A contractor's guide to umbrella company contracts

Most limited company contractors will be familiar with the provisions which ordinarily go into consultancy agreements, or contracts for services. Many limited company contractors will have their own template agreement and will be used to contracting on their own terms.

But if a contractor is considering using an umbrella company, they will invariably be given a contract to sign which has been prepared by the umbrella and which is generally non-negotiable, writes Hannah Morrison, senior associate at law firm Brabners LLP.

So, for contractors who are new to the umbrella model of working, what should they look out for in any contract of employment which is presented to them?

Here, exclusively for ContractorUK, I will examine four key provisions of the typical umbrella company contract.

1. Contract of Employment

Firstly, and importantly, virtually every umbrella contract is a contract of employment.

A contract of employment ‘does what it says on the tin;’ it affords a contractor employment rights.

This means that an umbrella employee is entitled to the same employment law rights as a traditional employee, including the right to receive statutory sick pay (subject to meeting the qualifying criteria), and holiday pay, the right to raise a grievance and the right to take (and be paid for) maternity, paternity and other forms of statutory family leave, again, subject to the qualifying conditions.

A compliant contract of employment should include information about all of these rights, or point you to where you can find further information.

Please note, many umbrella companies include certain information in the main contract of employment, and the rest (usually the information which varies such as the rate of pay, job description and location for a particular assignment) in a separate ‘assignment schedule.’

Most umbrella employment contracts are designed to be overarching, meaning that the employment relationship between umbrella company and contractor continues after an assignment ends, unless and until terminated by either party. This means that you (the contractor /umbrella company employee) can move from assignment to assignment, or even agency to agency (subject to their PSL requirements) while remaining employed by the same umbrella company.

2. Pay

The payment clause is, understandably, the clause of the umbrella company which most contractors are most interested in!

However, for those individuals who are new to umbrella companies, understanding your take-home pay can be a little complicated.

It is important to understand and distinguish between the ‘assignment rate’ (sometimes referred to as the ‘contract rate’ or ‘invoice value’), and your take-home pay (i.e. the amount of your gross pay).

The assignment rate is the amount which the client you work for has agreed to pay to your agency for your services (and which your agency passes to your umbrella company after deducting their fee).

Typically, the assignment rate is made up of the actual wages payable to you (your gross pay), plus the agency’s and the umbrella company’s fee (or ‘margin’), as well as the ‘employment costs,’ which the umbrella company will have to pay in respect of you such as holiday pay, employer’s National Insurance contributions, employer pension contributions and Apprenticeship Levy.

All of these elements are bound up in the headline rate (i.e. the assignment rate) which the client pays, and then these elements are stripped out by the agency and the umbrella company, leaving your gross take-home pay. A well-drafted umbrella employment contract will explain how your gross pay is calculated, and this should be clearly set out on your payslips.

An umbrella company employment contract will often describe your take-home pay as an hourly rate at the National Minimum Wage, plus another taxable amount often described as a bonus, commission or additional pay. As gov.uk points out, here, if any of this amount is described as “non-taxable,” your umbrella company could be involving you in a tax avoidance scheme and you should proceed extremely cautiously.

3. Conduct Regulations

The Conduct of Employment Agencies and Employment Businesses Regulations 2003 (‘Conduct Regulations’ for short), are designed to provide protection to work-seekers, including umbrella employees.

This protection is achieved by imposing certain requirements and restrictions on employment businesses (i.e. your recruitment agency). For example, employment businesses are prohibited from withholding or threatening to withhold wages due to a worker on the grounds that the employment business has not yet received payment from the client.

When the Conduct Regulations were first proposed by the government, some professional contractors objected to the legislation on the grounds that they were experienced, self-employed professionals who didn’t require the protection of the legislation (which some perceived as adding a layer of administration and restriction to their working relationships which they didn’t want). Accordingly, an ‘opt-out’ provision was inserted into the Conduct Regulations which today allows corporate work-seekers (i.e. those supplying their services through a limited company, including an umbrella company) to opt out of the Conduct Regulations in their entirety.

A reputable umbrella company will allow you to choose whether you want to opt-out of the Conduct Regulations or not, although be aware that some draft their employment contracts on the basis that you will be automatically opted out unless you notify your umbrella that you want to remain within the Conduct Regulations. So check your contract and other onboarding documentation to see what the position is, and ask your umbrella company if you are unsure. 

4. Notice

Sometimes there are circumstances when either you, or the client you are working for, wants or needs to terminate the assignment early.

It is important to distinguish between the termination of an assignment, and the termination of your employment with the umbrella company. As set out above, overarching umbrella contracts are designed not to terminate automatically when an assignment ends.

The contract of employment will set out the minimum notice periods required to terminate your employment (whether notice is given by the umbrella company to you or vice versa).

However, your contract (or more commonly your assignment schedule) will often also contain minimum notice periods required to terminate your current assignment. Typically, umbrella employees can be expected to provide two to four weeks’ notice (sometimes more) if they wish to terminate an assignment early.

Equally, clients often reserve the right to terminate your assignment on a few weeks’ notice or, sometimes, with no notice at all. It is important that you are clear about what has been agreed, because one of the most common areas of dispute arises when one party terminates an assignment without giving the requisite period of notice, leaving the other party in the lurch.

Umbrella company contracts in a nutshell…

Reputable umbrella companies should have detailed and clearly-drafted employment contracts, assignment schedules and/or policies covering all the above provisions. Contractors would be well-advised to review such documents carefully as part of the onboarding process, in order to avoid any surprises and to ensure that their umbrella company is contractually committing to afford them their employment rights.