With the new Labour government pushing ahead with its pledged Employment Rights Bill, including introducing a ban on exploitative zero-hour contracts, Martin Innes, Director at the Payroll Compliance Authority (PCA), a not-for-profit accreditor in the outsourced payroll sector, warns that this could push more contractors into the unregulated umbrella company market.
Innes says: “Protecting workers’ rights and removing exploitative practices is at the core of what we do at the PCA, but banning zero-hour contracts could have an unforeseen negative impact on contract workers, because it is likely to push our flexible workforce into more agency working scenarios, where they could risk being exploited by the unregulated umbrella company market.”
Many hiring businesses outsource their payroll function to a supplier. Lack of regulation has led to a proliferation of fraudulent schemes and activities by a minority of these payroll suppliers, known as umbrella companies, including incorrect tax deductions, pay skimming, and withholding of holiday pay.
Despite there being several accrediting organisations within the sector, tax evasion remains a significant issue, with HMRC publishing a live list of known fraudulent schemes which currently sits around 100. Workers are frequently unaware that illegal activity is taking place until they receive an unpaid tax bill from HMRC.
Innes, who led a team that facilitated an NHS cost reduction of £1.24 billion in agency staffing spend, adds: “The government needs to understand the increased cost and risk this move could bring. Creating more opportunity for tax avoidance will not help to fill the public finance black hole.
“Contractors across all sectors are usually unaware of the real risk that they could be exploited should they come on the books of an umbrella company that is taking advantage of its employees. By the nature of contract employment, many work through multiple umbrella companies, further increasing the risks if they are not vigilant about what is going into and out of their bank account.”
The new government is set on shaking up employment rights with the focus primarily on the worker or employee. A move towards potentially introducing a single worker status is also an area that would need careful consideration in order not to put restrictions on favourable worker flexibility or disincentivise businesses from hiring contract workers due to increased costs and liabilities.
Innes added, “Whilst we would expect government to open a consultation on these changes, the zero-hours ban appears to be an imminent step.
“We applaud the government’s intention to increase protection for UK workers and there is no doubt that zero-hours contracts have been abused by some employers at the expense of workers. However, we would encourage any ban to be in consultation with impacted sectors and thoroughly considered to avoid unforeseen consequences, such as pushing thousands more workers into an unregulated sector that is plagued by tax evasion.”
The PCA was set up in November 2023 in response to the urgent need for self-regulation in the umbrella company market to stamp out worker exploitation and protect recruitment firms from serious financial and reputational risks through a rigorous audit process and repeat annual audit checks. The not-for-profit accreditor also offers the opportunity for legitimate umbrella operations to demonstrate their commitment to unequivocal compliance.
