Last reviewed 18 August 2021

Umbrella companies should be banned according to a new report on their increasingly widespread use in the UK labour market.

Publishing the report, the TUC said that the scandalous workplace practices associated with umbrella companies have “no place in modern Britain”.

It explains that 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, the TUC points out, the umbrella company will also employ the agency worker, with the agency workers becoming “employees” of the umbrella company.

Its report, Umbrella Companies: Why Agencies and Employers Should be Banned from Using Them, can be found at www.tuc.org.uk/sites/default/files/2021-07/UmbrellaCompanies.pdf.

The TUC claims that workers face misleading and unfair deductions from pay, adding that breaches of holiday leave and pay entitlement are widespread — with umbrella companies preventing workers from taking their holiday entitlements.

Furthermore, the use of umbrella companies fragments the employment relationship, it argues, leaving workers unsure of who to speak to resolve problems and often “passed from pillar to post” when trying to sort out their issues.

New TUC research estimates that half of agency workers work for umbrella companies.

It 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 TUC warns that there is no proper regulation of the sector, because the Government has failed to make any of the enforcement bodies responsible for regulating the umbrella sector, despite a recommendation from the Taylor Review into Modern Working Practices that enforcement of umbrella companies should be stepped up.

Comment by Kate Palmer, HR Advice and Consultancy Director at Peninsula

The Government has recently indicated plans to “curb or kill” umbrella companies, meaning this call by the TUC may push the topic to the forefront of its agenda.

This will be worrying news for employers who rely on umbrella companies when hiring agency workers as they could be forced to rethink how they hire in future. For now, employers will be waiting for the Government’s update on this before taking action.