How an Umbrella Company Really Works

Umbrella company

There are some common misconceptions about how an umbrella company works, and they can be surprisingly pervasive. If you’re employed by an umbrella company, or you’re a contractor considering the umbrella option, it’s important that you understand what an umbrella company really does. In this article we’ll explain what we do, and hopefully arm you against some of those myths.

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What we mean by “Umbrella Company”

When we talk about umbrella companies, we mean compliant, professional companies who offer employment to contractors. However, there are many companies who don’t fit this description who badge themselves as umbrella companies. It’s important to remember that not everyone who says they’re an umbrella company will do things the way we describe here, and it’s just as important to avoid the ones who don’t. The table below shows some of the types of companies you could encounter when searching for umbrella companies.

Umbrella company

The best way to protect yourself from involvement in tax avoidance, exploitation and bad practice is to make sure your chosen umbrella company is a member of FCSA. All FCSA members are independently assessed against the most rigorous compliance code in the industry, so you can be sure they know what they’re doing and they care about doing it right. 

You should be employed

We strongly advise that you make sure your umbrella company offers employment. There should be no question about your employment status. When you’re employed by a good umbrella company, you’re not just “technically” employed, there is no deception, no lip service and no skulduggery. You are employed, and the umbrella company is your employer.

This, of course, means you’ll have the rights afforded to all UK employees, including statutory payments like sick pay and maternity/paternity pay, paid holiday and access to a workplace pension that your employer also contributes to.

How umbrella company contracts work

You enter into a contract of employment with the umbrella company, becoming their employee.

The umbrella company enters into a contract with your recruitment agency or end client, to supply your services to them.

If you’re working through a recruitment agency, they will have a similar contract to supply your services to the end client.

Your contract is with the umbrella company, and you have no contractual relationship with the agency or end client. However, your contract of employment will require you to abide by the terms of the umbrella company’s contract with the agency.

How umbrella company pay works

Two entirely separate things happen when you complete work for the end client:

  • The agency/client pays a fee to the umbrella company for your work
  • The umbrella company pays you as their employee

The agreed contract rate is the amount the agency/client pays to the umbrella company. This includes the umbrella company’s margin and costs in addition to your pay.

When your umbrella company pays you, the process is the same as with all UK employers, including deductions for PAYE tax, national insurance, and pension contributions.

One common misconception is that umbrella companies charge their employees for their services. If you think about it, this clearly doesn’t fit with an employer – employee relationship. Employers don’t charge their employees for being employed. The truth is that the umbrella company’s margin and costs come out of the invoice value they charge the agency/client for your time, not your pay.   

Successive assignments

One advantage of umbrella employment is that it gives you a single, continuous period of employment across all your assignments. This means you’re employed from when you join the umbrella company to when you leave them, even though you may work for many different clients and many different agencies. Even if you have periods between assignments when you’re not working, you’re still employed by the umbrella company, and you still have full employment rights.

Employee benefits

As your employer, your umbrella company may or may not offer additional employee benefits. Whether they do and what they offer can say a lot about what they think of their employees. For example, we’re determined to enhance our employees’ lives, and as an Orange Genie Employee you and your family would receive a huge range of benefits, including:

  • Fast access to healthcare with free 24/7 GP appointments by telephone and webcam, and expert help when you need to see a specialist.
  • Free support and advice on a range of issues from trained counsellors on a confidential helpline
  • A vast range of discounts and cash-back to help your money go further
  • Support for carers with expert help to find the right care solutions, as well as legal support and advice
  • A range of free lifestyle tools to help you improve and maintain your health and wellbeing.

If you have questions about umbrella companies, or if we can help in any way, please contact our expert team on 01296 468483 or email info@orangegenie.com.

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