A Labour Party manifesto pledge to outlaw umbrella companies has been hailed by activists for protecting workers’ rights, but labelled impractical and ‘foolhardy’ by industry insiders.
With election campaigning reaching its final stages the world of commerce has been holding a microscope to party manifestos. One area that has garnered interest from business is the Labour Party’s plan to ban controversial ‘umbrella’ companies.
Used as an intermediary between contractors and their client, umbrella companies act as a de facto employer, in theory allowing workers to retain the flexibility of contracting while being eligible for PAYE and NI contributions, and removing paperwork from the contractor (for a fee usually taken as a percentage of a worker’s salary).
However, umbrella firms have come under fire from employee groups and trade unions for denying some workers basic employment rights and shifting the employer’s responsibility to pay national insurance contributions (NICs) and pensions to the employee.
Among its commitments to workers’ rights the Labour Party manifesto contains the following pledge on page 51:
“Banning payroll companies, sometimes known as umbrella companies, which create a false structure to limit employers’ tax liabilities and limit workers’ rights.”
The manifesto acknowledges that self-employment brings many benefits, freedoms and flexibilities and is a “vital and often entrepreneurial sector of our economy”, but flags the “mounting evidence that workers are being forced into self-employment by unscrupulous employers to avoid costs and their duties to workers”.
An estimated 450,000 workers are paid through umbrella companies, and Labour’s pledge comes as a direct response to the rise in the use of such firms.
The increase has been particularly notable in the hospitality and construction industries, where large volumes of temporary workers are often required to work on short-term projects and there have been numerous media reports of staff being forced to pay extra tax and administration fees.
Lack of manpower
Graham Farquhar, employment tax partner at RSM, believes the pledge is "a sledgehammer to crack a nut".
Farquhar highlighted the fact that the issues raised in Labour’s manifesto and the media are often caused by a lack of enforcement of the existing laws.
“There are laws at the moment, but they’re just not being enforced,” he said. “The reason for that is the Revenue doesn’t have the resources to police this effectively – it just does not have the manpower.
“Most umbrella companies will also argue they’re tax compliant and provide workers with more rights than any other scenario.”
Small number of unscrupulous operators
According to Julia Kermode, chief executive of the Freelancer & Contractor Services Association (FCSA), the poor public perception of umbrella companies has come from workers who are mistreated by a small number of unscrupulous operators calling themselves umbrellas.
“Some firms suggest they’re an umbrella firm when they aren’t,” said Kermode. “If a worker is not on an overarching contract of employment then it isn’t an umbrella – that’s their whole purpose.
“Compliant umbrella firms offer all 84 statutory rights of employment, and a good umbrella firm gives an individual all their rights while providing the flexibility to work on a number of different contracts.
“To put it bluntly this shows that Labour doesn’t know what they’re talking about. It also seems foolhardy to ban umbrella companies unilaterally considering that the sector is worth more than £3bn in tax and NI contributions to the exchequer annually.”
The problem the manifesto pledge seeks to fix is one of workers’ rights, but is difficult to see how a ban on umbrella firms would work in practice.
The FCSA is not aware of a government that has come into power and outlawed a section of the economy before, and RSM’s Graham Farquhar believes that for such a ban to be successful the government of the day would have to carefully define the term ‘umbrella company’.
“For example,” said Farquhar, “if a ‘normal’ company gets someone to deal with their payroll what’s the difference?
“If you didn’t have umbrella companies undertaking payroll you would have contractors having to deal with it themselves, and you’d have to think about how you’d police that.
“Some of these people, the last thing they understand is payroll, so what would you do? It would need to be a real attack on the contractor sector as a whole”.