56,000 contractor payslips just got forensically audited. Here’s how umbrella companies performed

In the temporary labour market, opinions about umbrella companies often outweigh facts.

Yet, those opinions rarely get supported with concrete evidence or real-time data. Whether you’re approaching the market as a worker, a recruitment agent, or an end-client, we hope to have a good understanding of the umbrella companies working with us. But the bigger picture often eludes us. 

As part of our services, we have conducted more than 56,000 forensic payslip audits, writes Sebastian Sauca, the chief executive of SafeRec. And the metadata reveal a more nuanced landscape of the umbrella company market than many might think.

What is a forensic payslip audit?

Forensic payslip audits are an undercover mechanism, offering the possibility to audit an umbrella company without their knowledge.

This form of invisible inspection enables recruitment agencies and workers like contractors to gain a robust understanding of the company they collaborate with, potentially unearthing instances of payslip skimming, tax avoidance or even tax evasion.

The compilation of months of data from the mass audit has provided meta-data that shows the complexity behind the workings of umbrella companies, while also shedding light on the payroll function as a whole. For now, let’s keep the focus on umbrella companies.

Understanding umbrella compliance: it's not always black and white

The first major finding from the audit is that, contrary to popular belief, umbrella companies don't generally exist in binary states --- they aren't always just ‘good’ or ‘bad,’ compliant or non-compliant.

The reality we found is a spectrum with numerous shades of grey. The thousands of audit we ran on payslips uploaded by recruitment agencies across various industries, cast quite a consistent light on this often-overlooked nuance.

We internally decided to create a colour-code system to classify the umbrella companies we were auditing, and to identify which ones actually create HMRC tax liabilities for their contractual partners, like contractors.

Green umbrellas: The brollies contractors want -- compliant

Let's start with the good news -- most of the audited payslips passed with flying colours. Many umbrella companies do an exceptional job and care for their clients and workers. They form the 'green zone,' the standard bearers of compliance and quality!  So you very much want a 'Green' umbrella company.

Blue umbrellas: The brollies contractors will be irked by -- unintentionally non-compliant

We found umbrella companies which fall short on compliance, unintentionally. We call these ‘Blue’ umbrella companies.

I’m aware it may sound unrealistic to hard-nosed contractors, but an umbrella company sometimes is only as compliant as its payroll software. Where cloud-based payroll software is doing an excellent job, any non-compliance is less obvious compared with on-premises or internally developed systems. The poor performance of these two is easier to detect.

Yellow umbrellas: The brollies contractors will be concerned about -- ethically questionable

The ‘Yellow’ umbrella companies represent a more complex category -- the non-ethical umbrella companies.

Yellow umbrellas exploit the grey areas and the lack of payroll regulation for temporary workers, increasing their revenues through methods that are not technically illegal… just yet.

Whereas the green umbrella companies (compliant) only make money from the margin they charge as employment costs, the yellow brollies increase their margin elsewhere -- without the worker or agencies being aware.

Orange umbrellas: The brollies contractors will be confused by -- compliance shifters

The 'Orange’ umbrella companies are the unpredictable ones, swaying between compliance and non-compliance.

So Orange brollies are compliant when they need to be, but ready to cut corners as soon as they see an opportunity. These crafty organisations adjust their payroll processing methods based on the agencies, clients, or workers they engage with. 

Orange umbrellas are also sometimes the parent company of ‘Red’ umbrella companies – see below.

Red umbrellas: the brollies contractors ought to avoid -- non-compliant companies

Finally, ‘Red’ umbrella companies. These brollies are the outright rule-breakers of the lot!

Red umbrellas only engage workers in tax avoidance schemes -- a dangerous game that threatens the financial liabilities of agencies and workers involved. They are short-lived and often connected to orange umbrellas. When a candidate is referred to a red umbrella company, they are likely to paid via a tax evasion scheme. 

My message to contractors ahead of our deep-dive into the 56,000 

Understanding these variations in umbrella company operation is the starting point to promoting transparency and compliance within the industry. Forensic payslip audits have proven to be an effective tool in maintaining checks and balances and understanding the type of exposure agencies and workers are dealing with.

And with the government finally yesterday publishing its long overdue reply to feedback from HM Treasury’s call for evidence on the umbrella company market, we believe the future is bright for the temporary market. Almost regardless of what gets decided by policymakers in relation to the regulation of umbrella companies – which I do think yesterday’s document by HMT signals is now incoming, technology is bringing the power of knowledge to agencies and workers alike. And we believe it is a game-changer.

In this series of articles exclusively for ContractorUK, I will delve into the data underpinning the audits to shed light on instances of non-compliance within the umbrella market. Moreover, we will provide explicit examples of the good, the bad and the ugly, to paint a vivid picture of the current happenings within the contractor umbrella industry. Who knows, our findings might even get a mention in the now-open umbrella company regulation consultation, which I'd encourage all ContractorUK readers to respond to.