Why furlough pay isn’t straight forward for umbrella employees

In this article we look at the challenges around furlough for umbrella employees. In particular the frustration and confusion created by differing opinions as to whether furlough pay is calculated on gross pay or basic pay.

The reality is, the confusion is due to two key factors; the employment contract and the interpretation of the guidance.

First the contract

Umbrella contracts have been around for a long time, have been scrutinised by HMRC and work well for individuals who have more than one assignment. Most contracts are structured so that they:

• Provide a guarantee to pay minimum wage (which is a legal requirement) even if the umbrella is not paid by the agency;
• Allow for legitimate business expenses;
• Include an element of commission/bonus (being the balance that is payable when paid by the agency).

This flexibility has benefitted workers, enabling them to move from assignment to assignment without the cost and complexity of having to change contracts and has allowed, in a small number of cases, for expenses to be reimbursed before commission is paid.

The vast majority of umbrella company contracts work this way and have done for some time. It’s not a case of umbrella companies not getting their contracts right (as they were around a long time before the Coronavirus) but of the Government not clarifying the position in respect of the commission / bonus element.

We are aware that a small number of umbrella companies have claimed that they have ‘specially drafted’ contracts which means that they can treat government guidance differently from most other umbrella companies.

This has unfortunately led to confusion amongst umbrella workers and it remains to be seen as to whether this is the case.

The vast majority of umbrella company contracts work this way and have done for some time. It’s not a case of umbrella companies not getting their contracts right (as they were around a long time before the Coronavirus) but of the Government not clarifying the position in respect of the commission / bonus element

Next the guidance

Fundamental to the situation is that the Coronavirus Job Retention Scheme (CJRS) guidance talks about “conditional” payments being excluded from furlough pay.

Lawyers that have looked at the current CJRS guidance have warned that HMRC may interpret the commission / bonus paid to umbrella workers as “conditional” or “discretionary” and therefore may not refund umbrellas under the CJRS if payments are made on the gross amount. More information regarding the legal opinion on the guidance and legislation can be found here.

If umbrella companies pay furlough based on gross pay and then only receive basic pay back from HMRC it would leave them insolvent and unable to operate. 

This risk was identified by most umbrella companies at an early stage and we have been working hard collectively as an industry to gain absolute clarity from HMRC and/or HMT on this point.

The industry wants and needs to support workers as best it can without running the risk of insolvency. We’re disappointed to say that no clear response from Government was received, so the industry remains unsure and therefore unable to alter its approach.

Many of the larger umbrellas who follow industry standards asked FCSA, the trade body that monitors compliance in the industry, to use its influence to press Government for a straight answer.

We have previously updated you on the work carried out by FCSA (and other trade bodies such as Professional Passport, REC and TEAM) to get this information including a joint submission on 8 April. Frustratingly there is still no response from Government on this point either.

Our sector needs the same clarity that other industries have received. As an example, in the car trade, HMRC has confirmed that car salesmen’s commissions can be included even though they are surely conditional on selling cars. Our sector desperately needs the same clarity and confirmation and we will continue to push for it.

This risk was identified by most umbrella companies at an early stage and we have been working hard collectively as an industry to gain absolute clarity from HMRC and/or HMT on this point.

We are using our own funds to pay CJRS

We, and many other FCSA accredited umbrella companies, were hoping to introduce our furlough schemes when we had clarity from Government on the basis of the furlough pay calculation.

Waiting for this clarity was essential because HMRC has made it clear that once you make a claim, you cannot go back and claim for more during that period.

This means if we claimed for basic pay only, we would be stopped from making a gross pay claim later which would leave our umbrella employees ineligible for a top-up payment if the Government later gave us the news we want around commission / bonus pay.

However, it has reached a point where many of our umbrella employees are telling us that they need income now.

We have therefore, despite the ongoing lack of clarity, decided to start our furlough process and to pay umbrella employees using our own funds while basing it on a basic pay calculation and backdating it to the date they stopped working.

Using our own funds allows us to top-up the pay if or when we receive confirmation around commission/bonus pay from Government, at which point we will then make a claim under the CJRS.

In addition to this we are also:

• maintaining a strong workforce so we can continue to process payments and support you;
• continuing to pay bank charges and other overheads;
• paying the Apprenticeship Levy on furlough payments, which is not recoverable under the CJRS.

We are doing this because it is the right thing to do.

Using our own funds allows us to top-up the pay if or when we receive confirmation around commission/bonus pay from Government

We want to pay furlough based on gross pay

We are aware that there has been some criticism of umbrella companies and we fully understand that this is a deeply concerning and frustrating time for our umbrella employees. We would like to reassure you that we want to pay furlough on gross pay, however we hope that you understand the difficult position the industry has been put in by a lack of Government clarity which is stopping us from doing so. As a responsible business we have to base our furlough decision on both legal advice and the advice given by our trade bodies. 

What we need now is for the Government to do the right thing by stepping up and giving us the confirmation we require.

We appreciate that it is a difficult time for all, but umbrella workers deserve to be treated fairly, and we will continue to look after your interests as best we can.