Why do recruitment agencies require temporary workers to use umbrella companies?
There are good legal, tax and prudential reasons why a recruitment business should consider using a competent contract management or umbrella company rather than paying contractors gross.
What the law requires: Under UK law recruitment businesses cannot pay contractors gross as self-employed people. We cover the provisions of ITEPA 2003 as amended in another section in this webinar. The options that are left under the UK Off-Payroll Rules are to ensure that contract workers are paid under PAYE deducting income taxes and social security (NICs) at source or to pay their limited company. The implications of paying their limited companies in an international setting we cover in that section in this webinar. Many recruitment companies either cannot or do not wish to place contractors on their payroll preferring to outsource the task and responsibilities to others. This is perfectly understandable as umbrellas levy fees on the workers and not the recruiter. Under the UK’s Criminal Finances Act of 2017, recruiters have a duty of care to make sure they are not a party to tax evasion in the UK or abroad.
Insurance: Every recruitment business wants to make sure that it will not be sues for errors or omissions of its contractors and it is important in their risk management that there is adequate cover against these realities. Umbrella companies hold this cover and recruiters access it, again, at no cost, when they engage an umbrella as a financial intermediary between them and the contractor.
Ease of Making Payments: Single or bulk payments to an international umbrella is a far simpler and less onerous operation than making individual payment to contractors in a way that may not shield them from risk.
A competent international umbrella will know the law that prevail in the work jurisdiction and can advise on the lawful and tax efficient means to structure workers who may be resident in more than one state. They will know the double tax treaties, social security treaties and domestic law wherever that contractor may have a liability an ensure the contractor pays the right deductions – not more and not less!
Through outsourcing the payment method, the recruitment business can be assured of total compliance with immigration, employment, labour-leasing, tax, and social security law that the compliance staff ibn that agency can be confident that all the relevant laws affecting any given assignment are respected and provide complete risk mitigation.
When choosing a great international contract management or umbrella company, there are several factors to consider. Here are some key points to help you make an informed decision:
- Reputation and Experience: Look for a company with a solid reputation and extensive experience in the industry. Research their track record, client testimonials, and online reviews to gauge their reliability and professionalism.
- Compliance and Legal Expertise: Ensure that the company has a strong understanding of international laws, regulations, and tax compliance requirements. They should have expertise in managing contracts and all the legal and accounting implications of working and paying taxes.
- What covenant do they offer: Do you approve of their business ethics and will these and their financial stability ensure that they will stand behind their obligations.
- Global Reach: Consider the company’s global presence and reach. If you need to work in multiple countries, choosing a provider with a broad network and established relationships in those regions is essential.
- Services and Support: Evaluate the range of services offered by the company. They should provide comprehensive support in contract management, payroll processing, tax compliance, immigration, and other related areas. Make sure their services align with your specific needs.
- Technology and Systems: Assess the company’s technology infrastructure and software platforms. A reliable contract management or umbrella company should have robust systems to streamline processes, ensure data security, and provide efficient reporting.
- Cost and Pricing Structure: Compare different companies’ pricing models and fee structures. Consider both the upfront costs and ongoing fees associated with their services. However, avoid choosing solely based on price; prioritise value and quality of service.
- Customer Support: Determine the level of customer support provided by the company. Prompt and effective communication is crucial when dealing with international matters. Ensure they have responsive support channels to address your queries and concerns.
- References and Recommendations: Seek references or recommendations from trusted sources in your industry or professional network. They may have experience working with reliable contract management or umbrella companies and can provide valuable insights.
- Flexibility and Scalability: Consider the company’s ability to adapt to your changing needs. As your business grows or your contract requirements evolve, you’ll want a provider who can accommodate your expanding operations and offer scalable solutions.
- Do they provide an example of your Gross-to-Net Take-home Pay? You will want to know that you can see the Key Information Document and that contractors understand what happens to all their money so there is no skimming, no unauthorised or hidden deductions and that tax and social security are paid as the law requires without any misappropriation. In the UK we suspect that SafeRec and PayePass are the way to go but there are no equivalents abroad, as far as we are aware.
- Personal Fit: Finally, trust your instincts and evaluate whether the company fits your organisation well—schedule consultations or meetings to assess their communication style, cultural compatibility, and overall rapport.
Considering these factors, you can make an informed decision and select a tremendous international contract management or umbrella company that meets your specific requirements.