REC view on Compliance

The government must get a firmer grip on umbrellas says Shazia Ejaz, Director of Campaigns and Research at the REC.

We used a major and recent government consultation on umbrellas to reiterate our long-held view that regulation of the umbrella market is needed to help workers, and better tackle tax non-compliance. And we left policymakers in little doubt that umbrella company regulation is long overdue, and any further delay would be wholly unnecessary.

Some regulation of umbrellas is vital, with practices that confuse who is responsible for a worker’s employment rights by fragmenting the employment relationship. That can lead to breaching holiday leave and pay entitlement and even unwittingly embroiling workers in tax evasion schemes.

However, they are part of the labour market at least for the foreseeable future, partly because of demand by workers and recruiter’s clients to be pay rolled by them, so we must find a better way to help the best practice win out.

But the key to most problem solving is defining the problem. And this is the case with what to do about umbrellas and where any talk of regulation needs to start.

No definition

At the heart of the problem is that nobody has ever agreed on a legal definition of what an umbrella company is. This has left policymakers flat-footed as umbrellas evolve and change, with the growth in mini umbrella companies and joint employment models being such examples.

We urgently need a clear but flexible definition of umbrella companies or risk non-compliant umbrellas continuing to argue that they fall outside the scope of whatever regulation the government approves to oversee them. This kind of avoidance will continue to put workers and businesses at risk and see the public purse miss out on millions in revenue.

We have strongly suggested to the government that it should adopt the tried and tested definition of a Temporary Work Agency (TWA) in the Agency Workers Regulations (AWR) 2010, which was drafted to specifically cover both the traditional employment business and umbrella company.

This works to bring umbrellas under the cover of regulation because it refers to parties in the supply chain, and confirms that the workers must be supplied and will work under the supervision and direction of the hirer. This helps clarify things more than the definitions proposed in government’s latest round of consultation. The AWR definition will also add the umbrella company’s function of receiving payment or forwarding payment for the worker’s services. And it refers to the requirement ‘whether or not operating for profit, and whether or not carrying on such activity in conjunction with others.

The TWA definition is proven to work, so much so that it is not contested much by the umbrella market. It is also drafted broadly enough to make it more difficult for others to structure a model that would fall outside its scope.

This proposed definition will help to bring umbrellas within whatever regulation is agreed, to protect and benefit people and businesses, and support the HMRC’s tax take.

And given the propensity for the umbrella market to metamorphosise, it is imperative that any regulations allow the definition to be updated through speedier secondary legislation rather than the lengthier process of primary legislation.

EASI role

In the absence of the long awaited but yet to materialise Single Enforcement Body, (SEB), the Employment Agency Standards Inspectorate (EASI) should enforce umbrella company regulations along the lines it does for employment businesses and employment agencies. But while its current enforcement powers can regulate umbrella company activity, at least to the extent of EAS’s remit, it will need to lean on HMRC expertise and powers of enforcement on tax issues.

It is unfortunate that the option of having a SEB to enforce any legislation relevant to umbrellas was not an option in this consultation. This makes it crucial that EAS is given further resources, as it will struggle to cope with enforcing standards for thousands of additional businesses that would fall within its remit – but as we’ve already said, the return to the public purse in terms of tax receipts is well worth it.

Regulation along the lines we suggest is not about closing umbrellas or even leading to their ban. In fact, regulation that is well enforced will protect the legitimate payroll providers and umbrella companies.

This is not the end of our campaign work on umbrellas, especially because SEB would be the most effective way to enforce umbrella regulation. Legislative changes in recent years have made the sharing of intelligence between enforcement bodies slightly easier. But there is still no open flow of information from one body to the next. A SEB would make intelligence sharing far more effective and provide a single point of reference when things are reported. This would also result in greater efficiency and value for money for the taxpayer.

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