Umbrellas shield you from the rain... but not your taxes

In 2014, the government indicated that it was concerned whether umbrella companies were being used to avoid employment obligations, tax or paying the national minimum wage.

An umbrella company invoices the client (end user) for an individual’s services, it pays an individual from the fee charged but retains an administration fee for providing its services. Umbrella companies were used in the past often by self-employed IT professionals as a way of providing their services to several different clients and avoiding the hassle of setting up their own company. Using this model meant the individual paid less tax and the expense of travelling to work and subsistence, even when attending a permanent workplace, could be claimed. Increasingly companies require individuals who would not be considered to be self-employed, such as teachers and security guards, use umbrella companies to get work.  In January 2016, a pipefitter applied for work at Broadmoor Hospital in Berkshire. 

The main contractor was Keir and the mechanical contractor was Fascel. However, he was recruited by On-Site who informed him he had to contact Heritage Solutions City Limited, an umbrella/payroll company. He was paid weekly by the umbrella company, but it also charged him a weekly fee of £18 and deducted employer’s national insurance contributions. A few months later he was told he had to sign a contract which stated he was not an employee or a worker, but self-employed. He refused and took holiday, but he was not asked to return.  He made a claim in the Employment Tribunal claiming he was a worker and that unlawful deductions had been made to his wages for the charges made by the umbrella company. 

The case was dismissed by the Tribunal on the grounds that he was not a worker. However, he was successful on appeal. The EAT held he was a worker and said when deciding whether there was a contract (part of the test of whether someone is a worker) an employment tribunal must consider the intentions of the worker and not just the employer. As there was a contract between him and On-Site, the use of an umbrella/payroll company did not avoid this relationship. He and other agency workers paid via a payroll/umbrella company could be a worker of the agency, the payroll company or both.  

The EAT took the view that it was possible to be a worker for more than one body and potentially dramatically reduces the effect of using a payroll/umbrella company. Companies which use methods to try and give the impression that the individual is not an employee or worker must be aware of the risks. It is not unusual for the individual to go along with the arrangement for a period of time and challenge it at a later date or when a dispute arises.