IR35 is on the immediate horizon and, with it comes the expected influx of Quantum Employed contractors into the Umbrella market (many of whom are Umbrella virgins). You could almost have guaranteed that the magnifying glass that periodically gets passed over the sector would swing by again. And it did.

This time, it came in the form of the BBC’s Money Box (the episode can be found here for anyone who has not heard it). The episode focused on the so called  unscrupulous Umbrella industry ‘stealing’ holiday pay from contractors, whilst making sure to mention that Employers’ costs are deducted from the worker’s rate (which isn’t quite accurate). But before I get into it, I’d like to comment a little bit about me which will hopefully give context to my comments.

I’ve worked in the Umbrella industry for over a decade. Firstly, as a payroll manager for a very compliant umbrella and, secondly, at software provider My Digital who provides Quantum Employment Design (QED) software to the temporary labour market. The core of our Umbrella product, its beating heart if you will, is the payroll engine. The calculations of which I designed – just call me the Devil’s Architect. So, I firmly believe that I know more about the inner workings of how Umbrella payroll calculations are done than 99% of the population.

The logic behind the Umbrella payroll calculation is simple enough. But if the concepts are misunderstood by a contractor or poorly explained, then it can seem as though the Umbrella company is underpaying and pocketing the difference. This is what I blame for the majority of bad will towards umbrella companies and is the perfect illustration as to why end to end transparency in the Quantum Employment industry is vital. That’s not to say there aren’t uncompliant Umbrella companies, or unscrupulous Agencies, but that’s a different matter altogether that I’ll discuss later on. 

Before I come to the key issues of holiday pay and transparency, I just want to set aside some of the common misconceptions to do with Umbrella companies and the Umbrella rate. This is especially important for those who’ve never worked through or maybe even heard of an Umbrella company outside of those that make rain shields (catchier name in my opinion) or, if you’re a horror game enthusiast, Resident Evil.

Umbrella rating websites and websites where companies’ IR35 decisions can be rated are littered with contractor statements claiming that their Umbrella is “charging Employers National Insurance to them” or that the contractor “is paying two lots of National Insurance.” This is a gross misunderstanding. The Umbrella rate that’s sent from the Agency to the Umbrella company is an all inclusive rate that is made up of the contractor’s daily rate, the holiday pay on this, the employment costs associated (Employers NI, Employers pensions contributions, Apprenticeship Levy – all employers with a NICable wage bill above £3M have to pay this) and finally the margin charged for running the payroll which is the only money the Umbrella company makes on the whole amount.

Figure 1 An illustrative graph showing how Umbrella Rate is divided

That said, I’m not naïve enough to think that there aren’t some unscrupulous Agencies and Umbrella companies out there that don’t provide the full uplift to try and hide and make extra profit. This small minority are the ones who seemingly grab all the headlines and give the industry a bad name. It’s this ‘all-in-one’ rate that can be confusing and may even be mis-sold as this is not the contractors’ pay rate.

This is where transparency is key. Transparency from the Agency to the contractor in the form of a Key Information Document and transparency between the Umbrella company and the contractor in the form of detailed explanations of what the Umbrella rate is as well as pay illustrations. It’s why when designing the illustration tool used on the My Digital platform, I ensured that you can see the effective PAYE rate based on the inputs provided, ensuring that nothing is hidden or comes as a surprise to the contractor, even providing an illustrative payslip.

Onto the hot topic of holiday pay. Assuming that the sign up has been done correctly and transparently with the contractor understanding the Umbrella rate and which part of that is theirs, then transparency (and a bit of flexibility) is again key when it comes to holiday pay. The example given in the BBC Money Box episode is, from what I’ve seen, in the marginal minority, and I don’t believe it should be used to tarnish the whole industry.

Personally, when I worked through an Umbrella company nearly twenty years ago, I chose to receive my holiday pay upfront and itemised on the payslip as an advisory amount to keep aside for when I did take leave. I preferred it in my pocket straight off the bat. However, I understand that many prefer to have it accrued and request an amount when they take annual leave.

Contractors who receive payslips from My Digital will be well aware of the transparency that is provided, showing on every payslip the amount accrued as well as the total pot that’s available to draw from. Having software and systems in place like this ensures that contractors knows exactly where their money is all the way through the supply chain and can plan accordingly.

Ensuring the transparency of the whole process and that there’s an understanding of what the Umbrella rate is would solve most of the angst towards Umbrella companies. It doesn’t, however, solve the issue of reduced earnings as, quite naturally, an employee with the same equivalent rate as a PSC will earn significantly less due to the reduced availability of tax options… but that is a discussion to be had with the legislators!

My only advice for contractors is to ensure you receive a clear illustration from the Umbrella company stating what your equivalent PAYE rate is (based on the expected hours), a Key Information Document from your Agency which should back up the figures given on the illustration and a full explanation of how the holiday pay is worked. And if you receive an illustration claiming you can take home 90%, it will undoubtedly be illegal… If it seems too good to be true… It will be!!

For Agencies and Umbrella companies, we would suggest looking at what software can do for you. The temporary labour market is only expanding, and you need to ensure you are set up to cope with the corresponding workforce changes. The workforce of tomorrow is delivering increasingly digital services and goods to embrace and accelerate demand. It’s time that Agencies and Umbrella companies catch up with this Quantum Employed workforce and explore the QED market for their software needs. Introducing end-to-end transparency throughout workforce management and using software that adapts with the changing workforce and legislation will only act to legitimise your services. Not only will this benefit both employer and worker by being able to see the true costs involved, it’s the only way to make sure they are getting the best deal for them and will reflect in Agency and Umbrella perceptions in the market.

author: Matt Jennings