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What is salary skimming and how do unethical umbrella companies profit from it?

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 accusations involving a new practice termed as “salary skimming”.

This article aims to elucidate the concept of salary skimming, its occurrence, and the steps contractors can take to secure transparent and compliant payment from their umbrella company.

What is “salary skimming”?

“Salary skimming,” while a relatively recent term without a definitive 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.

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 few umbrella companies’ practice of retaining additional income via concealed fees. These instances of salary skimming have tarnished the sector’s reputation, already beset with growing discontent from stakeholders due to reports of a holiday pay scandal by a handful of prominent umbrella companies.

How have umbrella companies profited through salary skimming?

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 the umbrella was deducting an additional £2 every time they processed the payroll of their employees and this amount was not explained on payslips, making it “invisible to contractors”.

Having audited payslips by the accused umbrella from 2017, Contractor Voice estimated the umbrella in the spotlight could have pocketed over £4 million.

After reviewing the allegations, the FCSA suspended the umbrella for a month, which was later extended to six months after a review. Having appealed, the FCSA’s Independent Arbitration Panel considered the suspension fair but determined the umbrella’s actions were not salary skimming.

The official letter to the FCSA with 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 accused another umbrella company on LinkedIn of salary skimming by adding a 1.5% fee to employees’ payslips without explaining the deduction (and hiding it in the employment costs).

While stakeholders reacted to the allegations sceptically, the scenario showcases another example of a lack of transparency between an umbrella and the contractors and freelancers using it for their employment.

How can contractors and freelancers ensure they do not become victims of salary skimming?

The majority of UK-based umbrella companies offer reliable and transparent services. Yet, in light of recent episodes involving non-compliance and unethical practices by certain market leaders, it’s crucial to be selective in choosing your umbrella company to guarantee compliant payment.

Here are some handy tips to guide you towards a trustworthy provider and keep you clear of potential salary skimming pitfalls.

  • Pick an umbrella company with an accreditation from a well-trusted body that is committed to promoting compliance within the staffing and payroll sectors.
  • Before registering with an umbrella company, request a take-home pay calculation and study the figures carefully.
  • Understand how umbrella company margins work, and make sure you are familiar with the umbrella margin you are facing with your current provider, or any future providers.
  • Salary skimming involves hiding deductions on an employee’s payslip. Therefore, the only way you can identify salary skimming yourself is by thoroughly reviewing your payslips and checking the figures add up.
  • Keep up to date with the latest government announcements about umbrella companies and tax avoidance schemes. There are plenty of free guides available, including ‘Working through an umbrella company’, and ‘Check your payslip if you work through an umbrella company’.
  • Payslip support services have recently entered the sector, with Contractor Voice offering a free review facility, as well as the FCSA with the support of SafeRec. If you suspect your umbrella company is salary skimming or acting unscrupulously, request a payslip review at your earliest convenience because these services are valuable.
  • Read online contractor news platforms regularly to keep up to date with the latest goings on within the sector.
  • Only seek temporary assignments through recruitment agencies with a stellar reputation. Established and responsible recruitment agencies should have a Preferred Supplier List (PSL) consisting exclusively of umbrella companies with a proven track record of compliance. If you ever suspect an umbrella on an agency’s PSL of salary skimming, speak to the agency immediately and leave the umbrella.

Salary skimming poses a threat to recruitment agencies, as well as contractors and freelancers

Recruitment agencies placing temporary workers must educate themselves on salary skimming and the associated risks. In an article on the Recruitment & Employment Confederation’s (REC) website, 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 of skimming or not undertaken proper due diligence. At the very least, being associated with a skimming umbrella will be commercially damaging.”

Agencies can use the unethical practice of salary skimming to tighten up their PSL and provide added protection to the temporary workers they place. Not only is it essential PSL’s are reliable and reviewed regularly, but by providing exceptional support for candidates, agencies can boost their reputation and increase the value their candidates receive. After all, any agency found to be referring to unethical umbrella companies will undoubtedly face a backlash, as well as running the risk of non-compliance with the Criminal Finances Act.

The government doesn’t regulate the umbrella company marketplace

Even before the recent cases of unethical behaviour from several umbrella companies, there have been calls for the government to regulate the sector. However, despite an increase in online government resources to help the supply chain understand the role of umbrella companies, regulating the sector does not appear to be a government priority.

The FCSA and Professional Passport offer accreditations to umbrella companies that can prove they are compliant and transparent. Both bodies require members to provide thorough evidence they operate compliantly. Once an umbrella obtains accreditation, it must regularly undergo an audit to ensure its processes remain current with the latest government regulations.

While accredited umbrellas have had to prove they are compliant, it hasn’t discouraged a couple from acting unethically to boost profits. Recent holiday pay and salary skimming allegations have involved FCSA accredited umbrella companies, which has raised concerns from concerned stakeholders.

About the Editor

  • James Leckie

    James is an experienced business and finance writer. He studied economics and worked for large companies including British Airways, Citi and JP Morgan before working as a data analyst IT contractor in the late 1990s and 2000s. He founded Contract Eye in 2006 and also writes widely for a number of popular business sites. Connect with James on LinkedIn.

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Last updated: 31st May 2023