Thursday, January 30, 2014

Contractors - Employee Benefit Trust Vs Umbrella Company

It has been the tradition for contractors to refuse efforts to make them into regular PAYE employees. Contractors enjoy additional earnings and a more flexible working schedule (should they choose of course) However, they haven't had the same benefits given to full time, permanent employees. That is where an Employee Benefit Trust (EBT) steps in. Umbrella companies offer statutory benefits to contractors, which include:

  • Holiday pay

  • Maternity and paternity leave benefits

  • Statutory sick pay commensurate with regular employees

  • Guaranteed minimum wage or above and minimum weekly hours

  • Redundancy payments

  • Contractors may have no employee rights with their clients, but an umbrella company (EBT) that genuinely employs its contractors provides the full range of employee's rights.

All umbrella companies are not the same. The Pay As You Earn (PAYE) model sees the worker as an employee for income tax purposes. The agency deducts National Insurance Contributions and income taxes before payment to the contractor, even though the contractor isn't an actual employee. Other companies claiming to be umbrella companies provide the contractors an employee benefit trust paid into an offshore account. Neither offshore accounts nor agency PAYE models may give contractors employment rights. Many companies offering EBT style solutions claim to save contractors money.

Legitimate umbrella companies such as Parasol, Equity Incentives, Streets LLP, etc., which do provide an "actual" employment model for their contractors, follow all employment benefits specified by statute. They are usually members of recognized trade bodies and regularly pass vigorous membership compliance requirements. Those companies under trade body membership, provide contractors ongoing holiday pay.

Legitimate umbrella companies act as a "regular" employer. Now when a contractor needs a mortgage reference, he has a company that can give one, and an HR department to process the request. Support for grievances and disciplinary procedures are also provided if questions come up between the contractor and the client.

Quality employee benefit trust companies have stringent requirements for their contractors. This ensures that the contractor hasn't gone beyond expense limits with past clients or left tax bills unpaid. After working with an umbrella company for a period of time, that company will increase minimum payments to the contractor at times when they aren't in statutory redundancy pay or in a contract.

Reputable umbrella companies make benefits available, provide stability, and support for the contractor that regular contracting doesn't. This arrangement still offers higher earnings and a more flexible schedule than a permanent, full-time job. The contractors needn't worry about office politics, or fighting for the next promotion.

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