Questions remain over the calculation of entitlement for many umbrella company workers under the Job Retention Scheme (JRS) after Government updated its guidance this past weekend.
Last week, the Freelancer & Contractor Services Association (FCSA) called on Government to clarify the calculation under the JRS, amid concern that some umbrella company workers may not receive an amount comparable to their earnings.
The JRS offers employers a grant of up to 80% of wages paid to ‘furloughed’ workers, up to a cap of £2,500 per month. The scheme was designed to prevent redundancies while supporting businesses and employees affected by the coronavirus pandemic.
However, the publication of Government guidance has prompted fears that the calculation of entitlement will omit the bulk of earnings paid out to umbrella company workers who are remunerated partly through commission or bonus payments, rendering them eligible for only 80% of the National Minimum Wage (NMW).
Government urged to clarify umbrella worker position
“Having looked closely at the information we currently have available to us, we are very concerned about how the pay rate of furloughed workers, whose income varies, such as umbrella employees, will be calculated under the Job Retention Scheme, and have requested urgent clarification from government on this matter,” says FCSA chief executive Julia Kermode.
“It’s worrying that, as things stand, umbrella company workers risk finding themselves largely left out in the cold alongside limited company contractors, who were recently excluded from obtaining support via the Self-Employed Income Support Scheme (SEISS),” adds ContractorCalculator CEO Dave Chaplin.
“It’s only fair that umbrella company workers receive relief comparable to their earnings, as is the case for the vast majority of employees. The intent of HMRC in this instance appears to be in line with helping the workers, so hopefully we will see these issues ironed out.”
Professional Passport CEO Crawford Temple agrees: “The Government, as a result of these unprecedented times, has had to effectively rewrite the tax system in a matter of days and this was always going to create issues. What is clear is that there seems to be a genuine underlying principle to help workers during these difficult times.
“We believe that, in designing the arrangements in such a short time scale, nuances were overlooked. We still have confidence that once these inequities are fully understood they will be addressed.”
Guidance problematic for workers on certain umbrella models
Published on 26 March, instructing employers on how to calculate claims made for costs to cover employee wages, the original Government guidance on the JRS noted: ‘Fees, commission and bonuses should not be included’.
This is problematic for some umbrella workers who are signed up to models that remunerate workers via a combination of a basic pay rate, topped up with sums often referred to as ‘commission’ or ‘bonus’ payments. Umbrella companies often adopt this model to protect against instances where the agency or client defaults on payment.
For many umbrellas this is crucial, due to the lean margins on which they typically operate. Where late payment occurs, the umbrella will pay the worker their basic rate while withholding the ‘commission’ or ‘bonus’ payment until the sum is received from the agency or client.
This model provides umbrella companies with added stability while ensuring that the worker receives some form of remuneration even when the umbrella itself has not been paid. This is a common practice within the industry, although many umbrella companies simply factor the worker’s entire earnings into their pay rate.
For many umbrella workers, commission constitutes the bulk of their monthly income, and so its exclusion from the JRS calculation would severely diminish their entitlement. Based on the Government guidance, there is nothing to suggest that umbrella workers who are remunerated solely via Pay As You Earn (PAYE) might receive a diminished entitlement.
Questions remain over updated guidance
Government updated its guidance over the past weekend, though questions remain for umbrella workers. Notably, under the title ‘Past Overtime, Fees, Commission, Bonuses and non-cash payments’, it adds:
‘You can claim for any regular payments you are obliged to pay your employees. This includes wages, past overtime, fees and compulsory commission payments. However, discretionary bonus (including tips) and commission payments and non-cash payments should be excluded.’
Though umbrellas might consider payments made to workers to fall into the category of ‘compulsory commission payments’, many umbrella models issue contracts that refer to such payments as a ‘discretionary profit-sharing bonus’, aligning the model with Optional Remuneration Arrangements. In such arrangements, it is believed that payments would more likely be considered ‘discretionary’, and therefore excluded from consideration when calculating relief.
“Although Government is yet to confirm the fate of workers operating under these umbrella models, the fact that discretionary bonuses are specifically excluded suggests that many umbrellas can only offer relief as a portion of NMW,” comments Temple.
“We implore an urgent review of the arrangements. Making the necessary amendments, together with the cap on qualifying earnings of £2,500, will significantly benefit the lowest paid and most vulnerable workers during these challenging times.”
Do umbrella workers meet crucial JRS employee criteria?
Government is yet to respond to the FCSA’s lobbying efforts. However, there is a chance that umbrella workers may be classified as ‘employees whose pay varies’, the calculation of payments made to whom is outlined in the same Government publication, which states:
‘If the employee has been employed for 12 months or more, you can claim the highest of either the:
- same month’s earning from the previous year
- average monthly earnings from the 2019-20 tax year
If the employee has been employed for less than 12 months, claim for 80% of their average monthly earnings since they started work. If the employee only started in February 2020, work out a pro-rata for their earnings so far, and claim 80%.’
Notably, the guidance doesn’t exclude the inclusion of fees, commission and bonus payments from the calculation of employee earnings. Given the nature of payments made to some umbrella workers, both Temple and Kermode see no reason why they shouldn’t be classified as ‘employees whose pay varies’, although the specific instructions regarding the treatment of discretionary bonuses cast some doubt over this outcome.
Other practical issues are also yet to be addressed, as Temple highlights: “Under the outlined arrangement, nothing can be deducted from the sum paid to the worker. This suggests that the umbrella cannot charge its margin, and therefore cannot afford to pay staff to run the payroll or pay the Apprenticeship Levy. In addition to this, holiday pay would continue to accrue, generating further costs that umbrellas simply don’t have.”
Umbrella companies encouraged to exercise caution
Until Government responds to the issues raised, Kermode encourages umbrella firms to exercise caution: “This section of the guidance doesn’t mention commission or bonuses, but it is too great a financial risk to assume therefore that commission and bonuses can be considered for these workers. By ignoring this point, the umbrella risks not being reimbursed, or being required to repay the Government at a later date after they have audited the reimbursed furlough payments.
“Until we have confirmation from Government, then it is impossible for umbrellas to calculate furloughed pay based on an average of all earnings because there is a significant risk that this amount will not be reimbursed.”
Chaplin adds: “Contractors who are risk-averse may want to consider only signing up to arrangements where the full contract rate is paid via PAYE, just in case the coronavirus strikes again later in the year. Alternatively, they may wish to switch to an in-house agency payroll, if possible. In the meantime, we do hope that the government see sense on this issue.”