So what changed? I’m going to hazard a guess that the employment tribunal judges have finally had enough of umbrella companies that in reality are employers for tax purposes only, which for years have manipulated employment law to facilitate the provision of a payroll service.
In one claim, the judge decided that the worker could not be expected to know what he was going to be paid from the pseudo-Key Information Document supplied to him by the umbrella company, while the agency offered a composite rate of pay (with no explanation that is what it was) and all parties continued to refer to this as the pay rate throughout. The contract of employment was ambiguous, as all brolly contracts are, and did nothing to help the worker understand what being paid on an umbrella company basis actually meant, quite the opposite was in fact true.
Part 1 of this article series: Umbrella Company Fail at Employment Tribunal Opens Door for Change
Then came the twist. The judge in the A Pajpani v DNS Umbrella Ltd cited the well- established “contra proferentem” rule in contract law saying, ‘This provides that any ambiguity in a provision should be resolved against the party who seeks to rely on it.’ He further said ‘in this case, the Third Respondent, (DNS Umbrella Ltd) has not done enough to make the basis of the deductions clear to the Claimant. Contra proferentem places the cost of losses on the party who was in the best position to avoid the harm. This is generally the person who drafted the contract, i.e. the umbrella company.
The cost of employment to a hirer comprises the workers’ basic pay, holiday pay entitlement plus statutory employment costs, i.e. the employer’s NI and workplace pension contributions along with the Apprenticeship Levy. However, a grave error has been made by the continued reference to the cost of employment sum as the worker’s pay rate, by agencies, hirers and umbrella companies, and this has not been lost on the Government. It brought in new legislation in 2020 which placed a legal requirement on hirers and umbrella companies to provide workers with a Key Information Document which is supposed to provide details of the worker’s employer, their employee benefits, and the minimum pay rate that is achievable on what is generally referred to as being paid on an umbrella company basis.
Does the KID supplied serve the intended purposes? Generally, it’s not the case. These documents always start with that pay rate which has been offered by the agency or hirer, which as explained is simply the sum that equals the cost of employment of the worker. His or her true pay rate then, is just one of the elements included in that figure, but by failure, negligence or deliberate action, few umbrella companies make this sufficiently clear to the workers they employ, which is why the majority of individuals being paid via an umbrella company still believe they are paying two lots of NI contributions and the Apprenticeship Levy from their pay rate.
This decision meant that Pajpani was entitled to be paid at the rate of pay he had agreed with his agency, and the umbrella company now has to repay the difference between what he was paid and the rate he expected to be paid.
Can this decision help you? Yes, is the short answer, but you may need to rethink your position first. Forget about the idea that you are paying the umbrella company NI and Apprenticeship Levy from your rate, it’s a mistaken concept put about by people who should know better. It’s actually simpler than that. Since 2020, the rule is that all workers are entitled to know the pay rate they will be paid, before they agree to take on a contract. If you agree to a pay rate (and any other conditions of employment) and don’t receive it, you are entitled to compensation made up of the shortfall you have suffered. Contractors and agency workers have exactly the same protected employment rights in this regard, the legislation which introduced the requirement for a KID to be supplied to every worker, makes this very clear.
However, when considering a contract, if your agency does more than offer a pay rate with a vague reference to the umbrella company making some deductions, so you do realise that you are not going to be paid the rate that attracted you to the job, you don’t have good grounds for a claim using the contra proferentem argument in a claim of your own.
I predict that umbrella companies will soon revise the format of their Key Information Document, and contracts of employment will change in response to the recent rulings, after which point very few contractors will have a claim, because they will at long last gain the right to know exactly what they are being paid and will accept it or not, in full possession of the facts.
This is important because if you compare the pay rate you have initially agreed to, with the gross you are actually paid, ask yourself, would you have taken on that contract, or would you have negotiated a better rate, or maybe sought a job that apparently paid less but was more beneficial to you? You have had the right to this information, for exactly that reason and it is also the logic behind the relevant legislation and the current thinking of the employment tribunal.
What does this mean in the long term? Aside from being part of the smoke and mirrors that prevents clarity over pay rates in all industries, umbrella companies are a useful tool for contractors who don’t wish to enter into permanent employment, or who don’t want to work for one agency. They won’t disappear, however, they will no longer stand in the way of contractors being able to negotiate the best pay for the supply of their services, who will have full knowledge of pay offers in real terms for the first time. As we say, knowledge is power.
Disclaimer
This article is for information purposes only. We strongly recommend taking professional advice or an expert opinion before reaching any conclusion. You can also write us an email at [email protected].
