My agency says that if I want work, I must work through an 'umbrella company'. What does this mean?

Increasingly, employment agencies and businesses use umbrella company arrangements to pay the workers they supply, instead of paying them direct. Workers rarely get any say in these arrangements which are presented on a take-it-or-leave-it basis. 

Umbrella companies are found right across the UK economy, although they are a particular problem in construction and supply teaching. 

Effectively, the umbrella company ‘slots in’ between the worker and the employment agency or business, becoming the worker’s ‘employer’. 

As the ‘employer’, the umbrella company then deducts from the worker’s pay packet PAYE tax, employer and employee national insurance contributions (NICs), holiday pay and employer and employee auto-enrolment pension contributions, as well as a ‘service fee’, which can be as much as £30 a week.
It is not against the law for an employment business or agency to use an umbrella company to pay their workers, but unions have real concerns about serious abuses in this sector.

A key problem is the lack of transparency, including pay slips that are very complex and hard to understand, especially if English is not your first language. Sometimes it is hard even to work out who is responsible for paying your wages, let alone how much you are being paid and for what.

Because the umbrella company is your ‘employer’, the amount paid by the employment business or agency to the umbrella company must be large enough to allow for the deduction of all the costs associated with being an employer, including national insurance and employer pensions auto-enrolment contributions (which are increasing). Otherwise you will lose out. Only the balance after all the deductions will be your net pay. 

Workers are often encouraged to believe that their take home pay will increase under this kind of arrangement. This is not true, especially following a clampdown from HMRC, changing the rules on claiming tax relief on travel and subsistence expenses. HMRC has produced guidance warning about this. 

Another problem with all these arrangements is that the organisation providing the work escapes responsibility for key statutory rights such as the National Minimum Wage, holiday pay, redundancy pay and protection from discrimination.  

If you are concerned about these sorts of working arrangements, your best defence is to join a trade union. For example in the construction sector, construction union UCATT, now part of general union Unite, has been campaigning about abuses connected to the use of umbrella companies for many years. 

Some voluntary organisations can provide useful support and guidance if you have a question about umbrella companies.

TaxAid is a charity that helps people on low incomes with their tax affairs. It runs a helpline: 0345 120 3779.

The Low Income Tax Reform Group has produced a useful Fact Sheet on working through an umbrella company.  
It is worth remembering that even though you work through an umbrella company, you are still entitled to the same equality rights, in relation to pay, holidays and hours, as any other temporary agency worker. Employers cannot escape their obligations under the Agency Worker Regulations by using an umbrella company set up.