What to do when your contractor umbrella company goes into liquidation

It’s today reported by ContractorUK that Optimum Pay Group -- an umbrella company -- has gone into liquidation, leaving many of its contractors unpaid.

The guidance here will be relevant to ‘OPG’ contractors, as well as other contractors -- at other umbrella companies in financial distress or in liquidation or insolvency, writes Adrian Marlowe, managing director of recruitment law firm Lawspeed.

The case of Optimum Pay Group

Our research shows that Optimum consisted of a holding company and two subsidiary companies, all of which went into voluntary liquidation in June 2023.

Its website, www.optimumpaygroup.com, is still operational (at the time of writing), and it states that the group offers different payroll services -- as employers, PAYE (contract for services, not employment), CIS and worldwide.

The liquidation will clearly affect anyone working through Optimum Pay Group, but entitlement to protection for pay will depend on the status of the contractor.

What protections are you entitled to if your umbrella employer goes bust?

If you have been contracted as an employee via the umbrella employer model, you are entitled to various protections and/or claims including if the insolvent business is transferred to another organisation.

These protections all depend on the circumstances, but the key point is that employee creditors are treated as ‘preferred creditors.’

There is a government scheme to ensure that payment entitlements up to statutory limits are covered off. See more on this scheme at: https://www.gov.uk/your-rights-if-your-employer-is-insolvent/what-you-can-get

Are there protections in liquidation for non-employee contractors?

The protections mentioned above are not available to contractors who are not employees, namely those not engaged on employment contracts (i.e. those on PAYE-only and CIS contracts).

For the purposes of the liquidation, these are treated as self-employed and therefore are normal creditors who must wait to see if any monies are left over after priority creditors are paid off.

In either case, there is no normal entitlement to payment from an agency you are being supplied through as you will not have contracted direct with the agency.

A step worth taking, and a whiff to detect…

However some agencies (particularly those who use Lawspeed’s agency-to-umbrella contracts), may have withheld monies from the umbrella company pursuant to those terms -- and could possibly provide some payment to you in that case. You could, therefore, ask the agency if it holds any retained funds. And this may be a step worth taking in the case of Optimum.

More importantly perhaps, especially for non-OPG contractors and if it’s not too late, is to spot the signs of a problem before the business goes bust. This may be easier said than done. However, if, for example, you are paid late or get a whiff of a problem, regardless of any explanation that may be provided to you, you should report this to the employment business (the agency) who is supplying you -- and if possible, ascertain the reason.

Typically, ‘caution’ should be the name of the game here, as no one wants to work and not be paid, so it is better to discuss with the agency first. Although it will likely involve some hassle for everyone, your agency should be able to transfer your engagement either to a direct contract, or through another umbrella company if you ask, bearing in mind that no one should be forced to work through any particular umbrella company.

Why do contractor umbrella companies crash, fold, or wind-up?

But why might an umbrella company crash, fold, or wind-up? Umbrellas operate on volume turnover, with fine balance sheets and usually few reserves. Their money is generally earned out of the payments made by agencies which will normally include the umbrella’s fixed profit charge.

This charge should be set out in both the Key information Document and information which should always be provided to you by the agency before you start any work through a particular umbrella company.

A classic problem for brollies is this…

If sums received are not allocated correctly and used for a different purpose unrelated to your actual payment, then problems can quickly arise. Using VAT monies for another purpose (be it payment of a loan or allowing credit to another party), which are payable to HMRC quarterly, has been a classic problem area for some umbrella businesses that have failed in the past.

If the reason for liquidation is late payment by an agency or hirer, the liquidator should be able to collect the monies that should have been paid and then pay it over to you. However there will always be costs involved in  both collecting the money and in the administration, and if the umbrella company has taken out secured loans, those loans will always get ‘first bite’ of the cherry, leaving you still out-of-pocket and suffering a long wait for payment.

Also the agency or hirer might itself not be able to make payment, leaving you totally in the lurch.

Expecting your full entitlement from the liquidator? Good luck

For Optimum Pay Group to have gone into liquidation voluntarily, one can safely assume that there were problems in recovering monies owed and/or the debts of the business were too great to service. So, unfortunately, there is little chance that you will receive the full amount you are entitled to from the liquidator.

Furthermore, there’s not much else you can ‘do’ after the event.

But on taking precautionary steps, it is best to rely on the agency that is finding you work to check out the umbrella company’s credentials. Your continuing work and payment is the most important thing both to an agency and to you -- not employment or engagement by a particular umbrella payroll organisation. Putting it another way, there is little advantage to an agency to refer you to an umbrella company that is putting your payment at risk.

The future

What next? Well, the government is consulting right now on how to regulate the umbrella market. While the primary focus in the consultation is on recovering unpaid levels of tax, the issue of umbrella companies becoming insolvent is critical for contractors who are left unpaid.

This is part of the reason why our law firm is proposing to HMT, HMRC and DBT that there should be a government-run registration scheme for umbrella companies, which should weed out the good from the bad, and eliminate badly-run businesses from the marketplace.

There is also an argument for saying that the money paid to an umbrella company for work done by contractors should be legally ‘ring-fenced,’ perhaps paid into a separate account held by the umbrella company. That way contractor pay should no longer be left to chance.