An umbrella company is essentially a payroll company that is used by recruitment agencies to operate a PAYE (pay-as-you-earn) system for the agency workers that they find work for.
Umbrella companies do not carry out a traditional, outsourced payroll function. A recruitment agency doesn’t pay an umbrella company for its payroll services. In many cases, the umbrella company will pay a fee, per worker, to the recruitment agency to carry out the payroll services.
This raises a vital question. If an umbrella company is not paid by the recruitment agency for the payroll services it provides, then who does pay for this service? The worker pays for it.
Unions have reported that, among the umbrella workers, the following problems frequently arise:
– misleading and unfair deductions from pay;
– breaches of holiday leave and pay entitlement;
– large proportions of agency workers do not receive the Key Information Document;
– the use of umbrella companies fragments the employment relationship;
– workers can become unwittingly embroiled in tax evasion schemes, operated by the umbrella company;
– there is no proper regulation of the sector.
Potential benefits for workers are largely theoretical. They don’t experience any of the “employee” entitlements such as maternity leave and pay, redundancy pay, unfair dismissal protections and pay between assignments.