Summary
Significant Government reforms to “tackle” the umbrella company market are underway, including legislating to define umbrella companies in the Employment Rights Bill in order to bring them within the scope of ‘employment businesses’ and allow for their regulation.
In this article, we explore the forthcoming changes and how to prepare.
Background
If you are familiar with the employment business and employment agency landscape, you can skip this section
At present, employment agencies and employment businesses in Great Britian are regulated under the Employment Agencies Act 1973 (‘EAA’) and the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (‘Conduct Regulations’). Employment agencies typically find permanent staff, which are hired by their clients (e.g. what recruitment consultancies do), whereas employment businesses typically employ staff and hire them out to end clients (e.g. what temp agencies do).
The above laws regulate the conduct of employment agencies and businesses by placing certain minimum obligations on each of them (with some differences) but which broadly include the provision of a key information document, prohibitions on charging fees for finding work, requirements to undertake suitability checks, record-keeping requirements and prohibitions on detrimental action in certain circumstances.
In contrast, there is no statutory definition of an ‘umbrella company’. An umbrella company is generally considered to be an entity acting as an intermediary that employs individuals on behalf of employment businesses (i.e. recruitment agencies) and end clients. They are generally not caught by the above rules as they are not finding work for those they employ or engage.
Given this, the previous Conservative government launched a consultation back in June-August 2023 on “Tackling non-compliance in the umbrella company market”. In a surprise move, the current Government issued a response to the consultation in March 2025, in which it stated it wanted to define umbrella companies and allow for their regulation “in the same way” that employment businesses are regulated. The rationale for this was to protect “the most vulnerable at work” and the ensure that people who work through an umbrella company have comparable rights and protections to those working through an employment business.
What is changing?
Following the consultation response, the Government introduced an amendment to the Employment Rights Bill (‘ERB’) to expand the definition of ‘employment businesses’ in the EEA so that it includes umbrella companies.
The amended definition of an ‘employment business’, however, is broad and will cover the business of participating in “employment arrangements”, which includes people who are, or who are intended to be, in the employment of a person to be supplied to act for and under the control of another person in any capacity. ‘Participating in’ includes being an employer of the individuals, paying for or receiving payment for the individuals, supplying people or taking steps to do any of these things.
This has been done to allow for umbrella companies to be regulated. The Government has said that umbrella companies will be regulated “in a similar way to the existing Conduct Regulations”. According to this Fact Sheet, the Government has said it will consult on whether amendments to those regulatory obligations should be made to ensure they are “appropriate for application to umbrella companies and address the main harms identified in this sector (for example, lack of pay transparency and difficulty in enforcing employment rights and obligations).” No indication was given as to when this consultation might happen or how obligations may be varied and is clearly still subject to ongoing policy development. Whether the Government ultimately decides to apply the Conduct Regulations in the same way, including in respect of the prohibition on charging working-finding fees, or whether certain aspects are amended or disapplied therefore await to be seen. However, if such rules are applied to umbrella companies in the same way, this could have a profound effect on the overall business model.
Currently, employment businesses are regulated by the Employment Agency Standards Inspectorate (‘EAS’), but this will fall into the remit of Fair Work Agency once established. For more information on the Fair Work Agency including its enforcement powers, read our article here.
Tax reforms
In conjunction with the above changes, the Government has promised tax reforms to the umbrella company market.
At present, as the employer, the umbrella company is obliged to pay salary and run PAYE, meaning all the employment and tax related obligations sit with the umbrella company. It is common for various labour supply businesses to use umbrella companies to employ individuals, which are then hired out to other companies. The Government sees this as a loophole it wants to close. In particular, at present, the ‘end client’ and any agencies are not responsible for PAYE – the legal responsibility for ensuring proper payroll deductions are made falls to the umbrella company. This significantly mitigates the risks associated with IR35 (otherwise known as ‘off payroll working’) for end clients and agencies, meaning umbrella companies are an attractive proposition.
Accordingly, the Government has promised to legislate separately to transfer responsibility to account for PAYE from the umbrella company that employs the worker, to either:
- the recruitment agency that supplies the worker to the end client; or
- where there is no agency in a labour supply chain, to the end client.
The Government has indicated this will not prevent umbrella companies being used to operate payroll on behalf of the recruitment agency or end-client but means that ultimate legal responsibility for any unpaid amounts will rest with the recruitment agency or end-client, as applicable. In the consultation response, the Government notes that some respondents criticised this approach on the grounds that workers who continue to be employed by umbrella companies could have different employers for tax and employment rights purposes leaving them facing additional complexity in their engagements. To address this, the Government has said that it will update its guidance to clarify what the changes will mean.
The Government will consult on draft legislation this year and intends for this change to take effect from April 2026.
How to prepare
Until the Government launches its consultation and any revisions to the Conduct Regulations are made, the true impact of the changes to the employment framework for employment businesses is unknown. The policy intent on the tax changes is perhaps clearer, although the proposed legislation and additional technical guidance on some of the practical aspects is awaited.
To prepare, employers should:
- Try to understand their labour supply chain to understand their reliance on umbrella companies and other labour supply arrangements that may be caught by the new rules, undertaking any necessary strengthened due diligence processes to identify areas of risk
- Keep in touch with labour suppliers to see how they are responding to the proposed changes
- Keep on top of developments to see how the proposals progress over the course of the coming months
