Contracts paid on condition that an umbrella company is used for payment has become an occupational hazard for IT contractors, but the concerns about inexplicable deductions and unfathomable payslips, may soon be coming to an end due to an unexpected yet well- established legal rule and failures in the format of the Key Information Document (KID).
Identifying how umbrella companies have dug themselves a hole which has been highlighted in some claims that have recently been heard at an Employment Tribunal, may help other contractors to decide whether they too have a claim for compensation from their own umbrella company, remembering that once a grievance is lodged with any employer which isn’t rectified, an employed worker has only three months to submit a claim to an Employment Tribunal using ACAS as an intermediary.
Why do umbrella companies exist anyway? As with limited company contractors before the off-payroll working rules were reformed in 2017 and 2021, umbrella companies allow agencies and other hirers to parcel up the employment costs of each worker into one sum which is incorrectly referred to as the pay rate. This is the reason for the term ‘limited company rate’ being replaced by the ‘umbrella rate’ when IR35 seemingly became too much trouble for the hirers to deal with. Evidently, it was all the same to hirers; it has been a very different story for many thousands of contractors.
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.
In a show of complete indifference to the requirements of the 2020 law, the Key Information Document produced was and still is, simply a worksheet known as the Pay Reconciliation Statement, hastily re-titled. It has always accompanied the supplied payslip and shows how the pay rate offered by the agency or hirer is broken down to achieve the rate the worker will actually be paid.
The contract of employment supplied by umbrella companies is more of a commercial contract, and as the worker does pay the umbrella company a fee, that is understandable. So, it is written in a way that protects the umbrella company by giving further explanation of how the payments it receives from agencies and other hirers are managed. When a worker complains that he/she has not been paid the pay rate initially offered by the agency or hirer, some umbrella companies will offer the excuse that this is ‘our money’, which obviously makes no sense to someone who knows exactly what pay rate was offered before accepting the contract.
The majority of contractors have experienced this minefield of misinformation, confusion and sense of being conned, but so far claims for unlawful deduction from wages haven’t got very far, until everything changed with a few claims which recently went against the umbrella company. The umbrella companies must have been flabbergasted because these claims have never been successful in the past, even when so called legal experts in the field were involved in making them, so it was never recognised as a risk to them.
In part two, I have explained what I believe has changed the tide against umbrella companies and what this means for contractors.
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