Revealed: the dodgy activities of umbrella companies which warrant regulation

Amid this new momentum to regulate umbrella companies, contractors might be forgiven for thinking that recruitment agencies must be having a bit of a laugh, standing on the side-lines watching umbrellas take some serious flak, writes Matt Collingwood of tech recruitment firm VIQU.

But when it comes to dodgy practices, the truth is that too many agents have got dirt on their own hands too, as a direct result of the activities which umbrellas are being accused of as the basis to regulate them. 

‘A pre-loaded Mastercard for sending contractors our way’

In fact, if members of my recruitment team weren’t so upstanding, many of them would currently have pre-loaded credit cards thanks to brollies wanting business! This was the offering from umbrellas that we know (and which are still operating) who contacted my consultants directly to make an attractive kickback in the shape of ready-to-use Mastercards for introducing their services to contractors.

Numerous members of my staffing team could also have an array of the very latest electronic gadgets too! These were likewise offered by umbrellas, with acceptance of the cutting-edge tech meaning our staffing agency would have been expected to direct contractors to the umbrella company without asking questions. 

Bribing for referrals

Hard cash is involved as well. For example, I worked with a large multi-national corporate recruitment business, which in just a single year, let slip that they made £106,000 in rebates from a London-run umbrella company. And yes, the brolly is still open today!

So, with recruitment agencies receiving sizeable amounts of money from umbrella companies, is the decision to introduce contractors to these ‘gifting’ umbrella companies fair? And frankly, while some agents might have enjoyed seeing brollies taking a beating in recent weeks, how can we expect contractors to trust recruitment agencies and their recommendations if so many of us within the industry are getting commercial benefits?

Top 6 dodgy brolly activities

Below, I outline some of the other less-than-ethical practices which umbrellas use (and that many recruitment agencies endorse), which IT contractors need to be aware of.

It’s a quick list, if you like, of why the umbrella company industry MUST become regulated.

1. The kickback

So as mentioned contractors, holding his pre-loaded Mastercard or brandishing her shiny new bit of kit, does your agent really have your best interests at heart?!

I know of many contractors who have found themselves engaging with an umbrella purely because the recruitment agency they were working with insisted on it.

Now, this could be because the agency has gone through a thorough research period and has identified the umbrella as a reputable, law-abiding, HMRC-compliant company.

However, more often than not, the agency is insisting the contractor works with this umbrella because they are getting a kickback! We’ve all heard from the Loan Charge APPG that such kickbacks can range from luxury holidays to fitted kitchens for agency directors!

2. The take-home inflator

When comparing different umbrella companies, we know a contractor’s take-home pay should always be the same, as this is driven by the worker’s tax code. The only acceptable variable should be the umbrella’s weekly fee (normally between £10 and £30 gross).

However, I have seen so many examples of umbrellas manipulating the figures so that the perceived take-home pay for the worker is higher!

When umbrellas are asked to calculate a contractor’s take-home, it should be based on working 52 weeks per year. But some umbrellas will base their take-home calculations on 48 weeks, which will give the impression that take home will be higher.

However, what many inexperienced IT contractors do not remember is that you still have the same tax free allowance (£12,570), so you will end up with the same amount of take home in the end. Umbrellas and agencies partaking in this misleading and manipulative practice must be held to account for their actions.

Yet contractors can help themselves here too, by remembering that if an umbrella company’s take-home sounds too good to be true…it probably is!

3. The payslip ruse

Unfortunately, many contractors do not realise there is something wrong with their payslips until it is too late.

For example, I know of one umbrella company which paid their contractors in ‘loans’, until they went into administration. So, when administrators came in to recover any debts, they went after the contractors! I spoke with one IT contractor who owed HMRC £20,000 because of these ‘loans.’

These loan schemes, or, as the government calls them ‘disguised remuneration arrangements’ have since been addressed (at least in the government’s view). But they have left big damages behind and this covert usage of loans – often by scheme promoters who masquerade as umbrellas to lure in unknowing contractors -- is a clear example of why the umbrella industry needs regulation.

4. The payslip split

Another payslip ploy which a surprisingly large amount of umbrellas practice, is to split a contractor’s earnings into a minimum wage payment and discretionary bonuses.

Umbrellas do this to reduce the risk of Employment Tribunal claims brought against them, as a contractor may only be entitled to their actual salary (minimum wage). Again, this puts the contractor at risk.

5. The silent (holiday) treatment

In my opinion, a huge part of choosing to work with an umbrella company is their customer service. However, many umbrellas use their convenient lack of communication and service as an excuse not to inform contractors when they have not claimed their holiday allowance back!

In fact, the Labour Market Enforcement Strategy estimated £1.8 billion was made from workers’ untaken holiday allowance in 2018/2019.

Shockingly, I know of one Midlands based umbrella company in the charity sector which earns £100,000 a year solely from retaining contractors’ holiday allowances.

6. The vague script

When I want to test out an umbrella, I go into ‘mystery shopper’ mode.

I phone up pretending to be a naïve, first-time contractor, displaying a clear lack of knowledge. I use a score sheet and mark them out of 10 for how fully they answer my questions, their customer service, the quality of documents shared with me and whether they properly explain the employer costs.

In many cases, I have found the umbrellas to give the bargepole treatment to those whose telephone sales staff, whether they be the brolly’s ‘call handlers’ or flashily-titled ‘User Experience Executives’ to be very scripted – and very vague with their answers. These are the sorts of umbrella companies we would never introduce a contractor to.

The ‘Mystery Shopper’ and other ways to fend against being taking in

Now, let me disclose a little more about my mystery-shopper mode because it’s a sure-fire method that contractors can adopt a version of to separate the undesirable umbrellas from the desirable umbrellas. And the latter are most definitely out there – in fact, there are many ethical and customer-centric umbrella companies operating today in 2021.

I’m aware it might sound a little over the top to become a ‘mystery shopper’ to find them, but continuing to only work with and introduce ethical and reputable umbrellas is important to our business. And contractors, it should be important to you too!

Due diligence if you’re a concerned contractor looks like…

So here’s a list based on our own ‘due diligence’ checks. We:

• Ask them to come into our office and formally present their services
• Enquire about their ‘disaster recovery’ processes to ensure contractors will get paid
• Look through their tax compliance and insurance policies
• Require examples of pay slips, so that we can see the tax taken from the contractor
• Run credit checks. (N.B. On one occasion, we were in talks with a very established Home Counties-based umbrella which we had to decline to work with because of the results of their credit check! Take the financial position of an umbrella very seriously. If they go into administration, there is a good chance its contractors will not get paid)
• Check out the people behind the umbrella company. Some of the questionable and even downright bogus brollies are set up by people who have no business credentials or experience in the industry.

Contractors should run a version of these checks themselves, to give them peace of mind. And more than ever, it’s critical these checks are circulated to contractors right now.

Off-payroll rules bring these brolly checks into their own

Since the introduction of IR35 reform on April 6th 2021, it is unsurprising that a number of end-user clients have taken risk-averse approaches to using IT contractors. However, at times this has meant pressuring contractors into using umbrella companies when there is no need to. This pressuring illustrates a clear lack of consideration for the contractor, and the risks they have to take engaging with an umbrella company.

In the future, I would like to see both the umbrella and recruitment industries become regulated. There is clear evidence that umbrella companies have been able to get away with putting contractors at risk for far too long, and it needs to stop. Although I do question whether licensing such businesses would encourage education, understanding and transparency, something needs to change.

My KID report card: Good, but could do better

Early last year, I believe the government made a start. The April 2020 amendment to Regulation 13A of The Conduct of Employment Agencies and Employment Businesses Regulations 2003, introducing KID, was a positive step. It’s a real improvement to the agency and umbrella situation. But there is still a lot of vagueness. These obscurities make it easy for umbrellas to skirt around the law and take advantage of hard-working contractors. So although it didn’t show much appetite in the House of Commons on Monday night to lance the boil that is unregulated umbrellas, the government must go further.