With many workers moving from their own limited companies to umbrella providers as a result of Off-Payroll reforms we look at the importance of clarity around the rate.

Where a worker is using a provider, typically an umbrella company, the provider receives an uplifted rate from the recruitment company; a rate that has been increased above the PAYE rate to include provisions for employment costs such as Employers NI, Employer Pension costs, Apprenticeship Levy, Holiday Pay and the providers margin deduction. How this is presented to the worker is a critical aspect of operating compliantly.

The legal contractual arrangements are that the provider has a contract with the recruitment company which specifies the full terms applying to the assignment, including rate. They also have an employment contract with the worker that defines, amongst other things, their entitlement to pay.

This is an area that is coming under increased scrutiny.

The rate offered is not the rate for the worker and should never be presented as such. If the rate was presented as the workers rate then it in turn would suggest that it is the worker is paying their own costs of employment, something that they cannot do.

The rate is the amount received by the umbrella and, in line with the contractual arrangements, is effectively the providers money. This allows the provider to make the required deductions for the costs of employment so long as they can meet their pay obligations to their employee, as defined in the employment contract, after the deductions.

No provider can pay any employee less than the National Minimum Wage applying at that time, after all employment cost deductions. As a result providers will have a minimum rate that they require to ensure the workers are paid the NMW as a minimum after employment costs. This will be very similar across all providers with the only variable being the margin deducted by the provider, which makes a very small overall difference.

If you find a large difference it is important to understand why as all providers are operating under the same rules. We generally find where these differences emerge that the provider is either using an arrangement that we would not recognise as an umbrella, even though they may have that label on it, or they are not accounting for holiday pay as they should.

Where the rate on the umbrella contract is not presented correctly it significantly increases the risk of an Employment Tribunal for illegal deductions.

For further information you can also view the Factsheet produced by PRISM and The Low Incomes Tax Reform Group.