More important than compliance and customer service

Working with an umbrella company has many advantages for the recruitment agency. Outsourcing the cost, burden and risk of managing a temporary workforce allows the agency to focus on its core activity, finding great people to place in great roles.

In an increasingly commoditised marketplace, most umbrella companies promote themselves on customer service and compliance; employment and tax laws mean that a compliant umbrella solution should vary little from one provider to the next. However, there is a fundamental point of differentiation between providers that is sometime overlooked by recruitment agencies.

The umbrella company sits between agency and worker in the supply chain and the flow of funds on a “paid when paid” basis means the agency is entrusting the umbrella company to pay its contractors the right amount, on time, every time. This means that great customer service and water-tight compliance count for nothing if the umbrella company fails to meet its payroll obligations. And whilst the legal duty is on the umbrella company to pay the worker, it is the reputation of the recruitment agency that is wholly at risk should the contractor not get paid.

This is why proper financial due diligence must be an absolute priority for any recruitment agency choosing to work with an umbrella company. As a starting point the agency should check the umbrella company’s credit rating and examine the umbrella company’s group structure if there is one. UK-based subsidiaries can be owned by off-shore parent companies. Directors can be based overseas too. Should anything happen to the umbrella company the recruitment agency will not only have the significant problem of unpaid agency workers, but it may also be exposed to significant unpaid liabilities to HMRC.

New umbrella companies are set up all the time, and many have changed names over the years. In the course of due diligence the agency should establish who owns the umbrella company and who is managing it. Handling the wages and salaries of large numbers of workers is no small responsibility, so are the owners and managers of the umbrella company fit and proper to do so? Rogue operators can be barred from being a company Director, but it doesn’t stop them from setting up and owning a new business.

We recommend all recruitment agencies thoroughly vet their umbrella companies when putting together a Preferred or Approved Suppliers List but look beyond the compliance and customer service credentials of those companies. Clean backgrounds of umbrella owners and managers reduces the risk of liabilities not being met and a healthy credit check and balance sheet should confirm the umbrella company’s wherewithal to make sure workers are paid. An umbrella company that goes under can take its recruitment agency partners with it, so why take the risk?

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