With its origins rooted in the USA, the Professional Employment Organisation (PEO) has become a popular employment model in the UK in recent times. Similar to an umbrella company, when a contractor engages with a compliant PEO, they are fully employed under PAYE according to the rate agreed by the hiring agency and the end client. But both models are often misunderstood and have attracted negative media headlines over the past few years, most often when they purport to be an umbrella or PEO and are in fact other non-compliant dodgy schemes.
Crawford Temple is CEO and founder of Professional Passport, the largest independent assessor of payment intermediary compliance, and here he outlines the differences between a PEO and an umbrella firm whilst stressing the importance of working with compliant firms that offer these types of employment services.
Umbrellas have come under much scrutiny lately. The model has become an increasingly popular employment route, but many workers have been questioning their legitimacy based on a common misconception about their rates of pay and the deduction of employment costs from the rate paid to the umbrellas. All employers are legally required to pay employers’ national insurance as well as process employee deductions. Good umbrella companies explain how the deductions work so that confusion doesn’t arise.
Covid-19 also shone a big spotlight on umbrella companies as the Job Retention Scheme further highlighted complexities around the furlough arrangements for those working through an umbrella model.
The combination and some might argue, confusion, has seen many recruitment companies turning to a PEO arrangement as an alternative to umbrellas.
There are many similarities between umbrellas and PEO’s. Both models mean that the worker is employed by the provider and benefit from the same employment rights, such as holiday pay and sickness pay, as well as pension provision. A PEO is also responsible for all HR support and pay processing.
The big difference lies in the rate offered to the worker.
In a PEO arrangement, the recruitment agency offers the worker a ‘PAYE’ rate, which means the rate offered is what the worker will receive for each and every hour worked. The additional employment costs, such as employers National Insurance, Apprenticeship Levy, holiday pay and employer auto-enrolment contributions are charged back to the recruitment agency in addition to the rate. The providers fee for facilitating the arrangement is also charged back to the recruitment company. VAT must also be charged on the full invoice sent to the recruiter and this is where some confusion lies.
As the rate offered is what the worker receives, it removes many of the misunderstandings and complexities that arise by using umbrella companies as well as providing a simple payslip to the worker. This means that the worker is unaware of the employment costs associated with employing them. The structure of pay in the contract also makes it clearer in relation to furlough, an important factor in the current Covid climate.
Many recruitment companies are recognising that ‘one size fits all’ umbrella arrangements are not their only options and are developing a more bespoke approach that aligns better with their markets and sectors, as well as the rates on offer. The PEO is not a replacement for the umbrella model but it does have a role to play in the market alongside umbrellas.
The days of ‘the answer is umbrella, now what’s the question’ are coming to an end and we are seeing a wide and varied range of offerings entering the market. It is critical that recruiters fully understand those choices and ensure that they only engage with compliant firms. And, as we will see an increasing number of contractors being required to work through these models when the Off-Payroll legislation takes effect in the private sector in April 2021, never has it been more important to carry out due diligence when choosing a provider. By choosing a compliant firm, workers, recruiters and hirers will get all the assurance they need that providers have been rigorously checked and accredited and are good to do business with.