• Harrison Moore

Why you might be the reason umbrella companies exist (and how to get rid of ‘em)

ANYONE been ripped-off by an umbrella company lately? If you’ve worked through an agency, chances are you have. If like me, you’ve ever wondered exactly how or why umbrellas exist, you’re not alone. I can’t remember the first time I heard of umbrellas. I know that I’d finished a job and, as normal, I was trying to pin down the next. Suddenly, all the agencies I called told me I had to start using an umbrella in order to get my wages.

I asked how this would affect me but I couldn’t get much sense out of the agency reps. They seemed as confused as I was. The information was patchy and inconsistent and there wasn’t much online. Either that or I wasn’t looking in the right place.

Eventually, we all figured out that umbrellas meant having tax deducted from our wages rather than being left to us to pay ourselves. Umbrellas also meant many other unsavoury things (more on those in another post).

Umbrellas were bad news because they meant that we would end up earning less through paying more tax (or through paying tax at all). “That’s not what we signed up for! We’re bloody self-employed! We do our own tax! Who are these new middlemen taking a cut of our wages?” we demanded to know.

Personally, I did manage for a few more months to stick with a payroll company that paid me without deducting tax but only because I was presenting myself as a consultant instead of an electrical installer. Eventually, that loophole closed and I was put onto an umbrella payroll model like everyone else. The rest is history.

On site, we all had a sense that something sinister had taken place. But, knowing that something is wrong and knowing how to put it right are different things entirely. Like many of us, I was after the money and working long hours. Our jobs in construction are physically and mentally tiring, and I was working nights so that I could go to uni in the day, which made me even more tired. The last thing I wanted to do after work was to look for legislation about umbrellas. I wouldn’t even have known where to look if I’d tried.

Long story short, I’d just turned 25, paid off debts and overcome depression. I was looking at life differently. I wanted to go to uni to study art & design - my highest grade at GCSE, and something I’d always wanted to do but lacked confidence in. So I used agencies part-time (and full-time in the school holidays) for the next 7 years to help pay for uni.

Fast forward to today, it turns out that uni gave me space, time and support I needed to examine the things that had bothered me and so many others about working with agencies and umbrellas in construction. Here’s what I learned…

For decades, each successive government has tried to crack down on what they call ‘disguised employment.’ Disguised employment means a situation where workers are presented as self-employed when, in fact, the way they’re working is the same as employees on the books - a bit like the way I’d presented myself as a consultant when, in fact, I was doing electrical installation work like the other cardies.

The Government is clear on this. Either we’re self-employed (ie generating our own work and directing others to help us) or we’re employed (ie relying on work generated and directed by others). So there are two clear types of employment.

But it’s the grey area between these two types of employment - disguised employment - that pisses the Government off because it means that millions of workers are slipping through the PAYE income tax net by pretending they’re self-employed, or by falsely believing they are.

On top of that, HMRC and the unions view these same workers as being denied basic employment rights and benefits.

So, there’s a lot at stake in disguised employment. It creates big winners and big losers. Employers win big by avoiding the responsibility of employing workers. It’s obviously faster, easier and cheaper to hire-and-fire a subbie than an employee. Agencies win big for the same reason. And workers win big by earning a higher rate and by taking care of their own tax (ie paying less).

The Government, however, loses big on many millions of pounds of unpaid taxes.

To combat this, the Government has created a number of new regulations with tests designed to identify workers who are ‘bogusly self-employed’ and, therefore, an untapped source of tax revenue.

One such regulation is IR35. A key test of IR35 is to determine if a worker is under the CONTROL of an employer whilst at work and, therefore, bogusly self-employed. IR35 says that if we are supervised, directed or controlled by the employer while we’re at work, then we should be treated and taxed as employees.

Let's think about this in relation to two examples of work we might typically do…

If we’re putting in sockets for Mavis down the road, HMRC will view this as self-employment because we generated the work ourselves, we provide the materials, we do the work WHEN we want, and in the WAY we want. We can even get someone else to do the work FOR US. Nobody supervises, directs or controls us.

On the other hand, if we take a job through an agency, HMRC will view this as employment because we DIDN’T generate the work ourselves, we DON’T provide the materials, WE ARE TOLD when to turn up, WE ARE TOLD what work to do and how to do it. And we certainly CAN’T get someone else to do the work for us. Somebody always supervises, directs and controls us.

It's pretty clear, then. HMRC will NEVER view us as self-employed when we get a job through an agency.

Now, employers know this but they don’t want to foot the bill, which is why they use agencies as their ‘get-out-of-employing-the-worker’ card. Without agencies, employers would have to pay us all benefits like sick pay, holiday pay, paternity pay, redundancy pay and pay into our pension scheme, etc.

Until the IR35, agencies got away with avoiding this bill, too. They got away with it by misrepresenting us as self-employed. But when the IR35 dropped, agencies everywhere panicked. Imagine suddenly being responsible for all of these extra costs for every worker!

And, so it began. Just as employers needed agencies to avoid their responsibility of employing us, now it was the agencies who needed a way to avoid this responsibility.

Say hello to umbrella companies.

By outsourcing the payroll aspect of our employment to umbrellas, agencies were then able to say, “We’re not responsible for the workers’ employment because we pay an umbrella company to handle their wages.”

The umbrella then took on the responsibility for our employment along with the job of deducting income tax and employees National Insurance (NI) at 12%. And, as all employers must do, the umbrellas also paid their own share of employer’s NI at 13.8%.

But here’s the catch: umbrellas scrape back their share of NI in the fee that they charge us for processing our wages. Put another way, when we pay £25-a-week to the umbrella to get our wages, this is paying them back for the employers NI they have paid to HMRC. Effectively, this means we workers end up paying two lots of NI.

At this point, you’re probably thinking, “But, how can they scrape back their NI payment in our fee if the NI comes to more than the fee?” Good question. Answer? They do it by pretending we earn minimum wage and then paying NI on this amount instead of the real wage. Yes, that’s right. Read that again. For example, they pay NI on £8 /hour instead of £20 /hour, or whatever our real wage is.

The result? HMRC receives a deficit in NI, we receive a deficit in wages, while agencies and employers save money they would normally have to pay if they employed us directly.

It’s a system that works really well for employers, agencies and umbrellas but really bad for the Government and us, of course.

But before we start blaming umbrellas and agencies, it’s worth remembering that all of this stems first and foremost from the fact that employers won’t employ us directly (and some of us won’t agree to be employed).

You might wonder why the Government doesn’t do more to change this since they’re losing out on millions in tax. I haven’t been able to figure this out yet. My guess is that it’s probably a mixture of many things. There are probably more urgent issues (like Brexit) dominating attention and resources; probably a lack of any hard evidence or unified support; and probably powerful employers lobbying successfully at Government level.

Also, it’s probably impossible to force all employers to employ us directly. You don’t have to be an expert to grasp just how complex and time-consuming it would be for an entire industry (and its related industries) to make a change like this in one go.

Finally and most importantly, it’s probably difficult to force all of us workers to want to be employed directly, too. This last point is important and worth thinking about. Us workers hold the very key to getting rid of agencies and umbrellas altogether; all we’d have to do is stop using them. But we create the conditions for agencies and umbrellas to exist because we can’t agree with each other about our employment.

Let’s just imagine for a second that we all managed to agree with each other on one thing (I know this is ridiculous, but please just imagine it for a second!). Imagine that we all agreed to say “no” to any job unless it was on the books with an employer. If we managed to do this, then both agencies and umbrellas would vanish because employers would have no use for them any more.

In other words, if the only way employers could get us on-site to build their million-pound projects was to employ us all directly because we refused to go through agencies, then employers would stop using agencies, who would then stop using umbrellas.

I know what everyone’s thinking: “There’s no fucking way on God’s green earth that’s ever gonna happen!” But - BUT - to repeat the most important point: by pretending we’re self-employed when using agencies (or by staying ignorant about it), we’re creating the conditions for agencies and umbrellas to exist in the first place.

We all know we’re divided on this issue. A bunch of us want to be employed directly while a bunch of us want to keep our self-employment. Fair enough. But, we’ve already seen that we can’t be self-employed in the eyes of HMRC when we’re under direction, supervision and control, which we always are when we’re on an agency job.

Therefore, there can only be two clear positions: either we’re genuinely employed/self-employed (ie not using agencies), or we’re bogusly self-employed (ie using agencies).

Disguising our employment will do nothing but grease the wheels of the existing system. Burying our heads in the sand will do the same. And setting up our own Ltd company is not solving the problem either. It’s only disguising our employment more. Ltd companies are on borrowed time anyway; the Government is getting wiser to it every day.

This is why, depending on where you stand on this issue, you are responsible, at least in part, for the existence of agencies and umbrellas.

If we can’t agree and stand together as one, then agencies and umbrellas will continue to proliferate and our working conditions will continue to deteriorate.

However, if we CAN all agree on this point, then we’ll change our industry overnight.

But until then, we’re stuck with agencies and umbrellas and we should make the best of a bad situation, which is exactly what me and a load of agency workers are doing right now…

Since 2017, we've been building a community and a digital platform called earwig aimed at making agency work in construction more transparent and supportive for us agency workers.

Would you let me know what you think?

Thanks for reading.

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