to realise the company’s assets, pay all the fees and charges arising from the liquidation, and pay the creditors as far as funds allow in strict order of priority.

Under insolvency rules, employees are identified as ordinary preferential creditors, who will only be considered for payment after secured creditors with a fixed charge over assets and the expenses of the liquidation have been settled.

  • Who are “secured” creditors and why do they have more rights than employees?

Secured creditors are often banks and other asset-based lenders who hold title over a business asset. A fixed charge means the umbrella loses the right to sell or trade the business asset, so in liquidation, the holder of the fixed charge (or liquidator) will sell the asset to realise funds for the benefit of the secured creditor.

  • What if an umbrella company’s assets are in offshore bank accounts, will that have any bearing on employees getting what they are owed?

Where the assets are located has no bearing on the outcome. Clearly, assets held offshore are a concern and no reputable umbrella should be operating an offshore bank account, unless it has legitimate business operations offshore.

  • If the insolvency is due to a matter of negligence on the part of the umbrella (e.g., cyber/ransomware attack) can the umbrella company be sued by the contractors and expect even more than just their wage, but compensation? Or in such a case, couldn’t cybersecurity insurance make the umbrella pay out for wages?

If the umbrella company has become insolvent, with insufficient assets to meet its liabilities, there would be little point in pursuing a claim against them, although there are provisions for matters such as unfair dismissal. I am not aware of any Cyber Insurance that would provide a direct payment to employees with unpaid wages. A cyber insurance policy would be held for the benefit of the umbrella, so any insurance settlement would be paid to the umbrella / liquidator.

  • Is there ever a case where the end-client could pay the contractors direct to ensure swift payment rather than pay the umbrella if the umbrella company will just soak up the capital and pay other creditors first?

The liquidator has been appointed to realise as much of the assets of the business as possible, including the outstanding trade debtors on its balance sheet. If the end-client paid the contractor directly, they would still be required to settle their debt with the umbrella. Unless this is an act of kindness, the end-client is unlikely to pay twice.

As preferential creditors, what can employees claim for?

  • any arrears of wages (including any commission, overtime or contractual bonuses) for work done in the four months before the date of the insolvency order, up to a maximum of £800 in total;
  • accrued holiday pay of up to 6 weeks; and
  • pay in lieu of notice and redundancy pay.

Any amounts owed in excess of the limits above will then be considered under the rank of “ordinary unsecured creditor”, which in practice means those owed will be fortunate to receive anything, but a few pence of every pound owed to them.

In situations where there are insufficient funds to pay the amounts you are contractually owed; you should contact the Redundancy Payments Service (part of a government agency called the Insolvency Service).  Assuming you are eligible, you can make a claim for unpaid wages, accrued holiday, notice and redundancy pay up to certain limits.

In general terms employees can claim a maximum of eight weeks unpaid wages (capped at £544 per week), as well as unpaid pensions contributions, bonuses (providing there are contractual), sick pay, maternity pay, and a maximum of six weeks holiday pay.

  • What happens if this per week amount is far below what a contractor makes? And is there some form of compensation or agreement so a contractor’s credit profile is not negatively affected if they cannot pay things such as a mortgage or credit card because their employer is in insolvency?

Unfortunately, there is no additional form of compensation available. The Redundancy Payments Service will only provide financial assistance up to the prescribed limits.

In terms of practical steps, we agree you should immediately ask your end-client to get involved. If your umbrella is insolvent, or likely to be, your end-client should be able to terminate their contract with the umbrella immediately, clearing the way for you to move to a new umbrella. 

Whilst this will protect future income, your end-client will still be required to settle all undisputed amounts owed to your umbrella, regardless of your move to a new umbrella.

Securing evidence is also important. If your umbrella provides you with access to an employee portal, you should download all documentation available without delay, as your access could be terminated at any point.

Have a tax-related question or situation that needs addressing? Email your questions to editor@freelanceinformer.com

A big thank you to WTT Consulting for responding to this Tax Clinic reader question.

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