With the Employment Agencies Standards Inspectorate refining its enforcement focus, and the off-payroll working rules coming into force shortly, agreeing on clear contractual terms when engaging with an umbrella company has never been more important. This week, we’re looking at how and why contractual relationships are so critical.
The importance of the contractual relationship
When engaging a worker through an umbrella arrangement, recruitment agencies should be agreeing to and entering into a contract directly with the umbrella company. This contract of engagement should cover terms including payment, notice, and Contract Regulations opt-out.
However, many agencies are failing to recognise the importance of these terms and, accordingly, are agreeing to broad liabilities, inaccurate arrangements and lose clauses. This is leaving many agencies open to significant problems and liabilities in the future.
EAS and HMRC
Under the United Kingdom Labour Market Enforcement Strategy 2018/2019, the Employment Agencies Standards Inspectorate and HMRC have been directed to work together in clamping down on umbrella companies. While many use umbrella companies as an honest and legal way to take care of administration, reduce risk and help with finances, they can also be used to exploit workers, reduce employer responsibilities and avoid tax.
Failure to have a clear contract that accurately defines and guides the working relationship could potentially lead to questions or prosecution by HMRC and EAS.
Off-Payroll Working Rules
The off-payroll working rules come into force from April 2020, shifting the responsibility of determining IR35 status to all medium and large-sized end users. Businesses will, therefore, be looking at the contract of engagement to ensure that the relationship falls outside of IR35 and isn’t a case of “hidden employment”.
Failure to have clear and robust contractual terms with the worker’s umbrella company could lead businesses to question the working relationship and, accordingly, decide to engage their workers elsewhere or determine that the worker falls within IR35.
Conduct Regulations opt-out
Finally, there is also the Conduct Regulations to consider. The Conduct Regulations provide workers with a set of minimum standards to expect from recruitment agencies. These can be opted out of by workers who are keen to fall outside of IR35 and benefit financially from being considered a worker.
However, by failing to correctly opt the worker and umbrella company out of the Conduct Regulations, you can negate the opt-out. This can lead to increasing responsibilities on your behalf, as well as enabling a client to engage the worker directly with no compensation to yourself.
Defining the contractual relationship
We’re already seen a number of tax, worker status and Conduct Regulation opt-out challenges based on poorly defined contracts. To avoid this, we recommend:
- Agreeing to clear contractual terms
- Defining expectations
- Avoiding broad liability terms
- Working with a trusted and established provider of payroll services.
To find out more about working with umbrella companies, get in touch with our specialist team today.