What is an umbrella company, and how does it work?

No, an umbrella company doesn’t sell handheld items that protect you from the rain. Umbrella companies help clients and contractors to reduce their administrative burdens. If you choose to work via an umbrella company, the process can seem confusing if you haven’t worked for one before. Check out the following information to discover what an umbrella company actually is, and how it operates.

What is an umbrella company?

An umbrella company employs agency contractors working on temporary contracts, usually through a recruitment agency. A contract is signed between the umbrella company and the recruitment agency on behalf of the contractors. So, an umbrella company acts as an employer for its contractor employees. The umbrella company provides employees with a payroll service, processes all invoices and timesheets, and pays the employees their salaries after deductions have been taken. In short, an umbrella company takes care of the major accounting actions relating to the payment of employees. The best umbrella companies employ experienced and highly skilled accountants, like certified public accountants, to ensure all accountancy issues are handled correctly and accurately. Certified public accountants are highly qualified, as they have to pass the rigorous CPA exam to become CPAs. If you would like to know more about being a CPA and how to become one, the Accounting Institute for Success provides all the needed information on this subject.

How do contractors benefit from working for an umbrella company?

Contractors receive two main sets of advantages from umbrella companies. Firstly, an umbrella company will provide the Standard Set of Statutory Payments. These are things like statutory maternity pay, statutory sick pay, and holiday pay. Secondly, umbrella companies can provide other employment lifestyle advantages, such as dependent care, critical incident support, clinical counselling and legal support. The latter can be very beneficial for dealing with scams, schemes and other fraudulent activities, like cheque fraud, skimming scams, and falsification of applications.

What happens when you work for an umbrella company?

Most employees work for an umbrella company via a recruitment agency. If you are contracted to an umbrella company, you can expect to follow these steps:

  1. When you secure a contract position, the umbrella company acts as your employer and signs a contract with your recruitment agency.
  2. You will sign a contract of employment with the umbrella company.
  3. Once you have worked your designated hours, you will fill out a timesheet and hand it to your manager to sign.
  4. You will submit your timesheet to both the recruitment agency and the umbrella company. Your timesheet shows how many hours you have worked over the designated period, which is usually a week or a month at a time.
  5. The umbrella company invoices your recruitment agency. In turn, the agency bills the end client.
  6. After the umbrella company receives payment from the recruitment agency, it will prepare payroll.
  7. Once payroll has been processed, the umbrella company will pay your salary after deductions for things like employment taxes, personal taxes, pension contributions, and a pre-arranged fee to the umbrella company. If you have allowable expenses, like mileage, meals, and accommodation, these will be reimbursed in your pay.

Things to Be Wary of

The vast majority of umbrella companies are respectable firms. However, some umbrella companies are known to sneak unlawful clauses into their contracts, which include deductions that are not made clear until after a contractor has signed the contract. So, make sure you check the reasoning behind any deductions before signing the contract. Also, although there are indeed variations between the services and promises different umbrella companies provide, unscrupulous umbrella companies can make untrue claims. If their promises sound too good to be true, they probably are.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.