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Hidden cost of umbrella companies in UK ‘may top £4.5bn a year’

·4-min read
<span>Photograph: Nick Ansell/PA</span>
Photograph: Nick Ansell/PA

Union and employment experts have called on the government to step up regulation of the temporary labour market, amid concerns abuses by “umbrella” companies may be costing workers and the exchequer as much as £4.5bn a year.

As many as 600,000 temporary workers in the UK are thought to be employed by umbrella companies, used by recruitment agencies and companies to cut temporary payroll costs.

In some cases they can provide useful services for contractors, but industry experts and the Trades Union Congress (TUC) fear they are increasingly being used to diminish workers’ rights and misappropriate billions of pounds in unpaid wages and tax fraud.

“Umbrellas need specific legislation,” said Rebecca Seeley Harris, a tax expert and former Treasury adviser. “It’s rife with problems and I can’t believe the government has sat on its hands and not pursued it.”

Related: NHS Covid lab staff hired via pay scheme with tax scam hallmarks

Umbrella companies are coming under increased scrutiny as more people are forced to use them following new, stricter tax rules for contractors. There has also been more recent scrutiny of “mini-umbrella companies”, used to avoid tax potentially worth hundreds of millions of pounds a year. A Guardian investigation last week showed that mini-umbrella schemes appeared to be present in several suppliers to the government’s pandemic test-and-trace system.

The UK’s former director of labour market enforcement, an official tasked with coordinating the efforts of the various agencies overseeing workers’ rights, in 2018 cited estimates of a £4.5bn cost, including £1bn from unpaid wages, and £1bn from frauds including mini-umbrella companies.

The other crucial issue is holiday pay, a legal requirement. Umbrella companies have been estimated to withhold holiday pay worth £2.5bn a year. Holiday pay is forfeited if workers do not actively claim it before the end of a tax year – meaning unscrupulous umbrellas can pocket it rather than paying it to workers. There is no organisation in charge of recovering unpaid holiday pay for workers.

Seeley Harris, who chairs the Employment Status Forum, has written to ministers Jesse Norman and Paul Scully calling for urgent action, including the immediate appointment of a new director of labour market enforcement, a role that has been empty since the start of the year.

She wrote that the government must push ahead if it plans to create a single enforcement body for employment law, as promised in the 2019 Conservative manifesto.

Frances O’Grady, the TUC’s general secretary, said: “Everyone deserves decent work. But a lack of regulation is allowing dodgy umbrella companies to operate with impunity. The victims are often low-paid key workers, denied their basic rights like holiday pay and minimum wage.

“Ministers must consider whether umbrella companies should be allowed at all. Employers shouldn’t be able to farm out their duties to a long line of intermediaries – washing their hands of any responsibility.”

The TUC has also raised concerns about declining enforcement of labour market laws. Inspections of employers by HM Revenue and Customs, responsible for policing minimum wage laws, and the Employment Agency Standards Inspectorate (EASI) fell by 20% and 50%, respectively, during 2020 compared with 2019.

The TUC said that basic workers’ rights are “illusory” if not backed up by proper enforcement, and that more resources are needed. For instance, 40,000 employment agencies are covered by only 19 EASI inspectors.

Andy Chamberlain, director of policy at IPSE, the Association of Independent Professionals and the Self-Employed, said regulation of umbrella companies was “long overdue” and added that the “recent controversy over mini-umbrellas is the tip of the iceberg”.

He added that government action was urgent because the new rules for contractors had “pushed yet more individuals into the wild west of the umbrella market”.

A UK government spokesperson said: “Protecting and enhancing workers’ rights through robust regulation – including for those employed by umbrella companies – is a priority for this government.

“We have already introduced requirements to improve the information provided to new agency workers about their contractual terms and pay rates, and have committed to establishing a single enforcement body to further protect vulnerable workers.”

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