The well-known test case of James v Greenwich London Borough Council was influential in establishing that limited company contractors do not receive the protection of standard employment rights between themselves and their clients. This applies whether they are inside IR35 or not, but the situation is less clear cut for those contractors working through umbrella companies.
While workers in this category might not be able to exercise employment rights directly with their clients, they may well be entitled to certain rights regarding their umbrella companies. If an umbrella company genuinely employs a contractor, this equates to the contractor enjoying the same benefits as any permanent employee.
Your employee status with an umbrella company typically depends on the model that it utilises. Those using a “pure” employment model offer the same employment rights as any other employer. These companies are also often members of relevant trade bodies and might have stringent membership requirements.
Some businesses that market themselves as umbrella companies do not offer employee benefits, however. Agency PAYE providers might treat their contractors as employees for tax purposes, but these workers are not actually employees of the company. This means that the business can deduct tax and NI at source, but the contractor will not receive employee rights and benefits.
The same goes for payment scheme providers that offer offshore payment solutions such as an employee benefit trust (EBT). Companies often sell these as tax-efficient schemes but, again, the contractor will not have employment rights with the business.
Many contractors, freelancers and other self-employed people have greater freedom and flexibility as well as higher potential earnings than traditional employees. On the other side of the scale, employees enjoy greater security and a range of benefits.
Contractors who are genuine employees of an umbrella company should receive the same benefits as any other full-time employee, including but not limited to:
Contractors employed by a large, well-structured umbrella company can also benefit from elements of the organisation’s infrastructure. This might mean having access to human resources support for issues such as disciplinary and employee grievance procedures, should there be a problem between you and the client.
Being the official employee of a professional umbrella company can also bring other benefits. If you need a reference for a loan or mortgage application and your lender looks more favourably on employees, then the HR department can offer the necessary paperwork. Umbrella companies with efficient and experienced HR, payroll and finance departments in place can help individual contractor-employees with a wide range of issues and queries.
Some umbrella companies scale the benefits they provide depending on the amount of time that contractors stay with them. If a contractor is a genuine employee, then he or she may have some statutory rights that increase over time (such as redundancy entitlement), but others may be down to the umbrella company’s policies. This could mean, for example, a sliding scale of notice periods, with the company setting the length of a notice period according to how long the contractor has worked there.
Umbrella companies can fill a unique role, offering support infrastructures and benefits that are not available through a limited company, while still giving the flexibility and increased earning potential that contractors desire.