Why umbrella company regulation makes sense for everyone, except the unscrupulous

The news that the government hasn’t technically recommitted to the regulation of umbrella companies despite giving the impression of a recommitment, by publishing this report, has not been met with positivity. And perhaps understandably so, writes Kris Simpson, UK country manager at Cool Company.

Umbrella regulation via the SEB: the For and Against

Following the government’s implementation of the IR35 off-payroll working legislation, the government’s move to repeal the legislation, and then the now-completed move by the government to reverse the repeal, there’s a case to be made that businesses and contractors don’t want more change. So maybe no deviation from the government’s December 2022 position to shelve the mechanism to regulate brollies, the Single Enforcement Body, is no bad thing.

But as an industry that has a handful of unscrupulous operators, and some disappointing recent headlines, regulation of umbrellas is the future and we should all embrace it. Other than the unscrupulous of course, who are the only ones who have reason to fear it!

In the contractor’s shoes…

Let’s look at it from the perspective of the contract worker. You were successfully making a living for a number of years as a bonafide business, but as client-organisations struggled to get to grips with the details of IR35 reform, and feared repercussions for failing to adhere to their new obligations, your workload plummeted. Your income stuttered and eventually, after a lot of stress and research, you found an umbrella company to work with and your working life resumed. But what you didn’t realise is that that umbrella company was skimming your wages -- and they were getting away with it because the industry isn’t regulated.

There are many compliant umbrella companies but thanks to the changed IR35 rules, the population has grown, potentially swelling the numbers of the unscrupulous to beyond a handful. So the need for regulation is greater.

According to the UK’s Labour Market Enforcement Strategy 2022/23, HMRC estimates the number of individuals working through umbrella companies to have risen by more than 400,000 in the last 14 years. With indications that “IR35 changes may have accelerated this growth” even further, that’s a lot of potential to be taken advantage of, whether deliberately or through poor management and negligent investment.

For the contractor, the experience of working with a poorly managed umbrella company can be devastating. For businesses, it can be disappointing and disruptive. While scrupulous umbrellas become tarred with the same old unprincipled brush. Regulation has to be beneficial for all – but, whenever it finally hits, the umbrella market must be prepared for disruption.

How would the Single Enforcement Body impact the umbrella market?  

That disruption will be the case even though a SEB to regulate brollies has been the ultimate goal of many for some years. The current system of self-regulation is often viewed positively within the sector, freeing businesses from perceived red tape. But self-regulation leaves the door open to the kind of exploitation we’ve seen in recent months, such as salary skimming.

Establishing the SEB would provide a unified set of rules for umbrella companies, backed with government penalties which, with enforcement, seems a sure-fire way to remove bad practices and protect contractors.

For contractors, the SEB would mean improved confidence, increased opportunity, and a reduction of risk. Having a dedicated place to register complaints and/or whistle-blow on unscrupulous umbrellas would also provide reassurance, which is currently lacking.

For umbrella companies, the SEB would mean increased credibility, reduced suspicion, and the potential for plausible business growth. And importantly for tax receipts and economic growth, the SEB would set in motion the process for the removal of scam companies, often acting fraudulently and depriving the exchequer, from the market.

These are all positive things that as an industry we need to embrace, but disruption is the flip side. 

It’s all about the implementation

The success of umbrella regulation depends upon its implementation. The workings of the industry are largely unknown to outsiders. This is largely what makes it open to exploitation but this also means that with the coming of new regulation, there is the potential for ‘tried and tested’ processes currently relied upon by the sector, to get ripped out and replaced with new processes which may put a strain on umbrella businesses. Brollies would need to meet the SEB’s standards – whatever those might be.

Also brace yourself for the external, fresh insights brought in by the SEB leading to changes in legislation which could go against contractors’ needs, inadvertently even. One area open to such interference would be holiday pay. Right now, there are currently two accepted options for handling contractor holiday pay. But there’s the possibility that an SEB might, in the name of simplification, reduce umbrella company holiday pay to one method.

Sloppy implementation of the SEB’s framework for umbrella companies could even increase the average umbrella contractor’s tax bill, potentially leading many individuals to avoid working with regulated umbrella companies altogether.

Final thought

Personally, I’d support the appointment of a SEB on the basis that it will usher in proper regulation of the umbrella market – a market the Treasury has had a whole year to think on and done nothing about. Maybe that’s a good thing. How the government approaches umbrella regulation is key. If they manage the process internally, in an insular way, the potential for disruption to the 500,000-plus workers using umbrellas could be huge. Conversely, if they choose to embrace those in our sector who strive for the same compliant outcome, this could be an enormously positive move for everyone. Well, almost everyone.