On 4 March 2025, HM Treasury published the Government's response to the consultation on tackling non-compliance in the umbrella company market, which the Government says deprives workers of employment rights, distorts competition in the labour market, and leads to significant tax loss to the Exchequer.
In its response, the Government has confirmed that it will amend the Employment Rights Bill to define an umbrella company to allow for the regulation of umbrella companies and bring them in scope of the recruitment industry regulatory regime. This will bring umbrella companies within the remit of the Employment Agency Standards Inspectorate (and subsequently the Fair Work Agency), the regulator responsible for enforcement of the recruitment industry regulatory regime.
The Government recognises that the two options for defining umbrella company put forward in the consultation were too complex. A new simpler definition will focus on two key indicators of an umbrella company. Firstly, an umbrella company is an entity which is in the business of employing a person with a view to them being supplied to a hirer. Secondly, an umbrella company is an entity which is in the business of paying for, receiving or forwarding payment for the services of a person with a view to them being supplied to a hirer.
The intention is that regulation of umbrella companies will be similar to the regulation of employment businesses under the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (Conduct Regulations). The Government will consult before making any amendments to the Conduct Regulations. The likely key impacts of bringing umbrella companies into this regulatory regime will be:
- umbrella companies will not be able to withhold payment of their workers on the grounds that the end user client has failed to pay;
- umbrella companies will not be able to place restrictions on their workers from being engaged elsewhere unless they are an employee of the umbrella company engaged under a contract of service (as opposed to a contract for services); and
- umbrella companies and their directly engaged workers will no longer be able to opt out of the application of the Conduct Regulations unless the worker is also supplying their services via their own personal service company.
These measures are in addition to the Government's proposal, announced in last October's Budget and aimed at preventing tax non-compliance in the umbrella company market, to transfer liability for accounting for umbrella company workers' PAYE income tax and NICs from umbrella companies to staffing companies from April 2026. We cover this proposal in more detail in this article published in our Winter 2024 edition of Recruitment Watch: New tax burden for the recruitment services sector.