Skip to content →

Employment tribunal victory offers hope to umbrella employees hit by unfair deductions

I’ve discovered a significant employment tribunal win that hasn’t been widely reported by the mainstream media. Pull up a chair, this is BIG news. The judgement has potentially far reaching implications for the recruitment industry and could offer hope to thousands of beleaguered umbrella employees fed up with excessive and unfair deductions from their wages. 

Case no: 2410288/2019 was heard by Judge Sherratt on 12 December 2019. The action was brought about by P. Weldon employed by umbrella company 6Cats UK Ltd. The contract of employment was alleged to contain various unlawful provisions which entitled 6Cats UK Ltd to deduct employer’s National Insurance contributions and the Apprenticeship Levy while underpaying holiday entitlement.

P. Weldon raised a statutory grievance with 6Cats UK Ltd and then issued a claim for unlawful deductions from earnings and for recovery of underpaid holiday entitlement. Martyn Valentine of The Law Place Limited drafted the particulars of claim.

As a matter of law, an employer must pay employer’s National Insurance contributions and the Apprenticeship Levy. It is unlawful for employer’s National Insurance contributions and the Apprenticeship Levy to be deducted from pay owing to an employee and for holiday entitlement to be underpaid.

Accordingly, Employment Judge Sherratt ordered 6Cats UK Ltd to pay all the sums requested:

  1. 6Cats UK Ltd has made unauthorised deduction from the claimant’s wages in respect of employer’s national insurance contributions and is ordered to pay the claimant the gross sum of £864.01.
  1. 6Cats UK Ltd has made an unauthorised deduction from the claimant’s wages in respect of the apprenticeship levy and is ordered to pay the claimant the gross sum of £40.11.

Sadly, this practice is endemic throughout the industry and supported by the Freelancer & Contractor Services Association (FCSA). Certainly, whenever I’ve raised this issue with my umbrella employer they’ve simply sent me an information leaflet produced by the FCSA.

I put this question to Martyn Valentine who represented the claimant. Martyn said: ‘Umbrella companies exist in a legal vacuum but must comply with the law. The FCSA is simply a trade body and not a regulatory body like the Financial Conduct Authority. Therefore, I disregard their opinions.’

The case has led to some interesting discussions online including calls for reform from within the industry. Robert Sharp, founder and Chief Executive of umbrella, Orca Pay Group said: ‘This is seismic! This affects the whole supply chain and impacts both Recruitment Agencies and Umbrella Companies. I dare say that this is going to impact 98% of Umbrella Companies as well. Does this mean in essence, any Umbrella that has passed on the App Levy Cost to employees and who has retained or kept any holiday pay at any point from any of their employees have been “non-compliant” so to speak? Pandora’s box has well and truly been opened!’

‘There absolutely needs to be a complete overhaul of the industry. We currently still have the holiday pay scandal that is ongoing, you have the recent ruling with 6cat that in essence means a substantial number of Umbrella Companies have been incorrectly deducting Employers NI, App Levy and again holiday pay.’

‘A big clue was in the JRS when the brolly was responsible for paying the accrued holiday and app pay. Why? Because that has always been our cost to cover. Retrospective claims could shut down a huge number of brollies. These past 4 months have been a devastating period for brollies. That said, it is also about time we took responsibility for the state the market finds itself in. This has simply been caused by us. The very industry bodies that supposedly regulate our market are rumoured to be at the very core of allowing this to happen, whilst we have also seen contracts from some brollies (on off-payroll.org) who are founding members of these same bodies and are contractually paying their contract employees incorrectly.’

‘Have we become so ignorant and arrogant to just think we will always be immune to “getting away” with our actions by always somehow managing to sweep things under the carpet. Contract employees have had enough, the people replying to this thread have had enough and I have had enough. It’s time for serious, real and proper change!’

Contractor Andrew Clark, HST Fleet Technician at ScotRail Alliance had this to say: ‘This is extremely good news and hopefully is a catalyst for ending the daylight robbery that is umbrella companies, these shysters are rife in rail industry where you “must” join from the umbrella that’s backhanding the agency while stinging the worker, it’s time umbrella companies are shut down.’

The practice of rebate or kickback from the umbrella company to the agency has been confirmed by an industry source. Martyn Valentine asserts: ‘There is no legal requirement to use an umbrella company.’ The fact is, many agencies don’t have their own in-house payroll so in order to work and get paid you are in effect ‘forced’ to use an umbrella company. IR35 made sure of that with no other option available.

In 2017, MPs on the Business, Energy and Industrial Strategy Committee launched an investigation into the issue of insecure work and employee rights, called The Future World Of Work where the role of umbrella companies was discussed. I’ve trawled through the evidence and it’s clear that problems were clearly highlighted but nothing was done to stop the abuse. See below.

Mr Iain Wright, Chair:’ I talked about our online forum, Mark wrote and said, “We are now forced onto umbrella company pay schemes…The wage from one week to the next varies wildly. If you inquire about the discrepancy, you are met with reasons Stephen Hawking would not be able to comprehend. We now also have to pay employer and employee’s national insurance and £23 a week just to receive a wage.” What other job do you have to pay a £1,000 a year just to get paid?” Is this par for the course and, if it is, how do we regulate against unscrupulous umbrella companies?’

'The wage from one week to the next varies wildly. If you inquire about the discrepancy, you are met with reasons Stephen Hawking would not be able to comprehend.' Click To Tweet

David Camp, Chief Executive, Association of Labour Providers: ‘It is interesting to note that, in German legislation, there is a ban on what is known as chain leasing, in that there should be no more than one supplier between the worker and the end hirer, so it might be worth the inquiry looking at the legislation in that country.’

Anna Turley: ‘As I have said before, this seems to me to be basically a scam to create an extra layer for people to avoid their tax obligations, and it ends up hitting the workers in their pockets.’

Adrian Gregory, Director, Extraman Ltd: ‘Umbrella companies are becoming an increasing problem. Up until last April, travel and subsistence schemes, which were then outlawed, were the holy grail for recruitment agencies. You could make almost as much money as you wanted. You apportion a certain amount of the temp’s wages as tax-free expenses, and then you stick the proceeds in your pocket. They were fantastic, but they were outlawed from last April, and since then we have seen more and more umbrella company offerings. I am getting them every week. I got one yesterday, as it happens, from an umbrella company. I told them the size of our company, and they said that if we signed up with them—which we could do within a week or two—our annual profits from using them in addition to our normal profits would be £640,000 per year, and their fees would be £120,000 per year. This is a single-branch agency in Earl’s Court. As they say, you do the maths.

'Our annual profits from using them in addition to our normal profits would be £640,000 per year, and their fees would be £120,000 per year. This is a single-branch agency in Earl’s Court. As they say, you do the maths.' Click To Tweet

They also claim to be signing up new agencies every week, and although they would not give me their names, they told me they had two very large agencies already on board. Millions and millions of pounds are being leached, and in that umbrella model there was no tax, no employer’s NI, no employee’s NI, and the workers were worse off. Everyone lost out, but of course you could then, as an agency, offer as low a price as you wanted.’

'Millions and millions of pounds are being leached, and in that umbrella model there was no tax, no employer’s NI, no employee’s NI, and the workers were worse off.' Click To Tweet

Amanda Solloway: ‘ Just on that point, you said something around reputation. Is that the shift that you have gone through? In other words, you are cutting your profitability in order to increase your reputation, which will ultimately increase your profitability.’

Adrian Gregory, Director, Extraman Ltd: ‘The fact that HMRC has a very culpable role in allowing the agency world to develop in the way that it has should not be ignored. It does absolutely nothing, or nothing visible, to curtail the use of the most outlandish schemes that man has ever devised. It occasionally puts out strongly worded sentences, saying that this or that model is not viable. There was a scheme that was exposed by the BBC two years ago, where you split your workforce into hundreds of little mini-companies, to avoid employer’s national insurance. HMRC issued a strongly worded statement saying, “Do not do this”. There was another exposé on the same subject from the Guardian last November.’

‘We keep getting approached by the same companies, and different ones, saying that their businesses are going extremely well. It was a standing joke at the annual general meeting of the Association of Labour Providers in the travel scheme days: HMRC would have a spokesman every year standing up and saying, “Don’t worry. Be compliant; we are on the trail of the non-compliant. We will get them”. They never got them. The only success they ever had, that I know of, was when they fined Reed Employment £158 million for their misuse of travel schemes. That seemed to exhaust them, and there were far bigger culprits around the place that everyone knew about, which sailed through very happily. They are now probably migrating to other models.’

‘If, as an agency, we took up this one that I mentioned, and £640,000 a year came our way, I have very little doubt that we would be absolutely fine. If anyone was ever going to be taken to task, it would be the umbrella company, not us. We would also get a lot more business, because we would be a lot cheaper. We could double or treble our agency, I think, in a few years. I do not want to do it, but it should not be a choice.’

Every day, every week, every year, upwards of 650,000 contractors are caught up in the biggest employment scandal this country has seen for decades yet nobody is willing to do anything about it. Instead, we have the self-righteous trade body, the FCSA doing everything possible to maintain its cartel of ‘accredited’ members – blind to the suffering all around. ‘Compliant’ is the get out of jail card the industry loves to use but perhaps that card has now expired.

We have the self-righteous trade body, the FCSA doing everything possible to maintain its cartel of 'accredited' members – blind to the suffering all around. 'Compliant' is the get out of jail card the industry loves to use but… Click To Tweet

I haven’t bothered to contact the FCSA as they fail to respond to my enquiries, but I can guess their response would involve some inane statement containing words like compliant, ethical, professional and transparent. Martyn Valentine made it clear, the FCSA is simply a trade body and the best approach is to disregard their opinions.

A failure to reform the industry is a systematic failure by the Government and a catastrophic failure by unions and as for HMRC, well, they won’t help you. All have, to all intents and purposes abandoned contractors to an ever burgeoning pack of wolves in a feeding frenzy for profit. This should have been picked up by the unions and pursued doggedly through all channels including lobbying, media and litigation to challenge and force change in the industry.

But it’s not too late. Martyn Valentine believes this judgment is likely to open the floodgates for aggrieved contractors to claim damages for unlawfully deducted employer’s National Insurance contributions, the Apprenticeship Levy, and underpaid holiday entitlement.

I believe it is time for unions to step-up and pursue a class action through the courts. They have the resources, a plentiful supply of cases and Martyn Valentine to lead the charge. It is a time for action, time for change and time for a better deal for hard working people and an end to suffering.

It is time for unions to step-up and pursue a class action through the courts. They have the resources, a plentiful supply of cases and Martyn Valentine to lead the charge. Click To Tweet

Martyn Valentine is also available to represent individuals. Contact The Law Place Limited on 01323 335050.

If you found this article informative and helpful, please consider making a small donation to support my writing.

Published in Covid-19 Teaching Umbrella companies

Comments

Leave a Reply