The Pajpani case is a wake-up call to every UK umbrella company still using pseudo-KIDs

If you’re a contractor using an umbrella company, don’t be surprised if the next few weeks sees your brolly ditch that pay reconciliation-style statement that currently passes for a Key Information Document to instead hand you a KID that actually complies with the law, which must be as “clear as day” about your true pay rate, i.e. the rate you can actually expect to be paid, writes former Revenue inspector Carolyn Walsh, a tax and payroll adviser.

Unlawful deductions

If that long-overdue switch does happen, it’s probably because your brolly wants to avoid becoming the next DNS Umbrella Limited (renamed since March 2023 as SPRY Pay Limited), as a tribunal found that the company unlawfully deducted both the Apprenticeship Levy and Employer’s National Insurance from an agency contractor’s pay. 

As a result, DNS Umbrella Limited got ordered by the tribunal to pay the contractor almost £30,000 which the company wrongfully deducted, mainly because the umbrella’s two-fold defence, that 1) the deductions were permitted by law and 2) the deductions were permitted by a contract which the contractor had signed stipulating that they work “on an umbrella basis,” weren’t accepted by the tribunal.  

Paid 'on an umbrella company basis'

In fact, as employment tribunal judge S. Connolly said, DNS Umbrella Limited telling the contractor  -- a Mr A. Pajpani -- that he was to be paid “on an umbrella company basis” was unclear. And it didn’t give him sufficient information about the amount of pay that he would receive from the rate he had been offered by his agency (£800). This is the bugbear of many agency workers.

Now, all employed workers expect deductions for PAYE, so at that point, brolly contractors would generally accept the pay rate on offer. But what they don’t expect is that the rate will be instantly reduced by the umbrella company before their PAYE deduction is made in order to cover the costs incurred by the umbrella company, plus its margin. This is the basis of Mr Pajpani’s grievance and many other grievances which agency workers tend to have when being paid via an umbrella company.

No reversal, but definitely a wake-up call

Remember though, this case -- while important -- isn’t a reversal of best-practice understanding of how an umbrella company should compliantly operate. Instead, it is much more to do with the law enforcing the entitlement of agency workers to an accurate pay offer.

The argument put forward by the respondents at the tribunal highlights ignorance of the problem, but they are not alone in their sector. Rather, DNS Umbrella Limited merely trotted out the industry’s line on this issue.

But it’s not just brollies. Arguably, agencies misleading the worker with the higher or headline rate is the real issue, and although that wasn’t the basis of the claim before the tribunal and wasn’t mentioned in the case, in all likelihood, Mr Pajpani wouldn’t have accepted his £800 a day contract at £680 per day. Like thousands in his position, he wasn’t afforded the right to make an informed decision on accepting that contract -- perhaps pitted against another contract -- and so he should be compensated for that, and rightly will be.

What's (still) wrong with too many KIDs

So the Pajpani case actually pivots on the lack of clarity in the standardly formatted Key Information Documents that too many umbrellas still supply. Unfortunately, these PDFs are not much more than the old reconciliation statements that were long ago issued to explain the so-called 'umbrella calculation' (i.e. basic pay, plus holiday pay, plus margin, plus statutory employer deductions). 

Where a KID clearly informs a worker of the true pay rate, and the agency clearly informs the worker of that same rate (with the rate paid to the umbrella clearly laid out simply as the amount paid to the umbrella company for managing the worker’s employment), there will be no confusion, no confidence tricks and, potentially, no further claims of this kind to the employment tribunal.

At the video-phone hearing on March 24th 2023, the KID provided to Mr Pajpani was determined by the judge to be not of a ‘satisfactory clarity’ (see paragraph 48 of the ruling). 

Where the Pajpani judgment raises questions

Interestingly, both Mr Pajpani’s umbrella and agency (Alexander Mann Solutions) was more than able to identify the worker's true pay rate, but chose not to. Was that due to negligence? Ignorance of the law? Or just down to two companies following the status quo without due regard to the damage to agency worker rights?

Contractors are familiar with agencies and brollies advertising or offering a rate that is effectively unachievable. It’s not fair, and not lawful, and is now clearly laid out by the employment tribunal for anyone who reads this judgment (and other judgments such as M Binns v Umbrella Company Ltd.)

Lastly, does your brolly have pseudo-KIDs?

Yet I’m optimistic. My hope of the Pajpani case is that to better serve the workers they claim to take care of, all umbrella companies will now seek to equip their contractors with a totally transparent, compliant, unambiguous pay statement, which effectively kick what I condemn as ‘pseudo-KIDS’ into touch.  Even if that means directly contradicting the pay rates being offered by agencies “on an umbrella company basis,” and consequently suffering the wrath of some still-uniformed recruiter, that ridding of pseudo-KIDS needs to happen.

While binning pseudo-KIDS may take time, to quicken the process I’d advise any contractor who has been offered a set pay rate with insufficient explanation of what they can expect to be paid and can evidence that, to consider a potential claim. Otherwise there will be more regretful cases like this, with further umbrellas, and potentially agencies too, arbitrarily amending pay rates by making deductions that neither the law nor the signed paperwork permits.