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Umbrella Company Compliance - Why and How to Vet Your Umbrella Partners

Umbrella company employment is usually a positive thing for recruitment agencies and their contractors, but working with the wrong umbrella can do you more harm than good. In this article we’ll look at what you should be looking for in an umbrella company, and how you can make sure you only work with the good ones.

Why should recruiters work with umbrella companies?

There are two main reasons why umbrella company employment is good for your recruitment agency.

  • It’s good for your contractors. A compliant umbrella company will provide employment, which gives your contractors access to employment rights like paid holiday, sick pay, workplace pensions and maternity/paternity pay.

  • It allows you to outsource the cost, risk and work of employment to specialist experts, allowing you to concentrate on your core business.

However, this only works if you’re dealing with umbrella companies who know what they’re doing and care about doing things properly. In an unregulated industry, this combination of competence and integrity cannot be assumed.

What recruiters should look for in an umbrella company

The first thing to check is that the umbrella company is actually using the established “compliant model” and not something else that could be a risky tax avoidance scheme. In broad terms it should look like this:

  • The umbrella company employs the contractor. The contractor is the umbrella company’s employee.

  • The umbrella charges you a fee (often known as the “assignment rate”) for the work their employee completes for your end client. This fee includes the contractor’s gross pay, plus the umbrella company’s margin and costs.

  • The umbrella pays the contractor as their employee, deducting all the usual taxes through their PAYE system.

Any model that doesn’t look like this should be scrutinised very carefully before you allow your agency to get involved, particularly if the “umbrella” claims your contractors will take home more money by paying less tax.

Once you’ve established that your prospective umbrella partner operates in the expected way, the next thing to look for is that combination of competence and integrity. If you recommend this company to your contractors, they will hold you partly responsible if they have a bad experience, so it’s important to ensure this umbrella company are the specialist, trustworthy experts that your contractors need.

If you have limited places on your Preferred Supplier List, and you’ve got a number of umbrellas that fill these criteria, you could also look at what else they would offer your contractors. Additional benefits like private GP appointments, a discounts package and wellness services can improve engagement and satisfaction among your contractors, which gives them a better experience while driving better retention and referral figures for your recruitment agency.

Doing your due diligence

So, we’ve covered why you need to vet your umbrella partners and what a good one looks like, so how do you spot the bad ones? Here are some things to ask/establish during your vetting procedure.

  • How long have the umbrella company been established, and how many contractors have they employed?

  • Do their pay illustrations and example payslips work out as you’d expect?

  • Are their staff willing and able to answer questions about both?  

  • Do they use your contractors’ take-home pay as a selling point?

  • Will any part of your contractors’ pay (excluding legitimate expenses) not be subject to PAYE tax and National Insurance?

  • If there is a payroll error or delay, at your end of theirs, how will they deal with it?

  • What do their current/past employees say about them on online review sites like Trustpilot?


Industry accreditations can provide a useful shortcut, but they are just that – a short cut. If a prospective umbrella partner has a respected industry accreditation, you can be reasonably sure that it’s safe to do business with them, from a compliance point of view. However, auditors are not infallible and there’s no substitute for doing your own “hands on” due diligence.

For example, an accreditation confirms the umbrella’s compliance with a code of practice, but it tells you nothing about what that company will be like to work with, either for you or your contractors. Vetting them yourself, asking them questions, looking at their pay documents and reading their online content and reviews will tell you much more about what you can expect from that relationship. Getting involved in vetting them yourself will also help you learn about your prospective partners which will give you a closer, smoother and more useful relationship as you move forward.

If you have questions, or if we can help in any way, please call our expert team on 01296 468483 or email

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