In a new report on the increasing use of umbrella companies in the UK labour market, the TUC has called for them to be banned.

An umbrella company is essentially a payroll company, used by recruitment agencies to operate a PAYE (pay-as-you-earn) system for the agency workers for whom they find work. In many cases, it also employs the agency worker, making them an “employee” of the umbrella company.

As a result, the TUC says that workers face a number of problems, such as misleading and unfair deductions from pay. In addition, breaches of holiday leave and pay entitlement are widespread - with umbrella companies preventing workers from taking their holiday.

It has been widely reported that some umbrella companies promote and coerce their employees to use tax evasion schemes, leaving workers potentially facing huge future tax bills. The union body is warning that the use of umbrella companies could spiral post-pandemic because of a combination of changes to tax rules (IR35) which have come in this financial year and the increase in agency work.

The IR35 or “off-payroll working rules” will potentially make employers liable for the tax and national insurance contributions of the contractors that they engage with. Government guidance states that the off-payroll working rules are unlikely to apply to people employed by an umbrella company.

The TUC predicts that transferring contractors to umbrella companies will be seen by some as a convenient way to continue to shirk their tax and employment rights obligations.

It is concerned that post-pandemic the number of agency workers will increase – along with the number of umbrella workers – as companies scramble for new staff as sectors reopen and labour shortages emerge.

The union body warns that there is a “gaping hole in enforcement” in terms of regulation of the sector, despite a recommendation from the Taylor Review into Modern Working Practices that enforcement of umbrella companies should be stepped up.

The TUC is therefore calling for:

  • An outright ban on umbrella companies by requiring employment agencies to pay and employ the staff they place with clients
  • Joint liability laws in supply chains that make the end client and any contractor in the supply chain responsible for upholding the legal rights of those working in the supply chain
  • Greater trade union access to workplaces and new trade union rights

To read the report in full, click here.