Umbrella Company Legal Obligations

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Umbrella companies can be of great help to contractors who do not want the hassles associated with running a Limited Company. As part of our series 'Path of Education for New Contractors,' we have covered the basics of umbrella companies in an earlier article. In this article, we look at what are the legal obligations of an umbrella company towards contractors.


Limited Company contractors don't have any employment rights with their client. However, that's not the case with contractors who work through umbrella companies. While such contractors don't have any rights with their client, they get certain rights from their umbrella company. That's because technically a contractor who works through an umbrella company is an employee of the umbrella company. As such, it is obligatory for the umbrella company to provide the contractors with full employment rights that are available to any other full-time employee.

Obligations of an umbrella company

If you are looking at using the services of an umbrella company, choose wisely, ensure that they provide:

Employment contract:

Once you sign up with an umbrella company, you should get a contract of employment under the Employment Rights Act, 1996. The contract should include all your rights and obligations in relation to the umbrella company.

PAYE and National Insurance:

An umbrella company is required to deduct Pay as You Earn (PAYE) tax and National Insurance from a contractor's income and pay it to Her Majesty's Revenue and Customs (HMRC) on time. The umbrella company also has to take care of all tax-related correspondence with the HMRC on behalf of the contractor. You should note however that, unlike full-time employment, the umbrella company will not make any employer's contribution towards National Insurance.

Salary above National minimum wage:

As per the National Minimum Wage Act, 1998, all workers should get a minimum wage depending on the age. For 2014, the rate is £6.50 per hour for an employee above the age of 21. Earlier, umbrella companies would pay employees below the national minimum wage and reimburse the remaining amount as travelling or other expenses. The adjustment resulted in tax savings for contractors, and they were not complaining about it. However, some umbrella companies started to take advantage of these adjustments, and even included expenses that were not incurred by contractor. These fake expenses put contractors at risk with HMRC for future tax investigations and even posed a risk of additional tax payments. To address this, post 2011, it was made compulsory for all umbrella companies to pay a salary lower at or above the national minimum wage levels.

Working hours in compliance with Working Time Directive:

As per UK laws, employees should not be made to work for more than 48 hours in a week, unless they want to work more. This rule also applies to contractors working through umbrella companies. Typically, you will find details of working hours in the employment contract with the umbrella company. Working hours include any time spent on work-related training, paid overtime, business lunches, etc. Working hours do not include lunch breaks, paid and unpaid holidays, rest breaks, etc. Contractors, like other employees, can opt out of the working hours limit if they want. To opt out of the working time directive, you need to inform the umbrella company in writing, and you can opt in whenever they want in the future.

Sick pay:

If you work through an umbrella company, you can get sick pay of £87.55 per week. Your umbrella company is legally obligated to pay this amount for up to 28 weeks of sickness. To be eligible for sick pay, you should be away from work because of illness for four working days in a row, and you should inform your umbrella company within 7 days of falling sick. Any absence of three days or less because of illness doesn't qualify for sick pay. Typically, for the first week of illness, you are not required to submit a fit note from a doctor to claim sick pay. However, for any absence beyond 7 days due to illness, you will have to produce a fit note from a doctor and submit it to the umbrella company.

Holiday pay:

Your umbrella company is required to give you holiday pay of 12.07% of your gross pay. This means that for every £1 earned as gross salary, you get an additional 12.07%. This additional amount reflects that as an employee of an umbrella company, you don't get paid holidays; instead you get extra compensation in exchange of paid holidays.

Some providers provide two types of holiday pay:

  • Retained holiday pay: Under this arrangement, the umbrella company holds the contractor's holiday pay in a separate account. You can ask for it whenever you want. You need to be careful, however, that holiday pay is taxable. A good umbrella company will show the accrued holiday pay on the contractor's wage slip at all times.
  • Rolled up holiday pay: In this kind of arrangement, the umbrella company pays out the holiday pay every week. This method is ideal for contractors who want a higher take-home pay.

Maternity pay and leave:

To qualify for maternity leave, you should be an employee of the umbrella company for a minimum of 26 weeks prior to the 15th week your baby is due. In addition, you should have been earning a minimum salary of £109 every week. Also, if you want to start receiving maternity pay on time without any break in payments, you should give a MAT B1 certificate to your umbrella company 28 days before going on leave. In the event that you are not able to provide a certificate, you are required to provide the umbrella with some other proof of pregnancy. Once you have submitted the documents, it is the umbrella company's responsibility to provide you with maternity pay on time.

Upon starting of your maternity leave, for the first six weeks your umbrella company has to provide you with 90 percent of your average earnings per week. And for the next 33 weeks after the first six weeks, you should get either a fixed pay of £136.78 or 90 percent of your average weekly earnings - whichever is lower. Contractors working through umbrella employees can also take paid time off for attending any antenatal sessions.

If you are not eligible for maternity pay, either because you have joined recently or for some other reason, you can check if you are eligible for Maternity Allowance (MA). The MA is paid for up to 39 weeks, every 2 or 4 weeks in arrears. Your umbrella company should provide you with an SMP1, which states the reason you are ineligible for statutory maternity pay. You will need to provide the SMP1 to your local Job Centre Plus, who will review your SMP1 and inform you of further steps.

Pension scheme:

As a contractor working through an umbrella company, you can invest in a pension through the government's auto-enrolment scheme. The Government has started an initiative in which employers have to compulsorily enrol their eligible workers into a pension scheme. Automatic enrolment for pension schemes has begun since October 1, 2012 in phases depending on the size of the company. If your umbrella company is large, it must have already set up a pension scheme. Umbrella companies with less than 49 people will have to start auto-enrolment for their employees from June 2015 onwards.

Protection against unfair dismissal:

Contractors working through umbrella companies are protected against any unfair dismissal if the umbrella company dismisses them without any sound reason. For example, if you have asked for maternity leave/pay and the umbrella company dismisses you, this will count as unfair dismissal. Another example would be if the umbrella company dismisses you for asking for some other rights like national minimum wage. If you think you've been dismissed unfairly by your umbrella company, you can file a complaint with the employment tribunal.

You should note, however, that you need to work for at least 2 years with an umbrella company to qualify for protection against unfair dismissal.

Other obligations:

Including some of the above, an umbrella company should provide the contractor with full employment rights, which include:

  • Itemized payslip without any unlawful deductions
  • No discrimination because of age, race, religion, sexual orientation, to name a few.
  • To provide a notice of dismissal as agreed in the employment contract
  • Asking contractors to commit to health and safety policy


As can be seen, umbrella companies' obligations towards contractors are similar to that of companies' obligations towards full-time employees. Some of these advantages are important selling points for umbrella companies and are important factors why people choose to work through an umbrella company. However, not all umbrella companies may honour these obligations. For example, some company may refuse to provide maternity leave or maternity pay.

You should choose an umbrella company, which has a proven track record of fulfilling all its legal obligations towards contractors. Tempo is one such umbrella company, which has worked with hundreds of contractors over the past several years.

Further Reading

  1. Introduction to umbrella companies

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If you are looking for accounting support with your new limited company or if you need support setting up your accounts as a contractor, iCalculator recommends Tempo, a solid, dependable company that the team at iCalculator have known and worked with since 2009.

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