In the build-up to the introduction of new rules surrounding IR35 in the private sector, several articles appeared seeking to discredit the integrity and reputability of our industry and those who regulate it. Scrutiny is important and wholly necessary. However, the somewhat inflammatory and untidy rhetoric used in a handful of articles could, potentially, be extremely damaging to the reputation of entirely compliant umbrella companies. It also sets a dangerous precedent, casting doubt over a sector on which hundreds of thousands of people across the UK rely for their employment.
We should make clear from the outset that no wrongdoing or impropriety has been alleged against Danbro or Trafalgar. We’re extremely proud of our record. And, it goes without saying that honesty and compliance are the epitome of the service we endeavour to provide to our contractors. Nonetheless, in the interest of accuracy, and balance, we’ve pulled together a guide on the specifics of umbrella company employment as per the government’s internal manual on umbrella companies: ESM2390. We hope this will provide clarity, help correct certain inaccuracies, and allay any fears that contractors may have as a result of something they’ve seen or read. You can also find more information about working through an umbrella company, here.
What is ESM2390?ESM2390 is a subsection of HMRC’s Employment Status Manual, focusing specifically on umbrella companies. ESM2390 describes how legitimate umbrella companies operate, and how agencies and temporary workers engage with them.
It’s an important document. So, to help you understand it, we’ve taken a look at each section of ESM2390 in detail, providing examples of how it works in practice with additional comments from Helen Broughton MBE DL, Managing Director of the Danbro Group.
ESM2390: ‘The Contractual Chain’As you know, umbrella companies employ contractors to enable them to undertake assignments for end clients. So, once you’ve registered with an umbrella company – and the necessary agreements/contracts have been made/signed – you’ll become an employee of that umbrella company.
This affords you statutory employment rights and continuity of employment while allowing you to continue operating from contract to contract. In short, you get the benefits of employment while retaining the freedom and control of delivering your services to multiple clients and businesses. Here’s the ESM2390’s guidance on 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’When working through an umbrella company, you’ll complete weekly/monthly timesheets which detail your hours of work for that period, as well as any allowable expenses – subject to status.
Once each timesheet’s completed and submitted, the umbrella company will invoice your agency/client. The umbrella company then receives assignment income paid by the agency/client for the work undertaken. This is referred to as the ‘contracted rate’.
As with any employer, the umbrella company must cover employment costs. These costs are determined by the government and comprise:
- Employer’s National Insurance
- Employer’s pension contributions
Umbrella company employees are entitled to the statutory amount of annual leave. That’s at least 28 days in a 52-week calendar year, which equates to 5.6 working weeks. That leaves a total remaining working year of approximately 46.4 weeks. The calculation for an umbrella company employees’ holiday entitlement is as follows:
- The statutory entitlement figure (5.6) gets divided by the total working year (46.4), leaving a holiday entitlement of 12.07%. That means that for every hour you work, you’ll accrue an extra seven minutes’ worth of holiday entitlement.
- Income Tax
- Employee’s National Insurance contributions
- Employee’s pension contributions
Here’s how HMRC describe this process:
‘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 (margin)
- 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 the Apprenticeship Levy
‘Payslip’Umbrella company employees receive their wages in the same way as permanent employees – via bank transfer and with taxes already deducted. Furthermore, each time a contractor gets paid, they (should!) receive a payslip and reconciliation sheet which details their wages for that week/month.
What’s more, umbrella companies shoulder the legislative – not to mention administrative – burden of payroll. Not you, the contractor. Here’s what HMRC say about the payslip process in ESM2390:
‘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 are 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.’
‘Giving Contractors Freedom of Choice’Helen Broughton MBE DL: At Danbro, our contractors are, and have always been, at the very heart of the decisions we make. Clarity and consistency of message are two of the qualities that we find our contractors both expect and respect. That’s why we send payslips every single time one of our umbrella contractors is paid. Each payslip includes a comprehensive breakdown of the deductions made, along with an explanation of what each deduction is for. We do this to enable our contractors to reconcile the amount they’ve been paid to the contract rate for their work.
Before joining our umbrella company, all employees at Danbro Employment Umbrella Ltd agree to the terms and conditions of our employment contract. The terms of the assignment schedule, which forms part of their contract of employment, are made clear to each contractor in advance.
And, with regards to the issue of holiday pay, they have the freedom of choice: whether to keep their own holiday pay or have us keep it for them until they take a holiday.
So, if a contractor would like us to keep back their holiday pay so they can rely on a continuous income, we’re happy to comply with their wishes. If, however, a contractor does not want this to happen – and instead wants their holiday pay advanced to them each time they get paid – we accept their decision, and are prepared to write this into their contract at their request. In this instance, we would clearly state the amount accrued / paid in holiday pay on each payslip.
The option of ‘rolling up’ holiday pay is not one favoured by employment experts and some would argue it should not happen at all. However, we believe that individuals should have the freedom to make their own choices based on their personal circumstances.”
‘Protecting Workers’ Rights’HB: “The real issue at hand, in my opinion at least, is ensuring that umbrella companies encourage their contractors to take the required amount of holidays each year. Unfortunately, it seems many lower-paid workers feel as though they cannot take holidays because of a gap in their pay.
At Danbro, and with the many other compliant umbrella companies in this country, we seek to protect the rights of lower-paid contractors. That’s why we refuse to work with agencies whose rates do not leave contractors with at least the National Living Wage.”
‘Contractors are being misled’Adrian Marlowe is the Chair of the Association of Recruitment Consultancies and the Managing Director of employment law specialists, Lawspeed. Writing on their website, here’s his take on the adverse impact of media misinformation surrounding umbrella company payments:
“There is a risk that contractors are being misled into believing that umbrella companies and agencies are making unlawful deductions. All employers are obliged to operate the PAYE and the NIC schemes and umbrella companies are no different. As with any employer, all their overheads including employer NICs are taken into account in calculating and arriving at the employee’s gross salary.”
“The confusion arises where the employee believes that he/she is entitled to the same rate that the agency pays the umbrella company, yet the employee usually has no contract with the agency or umbrella entitling them to that rate. [‘Experts’ such as] Umbrella Reclaim, which is run by a firm of Solicitors, should know this. They should qualify their advice so that contractors are not misled into paying the charge it levies to be registered as a potential claimant.”
“Umbrella Reclaim also makes claims on its website that are simply wrong, alleging unlawful activity by both agencies that have PSLs and by umbrella companies. These not only could mislead, but also worry anyone working with agencies and umbrella companies without justification. It is perfectly acceptable for agencies to operate preferred umbrella supplier lists, not least to ensure compliance.”
‘Rogue Operators Do Not Represent Whole Industry’AM: “Rebecca Seeley Harris is also incorrect for the same reason when she says ‘what you probably don’t know is that the umbrella will also deduct the employers’ NICs from your wages and that is an additional 13.8 percent.’”
“The obligation under the IR35 rules to pay employer NICs is a natural rational for agencies to arrange alternative payroll through umbrellas where agreed with the contractor, since hirers are often reluctant to meet the 13.8% add-on cost. Agencies cannot absorb this charge within their margins any more than employer NICs can be avoided altogether, except where a contractor receives payment other than by way of employment income. So a switch from operating through a workers own company where invoices are paid gross to pay through the PAYE system is comparing apples with pears.”
“It is worth adding that those agencies that do run their own payroll will again absorb employer NICs within their own fees. In agreeing rates where the hire is direct, hirers also factor in all the costs including employer NICs. This does not mean they deduct them from wages. So whoever pays the individual, whether hirer, agency or umbrella, all the employer and employee NICs and any apprenticeship and holiday pay costs will always be taken into account in arriving at gross salary. That is how the tax legislation and the cost of hire works for any business.”
“Articles supported by ‘experts’ can appear to validate a position. Care should be taken to get the facts right and not unfairly undermine reputable businesses or exploit the fears of worried individuals. In any industry there will always be some rogue operators and in those cases some action may be justified. However they are usually not representative of the industry as whole.”
If you have any questions about any of the matters discussed above, please get in touch with our specialist team today. Or, if you’d like to find out more about umbrella companies in general, click here.
Sam Wright is Danbro’s Marketing Manager. He produces regular content and feature articles on our digital and non-digital channels – and social platforms – for the Danbro Group and its subsidiaries, as well as having responsibility for the Company’s internal and external communications.
His background is in Journalism and Creative Writing, having previously contributed to publications such as The Daily Post, The Lancashire Evening Post, and The Blackpool Gazette.
He is a keen swimmer and avid Manchester United fan (but don’t hold that against him), and he lives in Lancashire with his wife, Sarah.