Umbrella agencies cash in on temporary workers

When a teaching assistant opened his first payslip from a new job in an east London secondary school, he had an unpleasant surprise.

Based on the £90 daily rate the employment agency had told him he would earn, a back-of-the-envelope calculation suggested a fortnightly take-home pay of about £730. Instead he ended up with £665.82.

What he did not know was the daily rate did not represent his gross wage because payroll contributions by the employer were also included.

"The payslip said the employer's national insurance and pension contributions had been deducted, which I assumed was a mistake," he said. "But the agency said that's just how umbrella [employment] companies work, even though they didn't mention it when I accepted the job. It felt like I paid their share."

Passing on such costs is standard practice among the outsourced payroll providers that act as intermediaries between recruitment agencies or hirers and freelancers and short-term contractors. The so-called umbrella companies also take a margin of up to £25 a week to cover costs.

Use of the arrangement has expanded as the pool of temporary workers in the UK - 1.7m people in the final quarter of 2014 - grows at a faster rate than permanent jobs. It allows organisations with seasonal fluctuations in staffing needs to keep a flexible workforce without the burden of taking on employees.

"For somebody working a series of short assignments, it ensures their tax and admin is dealt with properly and they get full employment rights," says Julia Kermode of Freelancer & Contractor Services Association, which represents 50 agencies that employ about 95,000 people.

But critics say its proliferation in lower-paid segments of the workforce - where holiday pay is often "bundled up" into pay - is leaving some people worse off, casting doubt on government assertions that the recovery is spreading.

While official statistics are not kept on the numbers employed this way, Ucatt, the construction union, says the practice has become widespread since the government introduced measures last year to tackle bogus self-employment in the sector.

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Ms Kermode acknowledged some instances of unfair practice. "Employees should not be receiving less pay for the same work than they were when self-employed. Agencies sometimes don't understand how it works . . . [but] it's fundamentally wrong that people are unaware of what they are earning."

However, recruitment sector figures say a few rogue operators should not tarnish what is an otherwise legitimate option for professional contractors who do not want the hassle of dealing with tax, invoices and accounts that comes with operating as a sole trader or through a limited company.

"Umbrella models offer a range of benefits and rights including holiday pay which [self-employed] workers wouldn't normally get," says Kevin Barrow, partner at law firm Osborne Clarke. "In many cases they get a higher take-home pay than normal agency workers. Travel, subsistence and accommodation expenses can be paid tax-free . . . [which] can reduce the headline rate of tax and NI from 45 to 30 per cent, depending on the individual."

Yet a perception that some companies abuse expenses to limit their own tax bills has led to a clampdown on such perks. George Osborne, the chancellor, pledged in this year's Budget to restrict tax relief for temporary workers, which the Treasury expects to raise £635m by 2020.

In an effort to prevent workers feeling cheated on payday, employment intermediaries will also be forced to be more upfront about how they operate.

"Transparency is key. If the model isn't explained to people there can be a lot of confusion," says Colin Howells, chief executive at Crystal Umbrella and Atlantic, which together have 2,000 IT and healthcare professionals on their books and guarantee the national minimum wage to employees between assignments for up to 12 weeks.

For the teaching assistant, however, knowledge of the intricacies came too late. "When I called the umbrella company they said I should have negotiated the rate of pay differently to take into account all the deductions."

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