What is salary skimming and how does it hit umbrella company contractors?

Last week, the contractor sector learned that a well-known umbrella company is facing allegations of inappropriate practice in the form of ‘skimming,’ writes Crawford Temple, CEO of Professional Passport. 

Salary skimming is alive and kicking (contractors), allegedly

The allegations represent one more slur against a sector that is already under the cosh for non-compliant behaviour; a proliferation of disguised remuneration schemes popping up in the market, as well as respected brands operating in ways that while not illegal, are certainly morally questionable.

All of this serves to give the entire temporary work and payroll industry a poor name, and it feels extra disappointing when many industry stakeholders are working hard to raise standards and stamp out malpractice.

What is salary skimming?

Put simply, skimming is where a company is not being entirely transparent with its workers on the charges that it applies. They market a charge to a worker -- which most would assume to be the total cost to them for using that service, while at the same time applying other ‘hidden’ costs that effectively amount to profit for the provider.

Umbrella companies work on very small margins and rely on volume. Margins for umbrella companies have come under immense pressure as the market expands. Changes to legislation have also created more complex processes and increased risks for umbrella companies which increases their costs to remain compliant. 

One growing trend is where recruitment companies insist on a significant share of that margin when allowing their workers to operate through the umbrella. This, in turn, puts pressure on the providers and their business models.

Holiday pay withholding, the other big umbrella payslip wheeze

Recently, we have heard revelations of companies that have retained workers’ holiday pay without warning, relying on contractual terms that many workers do not read or fail to fully understand. Although this is not skimming, it has, according to reports, provided significant additional revenues for those providers operating in this way. 

And with increasing pressure by the industry to prevent providers from withholding holiday pay, those providers whose business model relies on these additional incomes will either have to change their structure or find other ways to replace the lost income. The fear is that skimming becomes the new hidden income stream.

Skimming can take a number of forms, but can only thrive and survive where a lack of transparency exists.

What does salary skimming look like?

One common approach is where a provider has a payslip that summarises all “employment costs” into one line with a single total value. This would allow a provider to hide any additional charges within this summary and, without carrying out a full analysis and check of the payslip, the hidden costs are unlikely to emerge.

Any provider who operates a single-line summary of employment costs should be asked to provide a full breakdown of the costs by either the contractor or recruitment company.

A recruitment company recommending contractors to a provider operating these additional hidden charges risks damaging their own reputation when these emerge -- even more so if the recruitment company is taking a commission from the provider for each worker.

Bearing down on skimming

With provider accreditation now increasingly becoming a ‘must-have’ rather than a ‘nice-to have,’ for an umbrella to operate and deal with a range of recruitment agencies, the compliance accreditation bodies need to ensure their terms are updated to address any non-compliance and malpractice.

Our organisation has, for some considerable time now, measures and requirements in place to prevent both skimming and covertly retaining holiday pay due to workers. Terms we put forward require a provider to confirm their margin and guarantee that this is the only and total cost to the worker. Providers must also confirm that all other deductions (the statutory deductions), are applied at the correct levels with the correct thresholds applying. If it was found that a provider operated outside of these terms they would immediately be suspended.

When we would (and wouldn’t) reinstate a skimmer-umbrella

Where we differ significantly from other accreditations is that rather than just deal with perhaps one or two individuals who have found the issue and recompense them, we would require a provider to identify all workers that have suffered as a result of not meeting the compliance standards and provide redress to all of them. Only then would we consider whether a provider could be reinstated.

A similar approach is taken by us on holiday pay, whereby if a worker has suffered any loss, and the agreed standards have not been met, then a provider would be suspended until such time that all workers impacted have been identified and recompensed. Only then would we consider reinstating a provider on our approved list.

Final thought

Compliance standards across the sector should be used to not only ensure the correct legal processes are followed but also to address the moral and integrity issues that the sector faces. This all has to be done in a way that does not overstep the line of the Competition Market Authority by interfering with the commercial operations of the business.

The importance of implementing effective compliance processes and sticking to them cannot be overstated. Non-compliance does not pay and could be costly in the long run, as some providers may now be discovering.