1. Umbrella companies can be a useful tool for complying with UK laws relating to tax, insurance and employee benefits.
2. The umbrella company becomes the legal employer of workers who are engaged by a client company.
3. The umbrella company is responsible for withholding payroll tax and essential deductions, as we as administering essential benefits.
4. Umbrella companies are similar to Professional Employer Organizations (PEOs). However, umbrella companies usually focus on short-term arrangements and work in conjunction with distinct recruitment firms.
An umbrella company is a company that employs or contracts with the (usually temporary) workforce of a client company. The recent introduction of IR35 and off-payroll working rules in the UK has made umbrella companies are more attractive compliance solution than ever.
Umbrella companies (also known as ‘umbrella agencies’ and ‘umbrella organizations’) are similar to, but distinct from, ‘Professional Employer Organizations’ (PEOs). While their focus may be domestic or international, umbrella companies tend to be more popular in the United Kingdom and Europe, whereas PEO services tend to be more popular in the United States and Asia.
In this guide, we explain exactly what umbrella companies are, how they can be beneficial for international expansion, and how they differ from global PEOs.
What is the definition of an international umbrella company?
Umbrella company arrangements are relatively complex commercial and legal solutions used to employ or contract a workforce, usually on a temporary basis. The best way to understand these arrangements is by setting out the different individuals or parties involved and the role that they play. Umbrella company arrangements usually involve:
These arrangements are particularly common in the United Kingdom, and for international businesses that have operations in the United Kingdom.
What is the purpose of umbrella companies?
There are a dizzying number of ways in which a company in the United Kingdom (for example), could engage its workforce. Some of the key options include:
It is the last possibility that is usually implemented in an umbrella company arrangement. So, why is this option used rather than the other ones mentioned?
This means that, within the United Kingdom, using an Umbrella Company is often the most efficient and compliant mechanism for client companies to engage temporary or fixed-term staff.
Umbrella company arrangements are particularly attractive for international companies that wish to retain a workforce in another country without setting up a local entity or subsidiary to employ that workforce.
How might an umbrella company be used in a global expansion?
The traditional approach to expanding a company abroad has been to set up a local entity or subsidiary of the international enterprise in the foreign country. This is required as foreign companies are generally not permitted to hire local employees. However, there are a range of challenges associated with this:
Engaging an umbrella company, rather than setting up a local entity, may be a way of dealing with some of these challenges.
How do umbrella companies work?
The specific umbrella structure will be based on the contracts between the relevant parties. However, set out below are the steps that are usually taken:
Key benefits of umbrella organization arrangements
An umbrella company bridges relationships between the client, recruitment agency, worker and the umbrella company.
Using an umbrella company has a range of potential benefits for enterprises expanding internationally, including:
It should be noted that the legality of different types of umbrella arrangements differs in different countries and you will need to seek professional advice before embarking on a particular type of arrangement.
What is covered by umbrella agency services?
The services an umbrella company offers will be spelled out in both a contract with the individual worker and its B2B contracts with the recruitment agency. However, core services of umbrella firms, include:
What are the risks of using an umbrella company?
Umbrella company arrangements are a useful business model for umbrella companies that strictly adhere to tax laws and regulations. However, both client companies and workers should be aware of the occasional unscrupulous operator and their typical scams. It is recommended to avoid umbrella companies offering:
What is a Professional Employer Organization (PEO)?
A Professional Employer Organization (PEO) employs a workforce on behalf of a client company. Where the organization is focused on temporary or project-based staffing they are often called a contract staffing company. PEOs come in either domestic or international forms, depending on whether they employ workers within just one country or across various different jurisdictions.
What is the difference between an umbrella company and a global PEO?
There are several ways in which umbrella company arrangements differ from global PEO arrangements:
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How to find an umbrella company
While there are many businesses that may advertise that they provide umbrella company services, it is important to select an umbrella organization that is established and recognized in the local market.
When meeting with umbrella companies with whom you would potentially like to do business, you should ask the following questions:
1. What is your schedule of charges?
You should have a firm understanding of how the umbrella charges for its services. This may be a gross fee per week or month or a percentage. Be familiar with additional fees, such as fees to join or leave the company.
2. What is your company’s background?
You should learn as much background information about the company as possible. You should know how long it has been in business, what industries it serves, how many professionals it has, and how many companies it does business with.
3. How are contractor payments made?
You should know how professional payments are transferred and the payment schedule. Also, you should be familiar with any extra service charges, such as same-day transfer charges. You should also be aware of the technology that is used to handle payments and timesheets and how this information is secured.
4. How do you ensure compliance?
You may be concerned about how you can ensure the umbrella company is compliant with local labor organizations and tax agencies. You may want to ask for copies of professional compliance audits.
5. Will you have an account manager?
The best umbrella companies will assign a specific account manager to handle each account.
Find out more about an umbrella agency or global PEO
If you would like more information about umbrella companies or other solutions to achieve global expansion in a more cost-efficient manner, you can contact Horizons.
We focus on providing global business solutions to companies that do not have existing legal entities or that require additional office support.
Our global business service offerings allow foreign businesses to reduce administrative costs, simplify and centralize payments, and delegate compliance and regulatory matters to a local company with existing relationships with governmental agencies.
Contact us to learn how we can help your business emerge into various promising locations.
Frequently asked questions
The purpose of an umbrella company is to stand between the worker and their workplace in a fixed-term or contracting situation, to ensure that the employee is paid in full compliance with employment and tax laws.
Umbrella companies add a margin to the total cost of employment, that is passed on to the ultimate client. Usually, the employee does not ‘see’ the fee paid to the umbrella company.