Is an unpaid umbrella company required to pay contractors?

Twice in the last month, I have had two separate umbrella companies ask me the slightly unnerving question of whether they have to pay contractors -- when their payroll business has not been paid by the agency/client, writes independent legal consultant Roger Sinclair, founder of Egos Consultancy Ltd.

The answer is worth knowing for contractors and workers alike, in addition to the out-of-pocket umbrellas and potentially errant agencies/end-clients.

The contractor’s inclusive rate: defined

To get close to understanding the answer, consider that most umbrella workers are engaged on the basis that the agency/client will pay the umbrella an inclusive rate.

Sometimes, it is instead described as a ‘limited rate’, or an ‘umbrella rate’. 

From this inclusive rate, the umbrella will pay the employment overheads (employers’ NIC, apprenticeship levy, employers’ pension contribution); set aside provision for holiday pay at the appropriate rate, retain its margin, and then pay the balance to the worker -- split, into (a) wages at the NMW for the number of hours worked, and (b) the balance as a bonus.  

Even reputable umbrellas need not pay contractors their bonus element, due to the contract

In the case of a reputable umbrella company -- and I’m confident that the two which approached me for advice are indeed reputable, this calculation, with each item shown separately, will generally be made visible to the worker on each payslip.

Where the arrangements are made on this basis, the contract terms may provide that the bonus element can be delayed, pending receipt of funds from the client;  but not the NMW element.

Unlawful deduction of wages

Indeed, failure to pay the NMW element on time would generally be an “unlawful deduction from wages” -- and may result in a claim before the employment tribunal.

Be aware, the umbrella-worker contract will generally contain a provision along the following lines:

“We undertake that we will pay your wages for all authorised time actually worked on assignment, whether or not we ourselves receive payment in respect of that work.” 

Asked and answered: Do unpaid umbrella companies still need to pay contractors?

So, the answer to the twice-asked, somewhat disconcerting question I’ve received, “The agency/client is late in paying us – do we still have to pay the workers?” is clearly “Yes.”

More accurately, the answer is, “Yes, the contractor(s) must be paid, at least to the extent of paying them the NMW for all hours worked.” 

Umbrellas, their employees (contractors) and others should note that paying the National Minimum Wage for all hours worked by contractors, where the umbrella themselves hasn’t been paid, will be the umbrella’s obligation, regardless of whether the individual is engaged by the umbrella as an employee, or as a ‘limb (b) worker’.

Conduct Regulations

But there’s a belt on top of the braces.

In fact, it is an express requirement of regulation 12 of the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (the ‘Conduct Regulations’) that non-payment by the hirer may not be used by an employment business as an excuse for not paying a work-seeker. 

Further, regulation 15 provides that an employment business’ terms must include:

“An undertaking that the employment business will pay the work-seeker in respect of work done by him, whether or not it is paid by the hirer in respect of that work.”

Failure of an agency/employment business to comply with these regulations is civilly actionable by an injured party;  it is also an offence (section 5, Employment Agencies Act 1973). 

Unpaid as an umbrella contractor? Here’s how to contact enforcer the EAS

Further be aware, the Employment Agency Standards Inspectorate (EAS) is responsible for enforcement. And should you need them, contact details for EAS should be found at the top of the KID (Key Information Document) which all employment businesses are required to provide work-seekers at various stages of negotiations leading to a contract, and on any later material change (e.g. start of pension autoenrollment contributions).

Who is the work-seeker?

From the viewpoint of these regulations, when a worker first approaches an agency/employment business, (s)he is a “work-seeker.” 

When a position is found for the worker, (s)he may be referred to an umbrella.

At that point, the roles then change -- the umbrella (which will have the contractual relationship with the agency/employment business) becomes the “work-seeker.” The worker (who will contract with the umbrella)  then becomes the “person who would be supplied by the work-seeker to carry out the work.”

When is a work-seeker a company?

Where the work-seeker is a company (which will be the case, where an umbrella is involved), then unless the worker will be working with “vulnerable persons”(likely to be the case for those working in healthcare, education, or social work), it is open to the company and the worker to agree to opt out of the Conduct Regulations, provided (a) they notify the agency/employment business, and (b) the agency/employment business then so notifies the client -- all before the work-seeker is “introduced or supplied” to the client.

Where there is a valid opt-out, the Conduct Regulations (apart from regulation 13A, which relates to KIDs) will not apply.

Not opting-out is a no-brainer, so check your contract

Today, while some agencies/employment businesses may prefer that umbrellas and their workers opt out of the Conduct Regulations, it will rarely be in the interests either of the umbrella or of the worker for them to do so. 

Why? Well, opting out deprives the umbrella and the worker of the protection of regulation 12, so it seems to me to be somewhat of a ‘no-brainer’ to not opt-out.  There are other advantages too of not opting out of the conduct regs.

Contractors must therefore be on guard because many umbrella-worker contracts will contain a default provision saying that you will agree to opt out, where legally permissible -- unless you tell the umbrella otherwise. It’s up to you as the worker to make sure your umbrella knows you do not want to opt-out.

Final thought

Standing back from the detail, the big picture is that umbrella contractors must be paid at least the NMW element of their pay, regardless of whether the umbrella themselves has been paid by the client/agency.

There are two frameworks which both stipulate this to be the case.

I’m pleased to say that this fact was readily accepted by the two umbrellas which approached me, meaning their contractors have been paid -- even if their employers haven’t.