ESM2390 - Agency and temporary workers: umbrella companies

There is no statutory definition of an ‘umbrella company’, although it is generally accepted that an umbrella company is a company that employs temporary workers who work at different end clients’ premises.

Umbrella companies do not source work. Typically the umbrella will enter into a contract with a recruitment agency who will source work from end clients.

The contractual chain

The worker is an employee of the umbrella company and there should be a contract of employment in place which defines the working terms and conditions.

A contractual agreement should be in place between the umbrella company and the recruitment agency for the provision of the worker’s services, and there should be a contractual agreement in place between the recruitment agency and the end client relating to the supply of the worker to the end client.

Payment

The end client will pay the recruitment company the agreed rate for carrying out the work. The contract between the recruitment company and the umbrella will have defined the terms of payment that apply for the work.

The umbrella company has the legal relationship with the recruitment company and the legal rights to the payment due for the work carried out for the end client.

On receipt of payment from the recruitment agency, the umbrella company has its overheads to cover so will typically retain:

  • its administration fee
  • an amount to meet their employer’s National Insurance contributions (NICs) obligation
  • holiday payment
  • allowable expenses
  • other amounts to cover other specific costs, such as apprenticeship levy

The remainder of the payment is paid to the worker as gross pay which is then subject to PAYE to deduct Income Tax and employee’s NICs.

Payslip

Umbrella companies provide the worker with an itemised payslip. All employees are entitled to an individual written payslip. The payslip provided by the umbrella company will usually provide a breakdown of the payment received by the umbrella from the agency which itemises the umbrella company overheads, including employer’s NICs. The payslip will also include a separate breakdown itemising the worker’s gross pay and deductions to arrive at the net pay.

The inclusion of employer’s NICs on the payslip often causes confusion with workers who believe they are paying the employer’s deductions. This is not the case as employer’s NICs is deducted from the payment the umbrella company receives from the recruitment agency which they have the legal right to.

Employers, which includes umbrella companies, cannot by law deduct employer’s NICS from a worker’s gross pay.

Where a worker has a dispute regarding an itemised payslip, every effort should be made to resolve it with the employer (umbrella company). If unable to resolve with the employer, then advice can be obtained from the Advisory, Conciliation and Arbitration Service (ACAS) via their helpline number 0300 123 1100 or the ACAS Helpline Online tool.