Contractors' Questions: Can my agency insist on their umbrella?

Contractor's Question: Since I don't have a limited company, I am opting for an umbrella company to execute my first contract. But my agency is refusing to work with my preferred umbrella companies and is instead insisting that I choose one from their preferred list.

I spoke to the umbrella companies in their list. They seem to provide PAYE type scheme with a minimal invoicing fee every month. But unfortunately, I would lose a big chunk in tax every month. I want to know, is it legal for an agency to force me to use one of their own recommended umbrella companies?

Expert's Answer: Your relationship with the agency is governed by your contract with them. From what you say, it seems likely that the contract allows them to demand that you use one of their preferred umbrella organisations. There is nothing illegal about this on the face of it; it doesn't breach any laws or regulations. Parties are free to contract on whatever terms they wish.

The law will only intervene if a contract contains an 'unreasonable' term, and it is up to a court to decide what is unreasonable. Courts consider this on a case-by-case basis, making it difficult to advise in general terms. Most unreasonable terms, but not all, deal with the limitation of liability in the event of breach of contract.

In your case, it is difficult to say whether the term restricting you to their umbrella organisations will be found unreasonable by a judge - and expensive to argue it out in court. The agency might argue that they have a specific commercial interest to protect by including this clause in your contract. If that is the case, a court might well agree that this requirement is enforceable, and it may be too late to complain after you have entered into the contract.

In this case, I suggest you approach the agency and set out compelling reasons why you should be allowed to operate through a different organisation. If you cannot convince them to amend the contract, you will either have to comply with their terms, or terminate the contract in accordance with its termination clauses, and then find another agency willing to agree to use one of your organisations.

The expert was Nigel Musgrove, a lawyer at Cousins Business Law.

Useful links:

Directory of umbrella companies

Click here for our umbrella company guide.