Umbrella firms face new rules under Employment Rights Bill - Part 2

Umbrella companies will soon be regulated in the UK for the first time. The Employment Rights Bill is set to introduce a new level of regulation and oversight which could make these businesses a less attractive link in the temporary labour supply chain. 

 

In part one of this article, we considered the effect that the new provisions will have. We now focus on what this means in practice for those businesses.

Compliance with the Conduct Regulations

The Conduct Regulations set out a range of requirements which an employment business must comply with. Key obligations include:

i. No fees to workers for finding work: Employment businesses cannot charge workers fees for supplying them work or make deductions from pay except in limited circumstances. This means umbrella companies will be prohibited from levying any general “administration” fees on the workers they employ for the opportunity to be on their books.

ii. Paying workers even if clients do not pay: Employment businesses are required to pay workers for the work done on-time regardless of whether the business has been paid by the client (with very few exceptions). This protects workers from cash-flow issues and shifts the risk to the business, which is better placed to absorb or pursue debts.

iii. Providing key information and documentation: Since 2020, employment businesses must give each agency worker a Key Information Document at the start of an assignment, laying out in a single summary the type of contract, who is paying them, deductions, fees, and an illustrative pay example. Additionally, the Conduct Regulations mandate written terms of engagement for workers and require keeping records of assignments. Umbrellas will need to implement robust documentation and record-keeping processes if those are not already in place.

iv. Suitability checks and information gathering: Before supplying a worker, an employment business must assess that the worker is suitable for the role and obtain certain information (like qualifications, experience, and any legal requirements) to share with the client. An umbrella company, working in tandem with agencies, will likewise be responsible for ensuring the worker is fit for the assignment (in practice, agencies often handle most of this vetting, but umbrella companies will need to verify details as the official employer).

Penalties for non-compliance

The penalties for non-compliance are significant. Breaching the Conduct Regulations is a criminal offence; an offending business and its directors can face unlimited fines upon conviction. The EASI can also seek to ban individuals from running or being involved in an employment agency/business for up to 10 years in serious cases.

Additionally, workers or hiring clients who suffer losses due to a breach may have civil claims for damages. Any contract terms which do not comply with the Conduct Rules are made unenforceable.

For umbrella companies, many of which have operated on a light-touch basis to date, non-compliance could be costly.

Case study: Platform-based staffing models on the edge of regulation

Take, for example, a tech-driven staffing platform that connects freelance or temporary workers with hirers via an app or online portal. You may even have used one to pay someone to assemble your flat-pack furniture before.

The platform facilitates introductions, provides onboarding tools, and may even handle timesheets and payment processing, but it does not formally employ the workers or directly arrange their assignments. Under the current legal framework, such a business might not be classified as an “employment business” because it does not supply workers in the traditional sense.

However, under the Employment Rights Bill’s broadened definition (capturing those “participating in employment arrangements”), this type of platform could now fall within scope. If the platform’s role in enabling the supply of labour is deemed sufficiently active, it may be required to comply with the Conduct Regulations. This would bring with it obligations around documentation, worker protections, and regulatory oversight.

Those using a smartphone to book help putting together their latest purchase are unlikely to be expecting to be sent a Key Information Document, and likewise, those who operate apps which make it possible are unlikely to be expecting to put one together.

Implications for umbrella companies, agencies and end-clients

While the changes affecting umbrella companies will only come into effect following a consultation, the expectation is that at least some of the Conduct Regulations’ requirements will be imposed. Therefore, it is wise for those whose businesses could be affected (directly or indirectly) to start contingency planning early.

Umbrella companies should be prepared to audit their businesses to understand what changes would be necessary to achieve compliance with the Conduct Regulations and plan to overhaul those parts of their operations which will become non-compliant under the stricter regime.

Recruitment agencies should review their relationships with umbrella providers, conduct due diligence, and prepare for joint tax liability rules coming in 2026. End clients must understand their labour supply chains and ensure any intermediaries are compliant, as liability and reputational risks may extend to them under the new regime.