Umbrella Companies: Common Skims, Scams and Unethical Practices

We delve into the various skims, scams and unethical practices that umbrella companies are using to boost their income, revealing the warning signs that workers (and HMRC) need to look out for.

Summary

• Umbrellas charge workers a weekly fee (known as a ‘margin’) to run a worker’s payroll. This fee is typically £20 per week
• However, umbrella companies can increase their income four-fold by engaging in unethical practices, skims and scams. Many of which are not, unfortunately, illegal.

Source and assumptions

• Insights and real-life payslips shared with offpayroll.org.uk by umbrella workers.
• Calculations are provided by inniAccounts, a specialist accountancy firm
• Assumptions used:
• Care worker earning £12 per hour
• IT worker earning £500 per day
• Both work 233 days per year

Tactics used by umbrella companies to boost their income from workers

Details

Below, we explain each of the tactics used by umbrella companies, including how they work, what signs or symptoms workers should look out for, what the benefit is to the umbrella and who is impacted by the tactic used.

Pocketing holiday pay at the end of the holiday year

How it works:
The umbrella company holds back earnings from the worker in a pot, to cover holidays. When the worker takes a holiday, they get paid from the pot. If, however, at the end of the holiday year, the worker has not used all the holiday pay they have saved in the pot, the umbrella company pockets it.

The law around this is not straightforward. The umbrella company should, according to case law, give the worker a warning that they have not used all of their holiday entitlement. If the worker still doesn’t take the leave, then the holiday entitlement is lost and the umbrella company can keep what’s in the pot. The law is complicated, and not clear, should an umbrella company not warn the worker.

Symptoms:
Umbrella companies that either don’t remind workers about the holiday pot or have very restrictive policies which make it hard to use leftover holiday (for example, not allowing any carry over to the new year, or unnecessarily complex approval processes.)

Benefit to the umbrella:
If the umbrella pockets just 3 days of holiday per year, the umbrella keeps:

• £1340 per worker, per year (IT worker on £500/day)
• £257 per worker, per year (care worker on £12/hour)

Who misses out:

• The worker – it’s their entitlement/money
• HMRC – in many cases tax / national insurance is not collected on this holiday entitlement

Pocketing holiday pay at the end of an assignment, by running down the clock

How it works:
When a worker finishes working for an umbrella company, they pocket the holiday pay left in the pot. This is illegal.

If it happens, the worker has three months from the event occurring to lodge a claim via an employment tribunal to get the holiday pay back. If they miss this date, even by a day, any employment tribunal case is automatically dismissed, and the umbrella can keep the holiday pay.

Symptoms:
Some umbrellas have contracts or processes in place which prevent holiday pay from being repaid until 3 months after leaving. This intentionally pushes the worker beyond the deadline to lodge a claim at a tribunal.

The benefit to the umbrella:
The same as above, for 3 days pocketed:

• £1340 per worker, per year (IT worker on £500/day)
• £257 per worker, per year (care worker on £12/hour)

Who misses out:
As above: the worker and HMRC

Paying the employee for expenses that haven’t been incurred

How it works:
Part of the worker’s earnings are paid out as expenses, most commonly mileage (as no receipts needed) instead of salary. These payments are not subject to income tax and national insurance deductions.

Often these expenses have simply not occurred, or lack sufficient justification or evidence. HMRC could pursue these expenses, deem them as income, and seek repayment of income tax and national insurance.

Symptoms:
Mileage repayments or other expenses on the workers’ payslips, with the worker having to submit receipts or keep a mileage log.

The benefit to the umbrella:
The average daily commute, according to the RAC Foundation is 20 miles per day:

• £290 per worker, per year

Who misses out:
HMRC

Payslips that don’t add up

How it works:
When following the flow of earnings to net payments, the umbrella skims a small amount of money somewhere, but it’s hard to see where and why. The part of the payslip covered by legislation always reconciles, but the part that is unique to umbrella companies, and not subject to legislation, doesn’t.

Symptoms:
When reconciling from earnings paid to the umbrella, down to the net payment (after applying the correct tax and national insurance deductions), the payslip is ‘out’ by a few pounds, in the umbrella’s favour. This normally occurs in a line called “employment costs”, with no details behind it.

The benefits to the umbrella:
The skims we’ve seen are typically £3-8 per worker, per week:

• £141 to £376 per worker, per year

Who misses out:
The worker

Charging the apprenticeship levy, even when it’s not due

How it works:
Umbrellas with an annual pay bill of more than £3m must pay the apprenticeship levy, which is 0.5% of their pay bill. Umbrella companies, as standard, charge the levy directly back to the worker. Many umbrella companies charge the worker, even though they’re not subject to the levy, pocketing the difference.

Symptoms:
Apprenticeship levy deductions on payslips of small umbrella companies.

The benefits to the umbrella:

• £509 per worker, per year (IT worker)
• £97 per worker, per year (care worker)

Who misses out:
The worker

Forming a “mini cartel” and forcing up fees

How it works:
Umbrella companies collude with recruitment agents, resulting in ‘preferred supplier lists’ of 1-5 umbrella companies. The worker has no choice but to use one of the umbrella companies. Given the lack of competition, the umbrella companies increase their standard fees above those stated publicly.

Symptoms:
Workers being told they have to use an umbrella from a small list, and the umbrella fees being higher than those on the umbrella company’s website.

The benefits to the umbrella:
In our experience, we’ve seen weekly charges vary by around £5 per week

• £233 per worker, per year

Who misses out:
The worker

Charging employer’s national insurance on pensions, when it’s not due

How it works:
The worker pays into a pension scheme, and a deduction is made from their gross income. The umbrella company counts this as income, and deducts, and keeps, employers national insurance from the earnings, despite it not being due.

Symptoms:
Normally hidden away in the “employment costs” line, which is a larger deduction than it should be.

The benefits to the umbrella:
Varies depending on how much the worker pays into their pension

Who misses out:
The worker

“Gap pay” charges

How it works:
The worker pays into a “gap pay fund”, which provides them with a payout should they be in-between work. The payout is not automatic – the worker must ask, and remember to ask. If the worker doesn’t need it or doesn’t ask, the umbrella keeps the gap pay fund. Often workers are unaware of, or are coerced into paying into these schemes.

Symptoms:
Normally hidden away in “employment costs”, with a statement such as “employment costs include (but are not limited to) employers’ national insurance, employers’ pension payments, gap pay contributions, any approved business expenses that you incur and any other reasonable employment costs.” [Source: umbrella company charging gap pay]

The benefit to the umbrella:
Unknown. Umbrellas charging gap pay often don’t provide a breakdown of fees.

Who misses out:
The worker

Employers national insurance allowance (mini umbrella companies)

How it works:
Small umbrella companies get a £4,000 reduction in their national insurance bill. Contrived arrangements mean a series of seemingly unconnected “mini” umbrella companies are set up, spreading workers out to claim the allowance multiple times.

Symptoms:
Workers are employed by unknown umbrellas, companies with strange names or the umbrella often changes. Looking up the company details on companies house often reveals overseas directors.

The benefit to the umbrella:
This scam is only effective for low paid workers:

• £1,468 per worker, per year (care worker)

Who misses out:
HMRC

Workers forced or unwittingly opted out of agency conduct regulations

How it works:
Workers are made to, convinced to, or simply without their knowledge, opted out of the Agency Conduct Regulations. These important protections prevent umbrella companies from withholding pay (even if they’ve not been paid), prevent them from blocking workers from taking up a permanent role with the end employer, and prevent the umbrellas from charging the worker for ‘work-finding’ services.

Symptoms:
Opting out is made a verbal condition of gaining work, but commonly the opt-out is simply placed next to the signature page on the contract, appearing like it’s mandatory.

The benefit to the umbrella:
Varies – opens the door to unscrupulous practices

Who misses out:
The worker