Recently, SIA reported on allegations that umbrella companies employing contractors in the UK have been systematically “salary skimming.” The allegations, which involve more than one umbrella company, are that these employers are deducting sums from the salaries paid to their contractor employees without informing them. While the relationships with umbrella companies are between the workers and them directly, contingent workforce programs and staffing firms may face repercussions of such alleged practices.
Prevalent in the UK and the Netherlands, an umbrella company acts as an employer to contingent workers in exchange for a fee paid by the workers, who are free to find their own work, usually through one or more staffing agencies. The umbrella company invoices the staffing firm for the services of the workers and handles all administrative, taxation, payrolling and legal issues pertaining to employing the workers. The umbrella company does not undertake any work-finding services, nor does it source workers for the end user or the staffing firm.
According to the allegations, the two umbrella companies have been deducting — without itemization on the pay slips — £2 per contractor from the income umbrella companies received from the staffing firms for the contractors.
The deduction is described by the umbrella firms as an “employment cost,” which includes the Apprenticeship Levy and employer’s National Insurance Contributions — both of which are owed by an employer and paid to HM Revenue and Customs.
The Apprenticeship Levy is a form of tax paid by employers with an annual payroll of over £1.5 million. The sum paid goes into a pot that is ringfenced to be used by the employer to train their employees. If it is not used, it is taken by HMRC as additional taxation on employment. National Insurance Contributions (NICs) are paid by employees (12%) and employers (13.8%) as a percentage of the employees pay. Employees NICs are deducted from the individual’s gross pay along with income tax.
Ordinarily, employers do not pass on the cost of the Apprenticeship Levy or employers’ NICs to the employee; those costs are considered overhead, part of running the business. But umbrella companies are not your normal employer. The umbrella company does not search for suitable assignments or assign work to the contractor; they act as a payroll employer or employer of record for the contractor, who contracts with one or more staffing firms to find work.
The contractor and/or the umbrella company agrees to the assignment rate with the staffing firm, from which the umbrella company makes various deductions to comply with its obligations as employer of record. These deductions must be itemized on the payslip that is given to the contractor when they are paid.
An employer is not allowed to make deductions unless:
- they are required or allowed by law, such as National Insurance or income tax;
- it is agreed in writing or set out in the contract agreed with the employee; or
- to correct an earlier overpayment of wages or expenses.
In any event, the deductions cannot normally reduce the pay below the National Minimum Wage unless the deduction is for tax or National Insurance.
Impact on CW Programs
On the face of it, this is a contractual issue between the employer and their employee and should not be of concern to either the staffing firm that supplies the contractor or the client hirer for whom the contractor is performing work.
Reputational. However, the umbrella firm might also be in breach of its legal obligations to itemize all deductions on the payslip or provide other documentation that explains these at the time of payment. This should be of concern to the staffing firm and hirer as it is often difficult for contractors and others to distinguish between the separate elements of the supply chain. At the very least, the risk for the hirer may be a damaged reputation as a bad employer.
Although there is no general legislation requiring due diligence other than the Modern Slavery Act 2015, the increasing focus on ESG (environmental, social and governance) by investors and other stakeholders also means companies cannot afford risks arising in the treatment of their workforce.
Financial. Of even greater concern is the suggestion that the sums deducted should have been subject to income tax and employers’ and employees’ NICs. If that is the case, both the staffing firm supplying the worker and the client hirer could be potentially liable to pay the tax and NI owed if it cannot be recovered from the umbrella company by HMRC under the Criminal Finance Act 2017.
The risk of HMRC using the “transfer of debt” provisions in the 2017 Act may be remote, but an estimate of the deductions made by one company over the years amounts to £4 million. This is a substantial reason for making sure that umbrella companies are abiding by their legal responsibilities.
The number of contractors working through umbrella companies has grown since the introduction of the IR35 Off-payroll Working Rules and hirers cannot afford to look the other way. An exploited workforce does not make for a happy workforce. Hirers who are concerned by these allegations should carry out due diligence on their supply chain, including conducting an audit of payslips and the other documentation given to their contingent workers.