Why do recruitment agencies use umbrella companies?

Don’t worry contractors, we’re going to answer this question with you mind – as it is something contractors can be puzzled about.

And that question, writes Kris Simpson, country manager at Cool Company, is 'Why do recruitment agencies use umbrella companies?'

The legislative elephant in the room

Let’s first acknowledge there has been a lot of attention in the last few years given to how the revised IR35 off-payroll working legislation has impacted contractors and business-owners.

The legislation has engendered a lot of expense and stress, resulting in a significant chunk of businesses abandoning the convenience of a ‘freelance’ workforce. And some contractors have abandoned or parked their chosen careers. Stuck in between the two parties, recruiters have faced a compounded set of problems. Effectively trying to supply demand to a client group unwilling or unable to manage the new legislation.

While some recruiters have started taking on the burden of payroll and HR management themselves, this can be a complicated and often expensive process, so much so that most agencies simply don’t have the resources to manage it all. And that’s why many have turned to umbrella companies to provide a more workable solution.

Four reasons why recruitment agencies use umbrella companies

1. Administration

Back before the introduction of the revised IR35 legislation, the administration associated with connecting a contractor with an end-user/employer was more or less transactional.

Recruiters still had to manage the headhunting, vetting, interviewing, and reference-checking -- of course. But beyond that, it was a case of taking a fee and letting the contractor manage their own invoicing. Today, if a contractor could feasibly be viewed as an employee, and the client unable to handle the technicalities of IR35, there’s a lot more admin to be dealt with. Including payroll, benefits, onboarding, and offboarding. This is what umbrella companies are good at. Some have dedicated teams. Some have advanced automated HR and payroll systems. Others have a combination of the two, thereby removing the headache for recruiters.

2. Insurance

When you’re working with people and money, insurance liabilities follow! Because a reputable umbrella company will shoulder this responsibility, recruiters are able to offset the cost of insurance for the work contractors perform for their clients.

In addition, umbrella companies will also cover Employers, Professional and Public liabilities, which is a huge bonus for agencies working across multiple sectors. Not only does the umbrella company avail recruiters of the need to have an extensive insurance policy, but they will also be responsible for any claims and associated administration.

3. Records

Seeking talent is nothing new to recruiters. But the background checks can be tedious and time-consuming!

When working with contractors through an umbrella company, recruiters have access to detailed records with minimal effort. Of course they still need to check references. But sound umbrella companies keep concise, regularly updated contractor records, so the agency can be more confident of making a valuable referral.

4. Peace of mind

Two of the primary drawbacks of contracting are a lack of continuous work/employment and a lack of benefits. For a lot of contractors, this is offset by variety, and the ability to pick and choose who they work for.

IR35 changing has made this more difficult, making contracting less appealing. When working through an umbrella company, contractors are freed from the concerns of finding clients who are IR35-compliant and appear to be willing to take on the additional administration in return for this peace of mind. They can still switch between clients, but they are able to enjoy continuous employment and the associated rights and benefits. Which can make for a happier, more stable contract workforce.

Final thoughts

New ‘solutions’ offered by umbrella companies  -- and those masquerading as ‘umbrella companies’ -- have opened up a range of possibilities for contractors, employers, and recruiters. But, as we have cautioned previously, it’s a straight PAYE employer who you really want as your brolly, if you are to avoid headaches later down the line and even a potentially nasty tax bill from HMRC -- and that goes for both contractors and agencies alike.