Contractors, holiday pay ‘pocketing’ that makes you see umbrellas as shady is fixable. Here’s how

Almost as stubborn as those persistent calls for prime minister Boris Johnson to resign – which he finally did yesterday, there is boil in the umbrella company contractor sector which once again has become inflamed, as we all try to lance it, writes Crawford Temple, CEO of payment intermediary compliance assessor Professional Passport.

In the unlikely but still possible scenario that you are unaware of this constant rub, the issue which just refuses to go away (no, I'm not referring to Mr Johnson), is the issue of providers keeping holiday pay for themselves – absorbing into their coffers -- when it is not used by the contractor.

Transparency is the key

First and foremost, for me, this issue is not about the law. There have been many very well-respected experts summarising the legal position in recent days since this ContractorUK exclusive. These experts have raised important, oft-overlooked points and realities of the law in this area. But to repeat, for me, the issue entirely centres on transparency. And it always has done.

While holiday pay is technically not ‘pay’ but a holiday entitlement, the fact that the entitlement is defined by a mathematical calculation leads most to see this as a financial amount. Also, the workers (umbrella contractors) see a specific value deducted under the heading of ‘holiday pay.’

Policy-makers, lawyers and even us compliance assessors therefore cannot expect contractors to be legislative experts or to need understand the intricacies of the arrangements, which is why it is generally referred to as ‘holiday pay’ and defined by a value. From a contractor’s perspective, I believe this to be the clearest term possible -- and the most easily understood, even if technically not entirely accurate.

A double-standard?

Labels aside, in my experience, the majority of contractors opt for ‘rolled up’ or ‘advanced’ holiday pay which means that any entitlement is automatically paid out with each pay run. This was recognised in 2017 by Matthew Taylor, and in his recommendations to government he proposed changes to the regulations to make this a lawful position. Crucially, the government rejected this, resulting in the current position of ‘rolled up’ holiday pay being unlawful.

Please note, this is a really important point, because if those who seek to defend their decisions by using the pure legal arguments allow the payment of rolled-up holiday pay then isn’t this a double-standard or a conflict? So, should those organisations also seek to ban ‘rolled-up’ holiday pay? I would suspect not as this would have a serious commercial impact on those providers.

The decisions spectrum

Furthermore, this highlights that within the area of holiday pay there are tight legal definitions, but there is also a spectrum of decisions that providers can make and these may stray from the pure legal position, even though they hold very little risk of challenge to the provider.

From a contractor’s perspective, where they receive ‘advanced’ holiday pay, there is no risk of them losing any of their entitlement, given that it is automatically paid out. Where a worker accrues their holiday pay i.e. it is retained by the provider and paid out when requested, this is where the risk of loss occurs.  

At the time of writing (but also as long as memory serves), almost all contracts of employment across the umbrella sector define a holiday year and clearly state in the contract that any unused entitlement will be lost at the end of the holiday year. But almost as well-established as those contracts is the problem that busy-contractors often do not read the terms that they sign and so are often unaware of the contract’s implications. The fact is this -- providers are free to make choices on how they deal with holiday pay balances at the end of the holiday year.

Contractor umbrella companies have three holiday pay positions

In my view, this is a commercial decision that can impact directly on their business volumes. Generally speaking, the three decisions that providers tend to make to address this area are:

1. They keep any unclaimed holiday pay at the end of the tax year.
2. They automatically roll any balances over to the next holiday year.
3. They automatically pay any balances out in the last pay run of the holiday year.

Now I am sure it will be easy for any purists reading to shoot down these points and challenge me from a legal perspective! However, the issue remains that it is the provider’s decision, based on their own accepted risk-profiling, which is another choice they make.

On this specific point, it is noteworthy that (as far as I know) no provider has ever been called out for paying all the balances out automatically! Only those who technically follow the pure legal process, thereby keeping any claimed entitlement for themselves, suffer negativity.

This brings me full circle to my opening point -- it is all about transparency.

Brollies, be open, plain-speaking and explanatory

Rather than rely on contractual terms that may or may not have been read or understood, it is our advice to all contractor umbrella companies to be very open and transparent with their workers.

So umbrellas, tell your contractors in plain English that they have an entitlement; how they can claim this entitlement, the consequences if they don’t claim the entitlement by a certain date and, if the option exists, how they can request the entitlement to be rolled into the next holiday year.

To practice what we preach, our organisation has worked with all the main software providers in the umbrella sector to ensure that all workers get a summary on their pay reports of their holiday entitlement. The summary shows any current balance; what has accrued in a pay period, what has been paid out, and any remaining balance. We regard this as a critical step in bringing transparency to the umbrella company sector. And I do mean the sector at large – because all providers that use this software now have access to this format, whether they are ‘Professional Passport Accredited’ or not.

We do get contractors' concerns

We’ve done a bit on transparency standards to complement this work with software providers, because we do understand the concerns of contractors. In the instance that a provider intends to apply the contract terms, as stated, then the worker has to be written to each month, in the preceding three months, with a communication that clearly lays out the full details on holiday pay, explaining:

• how much they are entitled to;
• how they can make the claim (just in case the recipient doesn’t know how to claim the entitlement);
• the consequences of not claiming; and, if available,
• how to request a concession to roll the entitlement/claim to the next holiday year.

Pocketing holiday money? Probably not. A way forward? Very possibly

The reason I’m outlining these particulars here is that, with this level of transparency, our belief is that contractors should not feel – and perhaps would even feel it unfair of them to argue -- that the provider is ‘pocketing their holiday money.’

So at the risk at repeating myself, and becoming as repetitive as those 60-something MPs who all took the same action in protest to Boris Johnson’s government, transparency is the key.

Furthermore, such out and out transparency, so ‘proactive transparency’ if you will, has the potential to remove the lingering, shady look of the umbrella company sector when it comes to contractor holiday pay. Holding absolutely no ambiguity in your terms if you’re a contractor umbrella company is vital and only those who seek to frustrate such clear-view processes, for their own gain, will likely oppose this very real way forward.