Can umbrella workers expect to be furloughed and fairly paid?

As employers, ‘umbrella’ companies can take advantage of the Coronavirus Job Retention Scheme (CJRS). Even if the contract used to engage the umbrella worker/contractor is a PAYE contract for services, the government scheme is available to be used. So why are many umbrella companies not furloughing their workers, or if they do furlough them, not paying more than 80% of the National Minimum Wage?

The answer appears to lie in the wording of the contract agreed with the worker. Most umbrella employment contracts provide for payment to be calculated in two ways. First payment of the national minimum wage. Second the amount above national minimum wage that arises from the value of work done by the worker. This second amount is subject to deductions that the umbrella company applies for its own overhead or profit, the net amount being a sum to which the worker is entitled. Many umbrellas display how the calculation for this second element (‘the commission payment’) works so that the workers can see what they will get in terms of pay.

This ‘two element’ system exists because umbrella workers get different rates for different assignments, so there has to be assignment by assignment flexibility in the pay arrangement. Subject to that flexibility the worker has an income which can be calculated in accordance with the CJRS which specifically allows for variations in wages arising from legally enforceable arrangements. Temp workers who don’t work through an umbrella company will have their regular wages assessed on their average pay over the last 12 months and 80% of the resultant sum up to a maximum of £2500 can be paid and claimed under the CJRS by the employer. Similarly agency workers typically will also qualify to be furloughed and paid pursuant to the CJRS on this basis. So what is the problem for some umbrella workers?

A clue can possibly be seen from the draft letter the FCSA has published on its website, for use by its members to send to their MPs. The letter states that this commission element is “often referred to as a discretionary commission or bonus (although it is not related to performance but rather to the umbrella having received the funds)”. Clearly the use of this word ‘discretionary’, which presumably is reflected in the contracts used by some umbrella companies, explicitly means that payment could be withheld at the discretion of the employer. A discretionary payment of any kind has been excluded by the treasury as being capable of being treated as regular wages for CJRS purposes.

In using the word ‘discretionary’, the nature of the relationship has been changed from one under which the worker/contractor could be contractually certain of the commission payment to one where the worker might not receive the payment, at the discretion of the umbrella company. Without an umbrella in the chain certainty for agency workers would exist because the Conduct of Employment Agencies and Employment Business Regulations 2003 (Conduct Regs) require employment businesses to make payment. Agencies or hirers would also never expect a contractor to agree that payment is discretionary. Do umbrella workers realise this when they sign up to an umbrella contract? The FCSA (with support from some other trade organisations) has lobbied the Treasury hard to make a concession for umbrella workers under the furlough rules to allow discretionary payment to count as regular wages. Their members are certainly right to ask for this, given the distress caused to their umbrella workers, but is the problem of their own creation?

Umbrella companies often structure their payment obligation on the condition that they receive payment from an employment business (agency) or hirer first, namely on a ‘pay when paid’ basis. Unlike unregulated umbrellas this would be illegal for regulated employment businesses who are prohibited by the Conduct Regs from using the condition. However payment to an umbrella worker based on this ‘pay when paid’ condition is entirely different from a ‘discretionary’ payment. One is a payment that is contractually due when the agency/hirer pays the umbrella, the other is a payment that is not contractually due and may be withheld at the behest/discretion of the employer.

Everyone knows that the payment is not discretionary as the umbrella has the expectation to pay it and the worker has the expectation to receive it. Agencies for example would be horrified if an umbrella company were to exercise its discretion not to pay, and indeed the umbrella company would quickly lose its contract with the agency as well as its agency worker workforce if it were to do so. Use of the word ‘discretionary’ is a fiction. We don’t use it in the contracts we draft for our Lawspeed umbrella clients, which provide for different rates without payment being at the whim of the employer. The explanation given by the FCSA, that it is used to enable different rates for different assignments, does not stand up to scrutiny. So the word ‘discretionary’ and the concept behind it appears to be the culprit, at best causing delay and at worst denying the umbrella worker fair payment. Instead, is use of ‘discretion’ more likely to be a device to facilitate tax or payment advantage than anything else, e.g. a drafting error? If so the Treasury may find granting the request for a concession a bitter pill to swallow. On the other hand it may want to come to the aid of the workers, but one way or another there are likely to be longer term ramifications.

So can umbrella workers be furloughed? Yes, as they should qualify if on the payroll as at 19th March. Can they be fairly paid based on their actual regular wage in the same way as PAYE agency workers? Save for those on umbrella employment contracts that do not use the fiction of ‘discretion’, the answer is ‘not for now’.  Umbrella agency workers signed up to contracts that include this fatal ‘discretionary’ element can only expect to be furloughed with payment based on NMW calculations, that is unless the Treasury changes the rules to accommodate the requested concession.

Agencies and hirers, realising that umbrella companies are in this predicament, are unfortunately too late to do anything about it except review their relationship with umbrella companies to ensure that going forwards any element of ‘discretion’ on paying the worker is totally ruled out. They will in the meantime have to bear the brunt of their umbrella workers frustration, through little fault of their own.

Author: Adrian Marlowe, MD Lawspeed

6th May 2020