Contractors, beware Hybrid Model Contracts

The contracting world is no stranger to complex employment arrangements, but fresh revelations have exposed a sneaky practice that is raising eyebrows and sparking debate -- Hybrid Model Contracts.

These contracts, designed to selectively engage contractors for PAYE tax purposes while treating them as self-employed for employment benefits, are under scrutiny for their potential to exploit workers. Online posts, LinkedIn threads and insights from us have brought these practices out of the shadows and into the spotlight, writes Jacob Bellas, founder of Contractor Voice.

What are Hybrid Model Contracts?

At their core, Hybrid Model Contracts (HMCs) aim to maximise flexibility for employers while minimising costs associated with full employment.

This is achieved by combining elements of PAYE employment with self-employment.

How do Hybrid Model Contacts work?

Here’s how these arrangements - HMCs - typically work:

1. PAYE engagement for tax purposes

Contractors are engaged under PAYE (Pay As You Earn) for tax purposes, meaning income tax and National Insurance contributions are deducted at source. This part of the arrangement is intended to comply with HMRC requirements and avoid the pitfalls of IR35 legislation.

2. Self-employment for employment benefits

For the purposes of employment rights and benefits, these same contractors are treated as self-employed!

This classification effectively opts the worker out of receiving statutory employment benefits such as holiday pay, sick leave, and pension contributions.

The financial implications of HMCs

One of the most concerning aspects of hybrid model contracts is their impact on contractors’ pay.

By splitting the engagement into the above two elements, ‘umbrella companies’ can reduce their financial obligations. Contractors may find themselves receiving below the National Minimum Wage (NMW) once all deductions and lack of benefits are factored in. This has significant implications for such contractor’s overall financial well-being and job security.

On LinkedIn, a written response to the Freelancer & Contractor Services Association outlines how some umbrellas are engaging contractors under HMCs. The response indicates that while these arrangements may offer short-term gains for employers and umbrella companies, they do so at the expense of the contractors’ fair remuneration and rights.

Hybrid Model Contracts: Legal and ethical considerations

The legality of these hybrid contracts is murky. While they may technically comply with certain tax regulations, they often skirt around employment laws designed to protect workers, thereby raising ethical questions about the treatment of contractors and the true cost of these engagements.

An article on ContractorUK entitled "What is the Elective Deduction Model (EDM)?" provides further context on these practices and delves into the complexity of the laws surrounding employment and this style of engagement.

The article helpfully spells out how the EDM allows for deductions that can leave contractors with significantly less take-home pay, thereby exacerbating the financial strain imposed by hybrid contracts.

Industry's response

There is growing concern from compliant industry quarters regarding the fairness and transparency of hybrid model contracts.

Contractors are therefore advised to scrutinise any agreement thoroughly before signing, and should seek advice if they are uncertain about the terms.

Meanwhile, regulatory bodies and industry associations are being called by us (and others) to address the murky practices of HMCs and ensure that all workers receive fair treatment and pay.

Unanswered questions and burning issues

There’s a further question which we believe needs answering. Should an umbrella be found to be engaging workers incorrectly – by using HMCs, would any financial liability from HMRC sit with the umbrella company for engaging the worker incorrectly, or with the agency for providing the worker to the end-hirer?

Bodies and associations speaking up, to answer this question and other burning issues related to HMCs, might inject some much-needed fairness and transparency into the umbrella company market. That’s certainly been thrown into doubt since an FCSA member was determined by us to have engaged workers using hybrid model contracts, further to ethical concerns we have surrounding the treatment of pensions for the affected contractors. All in all, it’s hard not to conclude that greater transparency and accountability in how umbrellas operate would go hand-in-hand with making HMCs less prevalent.

Hybrid Model Contracts are not to be taken lightly -- by industry or government

Hybrid model contracts represent a significant shift in how umbrella companies engage contractors and the complexity of the arrangements that contractors are engaged through. That’s why we’re calling on not just bodies, associations and accreditation bodies to step in here, but also on the new government, regardless of its political leanings, to draws up plans in its first 100 days from July 5th to stamp out unfair treatment and exploitative pay or working practices. If that happens, then Hybrid Model Contracts might disappear just as quickly as they’ve raised their ugly heads.