ContractorCalculator, a well-respected news source for contractors and freelancers, has conducted a survey which has “uncovered alarming levels of non-compliance and a lack of worker protections within the umbrella industry”. We’ve summarised the survey’s findings below and have provided some helpful tips to help you pick a compliant umbrella company for your payroll.
The umbrella company survey paints a concerning “picture of an industry rife with unacceptable non-compliance and contractor exploitation”
ContractorCalculator, an established and well-respected source of contractor-related information founded by Dave Chaplin, has surveyed temporary workers about umbrella companies. The survey received over 600 responses to 40 questions.
Dave Chaplin said the following about the umbrella company survey:
“The survey results paint a picture of an industry rife with unacceptable non-compliance and contractor exploitation. The umbrella mess has festered for years under a government that does not care about the flexible workforce. 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.”
What did the umbrella company survey uncover?
The key findings, as taken from the ContractorCalculator website, are summarised below:
- 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.
- 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.
- On holiday pay, just 54% understand accrued versus rollover structures. 19% have had holiday pay problems, and 11% have been unlawfully withheld.
- 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.
- Shockingly, 24% have not been auto-enrolled into a pension, and 14% are unlawfully told they cannot even have one. Worryingly, half don’t know how to check their pension contributions are correct.
- 37% don’t understand the 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.
The following are quotes taken directly from responses to the survey relating to umbrella company payment issues:
- “…restrictive payment terms if you don’t use their PSL umbrella list – 6 weeks in arrears rather than 7 days.”
- “Main problem with brolly is getting paid on time owing to supply chain not paying brolly.”
- “I do not think it is acceptable that as a contractor I have to pay both Employee and Employee Contributions.”
- “Always requires multiple calls to the umbrella company to work out what on earth is going on.”
- “…the wider issue is that the client has opted to pass NI ERs onto the consultant”
- “I only received the Key Information the day before it was due to start. This was when I found out the day rate was in fact the umbrella rate and so all NICS would be taken out of it. I found this very sly”
- “…the process of getting paid is slower than with an agency”
- “Employers National Insurance should not be taken from a contractors gross rate.”
- “Nobody else has to pay money to someone else just to get paid.”
- “It’s a mine field. I have no idea if I’m getting the correct pay.”
- “…colleagues have been left without pay when they have failed”
- “The big problem is “pay when paid” where the entity above the brolly always fails to pay on time.”
- “…had salary ‘skimmed’ as part of the [NAME REDACTED] scandal.”
A few contractors stated that they had gotten into tax trouble as a result of using an umbrella company:
- “Currently informed by HMRC I owe many thousands of pounds in tax, incorrectly paid by my umbrella company . Which has now gone out of business”
- “Recently been approached by the pension provider to say my umbrella company has not paid pension payments for 60 days”
- “My 1st year under Umbrella, they taxed me incorrectly and I now have a £7000 bill I have to pay off”
- “The umbrella company paid my tax however this was insufficient and I ended up spending 4 months sorting out additional payments and straightening out my tax affairs with HMRC.”
ContractorCalculator shares its opinion on the survey findings
“Whilst the figures are alarming, we should be mindful that the respondents are a small selection of the flexible workforce and ones who have experienced problems.
The government was warned about unregulated umbrellas before the IR35 Reforms in April 2017 came into effect but failed to act. 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.
There is concern that legislation won’t come until 2025 or later, and a General Election could also stall matters. Some short-term fixes could help, like removing the ability to opt out of the conduct of employment regulations when umbrellas are used. It makes no sense for workers to forfeit rights they should be getting as agency workers. 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.
While complete legislative reform may not come by April 2024, enforcement activity should help curb abuse in the short term. Once reforms are enacted, the umbrella market will likely shrink as dodgy operators leave, leaving the quality providers to thrive. More contractors may end up on the agency payroll.
It appears inevitable, to prevent the longstanding issues, that agencies will have debt transfer obligations to resolve payroll fraud. The result may be that some agencies run their payroll or use properly audited umbrellas where every penny is scrutinised independently.”
Dave Chaplin concludes by adding:
“Umbrellas operating compliantly, simply processing pay and retaining their published margin, should not have any concerns. There might be extra reporting requirements to satisfy independent due diligence, but the systems can easily be adapted.”
How can you be confident the umbrella company you use is compliant?
The umbrella company marketplace is saturated and there are hundreds of providers to pick from. With so much choice, it’s important that you understand how a compliant umbrella company operates. Here are some important factors to consider.
The umbrella company sector remains unregulated by the government. However, more and more stakeholders are calling for this to change, and a recent consultation suggests that regulations may be on the horizon. There is a well-respected self-regulatory body called the Freelancer and Contractor Services Association (FCSA). For an umbrella company to earn accreditation from the FCSA, it must undergo a series of strict audits and assessments to ensure all internal processes adhere to the highest compliance standards. Therefore, if you’re looking for a compliant umbrella company, it’s a good idea to search for one with professional accreditation from the FCSA.
SafeRec is another certification that compliance-driven umbrella companies are keen to earn. Powered by Artificial Intelligence (AI), SafeRec Certified Umbrella Companies provide every employee with a payslip audit, and this happens every time a worker is paid. Therefore, umbrella companies have nowhere to hide, and compliance is put in the hands of the contractor. SafeRec is revolutionary, and if you are interested in receiving a detailed audit every time you are paid, pick a SafeRec Certified Umbrella Company for your payroll.
Pay As You Earn (PAYE)
Compliant umbrella companies process payroll with HMRC’s tax system – Pay As You Earn (PAYE). This is the same method used to pay workers in full-time employment. It’s essential you pick an umbrella company that processes payroll with PAYE. It’s common for non-compliant umbrella companies (tax avoidance schemes) to advertise alternative, unethical methods of processing payroll. Avoid these companies at all costs!
Take-home pay calculations
Before registering with an umbrella company, request a tailored take-home pay calculation. This document will provide you with a breakdown of your expected pay and highlight all the deductions made to your pay before your net salary is stated.
Every compliant umbrella company will process payroll in the same way – with PAYE. Therefore, if you approached two umbrella companies with a £20 weekly margin, your take-home pay should be precisely the same with both umbrella companies – to the penny. Therefore, the only factor that will impact your pay retention between compliant umbrellas is the margin.
The best umbrella companies will have the best reviews. Look at Google and other popular review platforms such as Trustpilot and see what other contractors and freelancers say about umbrella payroll providers.
Long trading history
Not all, but most umbrella companies in the UK will have an established trading history. A few years ago, mini umbrella company fraud came to light, and it involved multiple umbrella companies popping up overnight (and, therefore, not having an established trading history). It’s a good idea to pick an umbrella that’s established in its field, and you can learn more about individual businesses on Companies House.
Picking an umbrella with good customer service is essential. Before registering with an umbrella, call them and discuss the registration process and your take-home pay projection. If the umbrella representative is helpful and informative, it’s a good sign. However, if you get negative vibes – shop around. Also, as mentioned above, check the reviews of any umbrella you are interested in joining.
Referrals from friends and colleagues
Speak with your friends and colleagues who use an umbrella company and ask for advice. Word of mouth is an exceptionally valuable tool and it may save you plenty of time!
Understand how umbrella companies work
You must understand how compliant umbrella companies operate before you join one. We’ve written a guide here that’s worth reading. There is also a lot of government guidance that you will find beneficial, including:
- Working through an umbrella company.
- Check if you are at risk of tax avoidance.
- Check your payslip if you work through an umbrella company.
- Check how to reduce your risk of using an umbrella company who operates a tax avoidance scheme.
For more information about non-compliant umbrella companies, please check out our recent article: Everything you need to know about non-compliant umbrella companies.
Top 10 umbrella companies
To help you with your search for your next umbrella company, we have collated a list of our top 10 umbrella companies. All our top 10 are accredited by the FCSA or Professional Passport, and some have special offers at the moment that you will not want to miss!