How an umbrella model works: rates of pay and benefits explained by Crawford Temple, CEO and Founder of Professional Passport
With the new Off-Payroll tax rules set to go ahead in April 2021, we shall undoubtedly see an increasing number of contractors working through umbrella firms. Crawford Temple is CEO and founder of Professional Passport, the largest independent assessor of payment intermediary compliance, and here he outlines how an umbrella model works when it comes to rates of pay and benefits and clarifies how compliant umbrellas work in practice.
Rates of pay
Where a worker is using a provider, typically an umbrella company, the provider receives an uplifted rate from the recruitment company; a rate that has been increased above the PAYE rate to include provisions for employment costs such as Employers NI, Employer Pension costs, Apprenticeship Levy, Holiday Pay and the providers margin deduction. How this is presented to the worker is a critical aspect of operating compliantly.
The rate offered is not the rate for the worker and should never be presented as such. If the rate was presented as the workers rate then it in turn would suggest that it is the worker who is paying their own costs of employment, something that they cannot do.
The rate is the amount received by the umbrella and, in line with the contractual arrangements, is effectively the provider’s money. This allows the provider to make the required deductions for the costs of employment as long as they can meet their pay obligations to their employee, as defined in the employment contract, after the deductions. No provider can pay any employee less than the National Minimum Wage applying at that time, after all employment cost deductions. As a result, providers will have a minimum rate that they require to ensure the workers are paid the NMW as a minimum after employment costs. This will be very similar across all providers with the only variable being the margin deducted by the provider, which makes a very small overall difference.
By offering both a PAYE Rate and an Uplifted Rate helps to demonstrate to the worker which would provide the best return for them and clears up much of the confusion.
Generally, umbrella companies work on a standard 28 days’ holiday which equates to 12.07% of their gross taxable earnings. Holiday pay should always be calculated on the gross taxable earnings not just the base salary element.
If holiday pay changes as a result of AWR matched pay, then the umbrella will have to change the percentage but they should never pay below the 12.07%.
When paid it should always be shown as a separate line on the payslip.
Any outstanding balances should be paid on leaving, as is the case with all employees.
Where a worker is on accrued holiday pay, the provider holds on to it and the worker must claim when they take holiday. If there is a positive balance in the run up to a holiday year end, they must be informed to take it or lose it, as stated in the terms of the contract. Without transparent communication between worker and provider, there is an implied risk that the provider could retain any positive balances.
Changes in The Finance Acts of 2015, 2016 and 2017 have resulted in very different rules being applied to umbrella expenses.
In simple terms,mileage is the main expense that can be claimed from a contractor’s general earnings but they are now required to provide much more information on the claims to allow the providers to meet their obligations and demonstrate to HMRC, where required to do so, that they have correctly assessed the workplace status and applied the rules as intended.
Agency reimbursed or rechargeable expenses are also often misunderstood. An agency rechargeable expense is no more than additional monies received by an umbrella. The word expense is not referring to the expense being tax deductible.
In all cases umbrella providers must have a fully completed expense claim form for any expenses the worker wishes to claim. This must include enough detail to allow the provider to demonstrate that the expense is allowable.
Umbrella Payslips tend to have 2 parts to them:
- The payslip
- The pay statement or assignment reconciliation
The payslip is defined through the Employment Rights Act and should be like any typical employees’ payslip. It should not show the umbrella margin; where holiday pay is paid this should be shown as a separate line and the gross pay should never be the amount received by the umbrella from the recruitment company. A payslip must be provided on or before the worker is paid and it is acceptable if this is available through an online portal.
The pay statement is not restricted by any legislation and should be designed to show the worker a clear flow of the income received by the umbrella from the recruitment company with a detailed breakdown of all deductions made. This is the document that the worker is really interested in.
Agency Workers Regulations (AWR)
Umbrella workers are generally subject to AWR which requires matched pay and various entitlements to a full-time comparable employee.
The 2 key elements are pay and holiday and umbrellas will seek the data to check this.
Comparable pay – the gross taxable pay of an employee should be no more than the gross taxable pay on the umbrella worker’s payslip.
Holiday – Umbrella companies typically work with 28 days as their standard holiday; if the comparable worker receives 30 days then the umbrella will need to amend the percentage applied to the holiday pay calculation and then ensure that the comparable pay is still equal to or greater than the comparable employee.
EASI, the body tasked with enforcement of the regulations on recruitment companies has a sharp focus on the application of contractual terms and the Conduct Regulations.
They are looking to see that recruitment companies can evidence the following:
- Clear terms agreed for providing work finding services with candidates as soon as you start to act for them.
- As the candidate is an individual (s)he is prevented from opting out of the regulations so all requirements must be met.
- Where the worker subsequently decides to operate through an umbrella there needs to be clear terms in place with the umbrella and these should categorise the umbrella as the work seeker.
- As the umbrella is the work seeker and a limited company, where the regulations allow, the umbrella and their worker can effectively opt out of the regulations.
- For the opt out to be valid a written notice must be provided.
- For the opt out to be valid the umbrella and the individual must agree, and must notify the agency, and the agency must so notify the client, all before the work-seeker (Umbrella) is introduced or supplied to the client (Regulation 32(9))
- Such notices must be in written form (can be paper or electronic) (Regulation 33) Failure to apply this process and clearly evidence the terms will result in workers being treated as within the regulations for all purposes.
The Off-Payroll rules are coming and recruiters would be advised to ensure they have clear processes in place and any umbrella they operate with fully understands their expectations so that all parties in the supply chain are well placed to enable contractors to carry out their assignments smoothly.