Umbrella companies offer a crucial payroll service for temporary workers, though recent events have raised questions about ethical practices within the sector.
Several high-profile umbrella companies have been embroiled in allegations of a new practice known as “salary skimming”.
This article aims to clarify the concept of salary skimming, its prevalence, and the steps contractors can take to ensure transparent, compliant payments from their umbrella company.
What is “salary skimming”?
“Salary skimming”, while a relatively recent term without a definitive legal definition, is generally understood in the industry as the unethical and covert retention of fees by an umbrella company, resulting in unsuspecting contractors and freelancers losing money.
It’s important to note that not every deduction or adjustment to pay constitutes salary skimming.
Where deductions are clearly explained, contractually agreed, and applied transparently, they may be lawful even if unpopular.
Concerns arise where deductions are hidden, misleading, or not properly disclosed to the worker.
Upright umbrella companies act in compliance with regulations, deriving revenue from a pre-agreed margin deducted each time an employee’s payroll is processed.
This margin should be clearly communicated in take-home pay illustrations and on every payslip a worker receives while using the provider’s payroll services.
Ideally, the only source of income for an umbrella company should be this margin, with all other deductions directed to HMRC or third parties, such as pension providers.
Nonetheless, recent whistle-blower cases have shed light on a small number of umbrella companies retaining additional income via concealed fees.
These instances of alleged salary skimming have tarnished the sector’s reputation, which is already beset by growing stakeholder discontent over reports of a holiday pay scandal involving a handful of prominent umbrella companies.
How have umbrella companies profited through salary skimming?
A key distinction in salary skimming allegations is whether deductions are made from the assignment rate (before pay is calculated) or from gross pay itself. UK employment law treats these two scenarios very differently.
Late in 2022, an umbrella accredited by the Freelancer and Contractor Services Association (FCSA) was accused by Contractor Voice of salary skimming.
In this case, it was understood that the umbrella deducted an additional £2 each time it processed employee payrolls. This amount was not disclosed on payslips, making it effectively invisible to contractors.
Having audited payslips issued by the accused umbrella from 2017 onwards, Contractor Voice estimated the umbrella in question could have retained over £4 million.
After reviewing the allegations, the FCSA suspended the umbrella for a period of one month. This suspension was later extended to six months following a further review.
Having appealed, the FCSA’s Independent Arbitration Panel found the suspension fair but determined that the umbrella’s actions did not constitute salary skimming.
The official letter to the FCSA setting out the IAP’s findings stated:
[The] IAP were content that the deduction of the £2 charge was not ‘salary skimming’ or, in correct legal terminology, an unlawful deduction of wages. The £2 charge was deducted from the assignment rate and was never deducted from the gross pay. It is not, therefore, an unlawful deduction of wages, in line with recent case law Zajota v. Umbrella Company Ltd [2022] ET 2210575/22.
Contractor Voice later accused another umbrella company on LinkedIn of salary skimming by adding a 1.5% fee to employees’ payslips without adequately explaining the deduction, and by embedding it within employment costs.
While some stakeholders reacted sceptically to the allegations, the scenario highlighted continuing concerns around transparency between umbrella companies and the contractors and freelancers they employ.
Is salary skimming illegal?
Whether salary skimming is unlawful depends on how deductions are applied and disclosed. UK employment law prohibits unlawful deductions from wages, but not all deductions automatically fall into this category.
If a deduction is clearly set out in contractual documentation, applied to the assignment rate, and properly explained to the worker, it may be lawful even if it reduces take-home pay.
Where deductions are concealed, misleading, or deducted from gross pay without proper authorisation, they may constitute an unlawful deduction of wages.
This distinction explains why some high-profile allegations have not resulted in legal findings of wrongdoing, despite causing reputational damage and concern across the sector.
How can contractors and freelancers ensure they do not become victims of salary skimming?
Most UK-based umbrella companies provide reliable and transparent payroll services.
However, recent episodes of noncompliance and unethical practices by a minority of providers underscore the importance of due diligence when selecting an umbrella company.
The following steps can help contractors and freelancers identify trustworthy providers and reduce the risk of salary skimming.
- Choose an umbrella company with accreditation from a well-established body committed to promoting compliance within the staffing and payroll sectors.
- Request a take-home pay calculation before registering with an umbrella company and review the figures carefully.
- Understand how umbrella company margins operate and ensure you know the margin applied by your current or prospective provider.
- Review payslips carefully. Salary skimming typically involves hiding deductions, so verifying that figures add up is essential.
- Stay informed about government guidance on umbrella working and tax avoidance schemes. Useful resources include independent guides, Working through an umbrella company, and Check your payslip if you work through an umbrella company.
- Payslip review services have emerged in response to sector concerns. Contractor Voice offers a free review facility, and the FCSA, with support from SafeRec, also provides payslip checks. If you suspect irregularities, seek a review promptly.
- Only accept assignments through recruitment agencies with strong reputations. Responsible agencies maintain a Preferred Supplier List of umbrella companies with established compliance records. If concerns arise about an umbrella on an agency’s PSL, raise them immediately and consider leaving the provider.
Salary skimming poses risks not only to contractors and freelancers, but also to recruitment agencies.
Recruitment agencies placing temporary workers must educate themselves about salary skimming and the associated legal and reputational risks. In an article published by the Recruitment & Employment Confederation (REC), Fred Dures, founder of payslip review software provider PayePass, said:
Although still to be proven in a court of law, several well-known umbrella companies have been called out in recent months. As a result, workers are on high alert. They are understandably wary about which umbrella company they work through. If the threat of operating via a potential tax avoidance scheme wasn’t enough, many are now contending with having their take-home pay skimmed, too.
Agencies are advised to take this into account and undertake enhanced due diligence on all umbrellas they engage with. If an agency insists that their candidates use specific umbrellas, such as those on a PSL, and one is found to have been skimming, they may find themselves liable if they have turned a blind eye to the risks or failed to undertake proper due diligence. At the very least, being associated with a skimming umbrella will be commercially damaging.
Agencies can use concerns around salary skimming as an opportunity to strengthen their PSLs and provide greater protection for the workers they place.
Any agency found to be referring candidates to unethical umbrella companies risks reputational damage and potential non-compliance with the Criminal Finances Act.
The government does not regulate the umbrella company marketplace
Even before recent allegations of unethical behaviour, there were calls for greater regulation of the umbrella company sector.
While the government has published additional guidance to help supply chains understand how umbrella companies operate, direct statutory regulation of the sector has not yet materialised (although it’s scheduled for 2027).
Consultation and policy discussion continue, but meaningful reform has been slow to materialise.
The FCSA and Professional Passport provide voluntary accreditation schemes for umbrella companies that demonstrate compliance and transparency. Both bodies require members to submit detailed evidence of compliant operations and undergo regular audits.
However, recent allegations of holiday pay and salary skimming involving accredited umbrella companies have raised concerns among contractors, agencies, and other stakeholders about the limits of voluntary regulation.
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