IT contractors urged to check umbrella payslips as two firms caught making unlawful deductions

IT contractors engaged via umbrella companies are being urged to ensure they understand their pay slips after two firms were found to have made unlawful deductions from the pay packets of their employees.

The firms in question, trading as DNS Umbrella Ltd and Umbrella Company Ltd, were both the subject of separate Employment Tribunals in March, with the decisions in both cases coming to light in June 2023.

In the DNS Umbrella case, the Tribunal judge confirmed the company had unlawfully deducted sums to cover the costs of Employer’s National Insurance (NI) and the Apprenticeship Levy from a single contractor’s pay packet during the an assignment that ran from March 2021 until May 2022.

As a result, DNS Umbrella (which incidentally now trades as Spry Pay) was ordered to pay the contractor concerned £29,885.12 to cover the cost of the deductions.

Responsibility for covering the cost of Employers’ NI falls to the umbrella company who employs the contractor, and this sum cannot be lawfully deducted from the individual’s pay packet once the contract rate has already been agreed.

HM Revenue & Customs (HMRC) guidance states that contractor day rates can be negotiated up or down to accommodate the added cost of Employers’ NI, but it is not lawful for Employers’ NI to be deducted by the umbrella or agency from a fee that has already been agreed.

Therefore, if no uplift or reduction in the contractor’s day rate to cover the cost of Employers’ NI has been agreed, and the umbrella company deducts this from the contractor’s gross pay, that would be classified as an unlawful deduction.

The Umbrella Company case, meanwhile, concerns a contractor who worked as a lecturer for Wakefield College for nine months from December 2020 and then Stockport College between September 2021 and July 2022.

In that case, the “unanimous judgement” of the tribunal is that the “complaint of unauthorised deductions” being made from the contractor’s pay was “well-founded” after it was confirmed that employment costs had been taken from the hourly rate agreed for the assignments.

At the time of writing, details of how much these deductions totaled were yet to be made public.

Dave Chaplin, CEO of IR35 compliance firm IR35 Shield, said these cases highlight a common, recurring theme within discussions about umbrella company compliance where confusion abounds about what umbrella firms and employment agencies mean when they use the term “assignment rate”.

In the context of contractors, the assignment rate is often (if not legally) defined as being made up of the gross pay that is due to come the contractor’s way, plus the employment agency’s fees and the umbrella company’s margin and any employment costs incurred.

“The concept of the not-legally-defined ‘assignment rate’ continues to cause problems, and was a key issue highlighted in the recent umbrella consultation response by government. This second similar ruling demonstrates that proper operational compliance is essential, in conjunction with real-time checking of the money flows,” said Chaplin.

“Ensuring the worker understands what they are being paid, and why, is umbrella basics, and it’s alarming that this was not picked up during basic compliance checks.”

Crawford Temple, CEO and founder of independent assessor of payment intermediary compliance Professional Passport, said the cases highlight the need for umbrella firms to be subject to “robust and rigorous” compliance checks.

“These cases would have passed any payslip checks, as they failed on their operational processes and procedures – attention to detail is critical in running a compliant umbrella,” Temple told Computer Weekly.

“Professional Passport requires the highest level of transparency between the umbrella and the workers to avoid such situations. Providers failing to meet these exacting standards will not retain their accredited status.”

On this point, Computer Weekly understands that both umbrella firms were members of the Freelancer and Contractor Services Association (FCSA), which provides accreditation to umbrella firms that want to publicly demonstrate that they are committed to operating compliantly.

However, DNS has since had its membership terminated, while Umbrella Company remains on the books of the FCSA.

In a statement to Computer Weekly, the FCSA confirmed that DNS was stripped of its membership in September 2022 for reasons “unconnected to the employment tribunal they recently lost”.

Meanwhile, in a follow-on statement regarding the state of the Umbrella Company’s membership, FCSA CEO Chris Bryce, said the case is not quite as black and white as it seems.

“It’s important to note that umbrella.co.uk won an earlier case before the Employment Tribunal and the judgement found the process was clear and transparent to the worker, and it was understood from the outset that deductions for employment costs, which include Employer’s National Insurance and Apprenticeship Levy, would be made from the assignment rate as per HMRC’s own guidelines,” he said.  

“The second case involving our member is far more complex, dealing with an entitlement to equivalence of holiday pay under the agency worker regulations and the technicality of rate definitions by the employment business involved, and is being appealed.”

He added: “It is FCSA’s belief that the government’s forthcoming changes to the working time regulations will clarify holiday entitlement and allowances for part-time and part-year workers.”

As previously reported by Computer Weekly, unlawful deductions of Employers’ NI is a problem that is thought to be widespread across the contractor industry, after details emerged in early 2021 about a series of group litigations being prepared to secure compensation for contractors who had fallen victim to the practice.

At the time, litigated estimated that thousands of contractors from various sectors had erroneously had Employers’ NI deducted from their pay since the roll-out of the IR35 reforms to the public sector in April 2017, with IT contractors tipped to be among those left most out of pocket by the practice.

Professional Passport’s Temple said cases such as this have resulted in contractors becoming a bit savvier and more questioning about how the umbrella companies they work for operate, but he said it is essential that all workers do due diligence on any payroll company they decide to align with.

“Our message to workers is please seek out a compliant umbrella and ask key questions; understand the warning signs and what to avoid when looking at the providers in the market.  It is this detail that will determine if it is an umbrella company or a ‘Have I got a good idea for you’ scheme and best avoided,” he said, as the latter tends to be synonymous with umbrella firm’s acting as fronts for tax avoidance schemes.

“Transparency is key and your payslip should be clear to understand with the right deductions highlighted and the same amount appearing as a single payment in your account,” he added.