Government restates ambition to regulate umbrella industry

24th March 2023
Written by Qdos Contractor

Labour market enforcement strategy includes fresh promise to "root out" non-compliance in umbrella industry and focuses on the impact of IR35 reform on self-employment

The government has published its Labour Market Enforcement Strategy report for 2022/23, which promises to regulate the umbrella sector and renews hope of a Single Enforcement Body (SEB) – considered instrumental in protecting workers and ensuring employers meet their legal obligations. 

This report addresses several issues key to the world of self-employment, as well as “shifting labour market dynamics” and “the key emerging non-compliance threats” in the jobs market. These include the impact of IR35 reform and issues related to the gig economy, as well as the rise in umbrella company working and umbrella industry regulation.

Written by Margaret Beels, Director of Labour Market Enforcement, the report is characterised as an "interim strategy". Beels was preceded in the post by Matthew Taylor, who produced the Taylor Review into working practices.

Government departments are required to publish such strategy documents by the end of March of the financial year that the report covers. 

In this article, we address the key points impacting self-employed workers.

Promise to regulate the umbrella industry

“The Government has committed to regulating umbrella companies…I will work closely with the relevant departments to seek to root out non-compliance in this area.”

The report found that there is “scope for, and evidence of, significant non-compliance” in the ways that some umbrella companies operate, and in “how they interact with the tax and employment rights system.” 

However, it concedes that the Employment Agency Standards Inspectorate, while active in policing compliance, lacks “the resources and the statutory tools to protect workers.”

It also acknowledges concerns that “the growth in the use of umbrella companies combined with their lack of regulation” has heightened the “risk of unfair competition and worker exploitation.”

The document suggests that the government is still committed to regulating the umbrella industry – a move which, broadly, has been welcomed by experts from across the industry. Although, given that umbrella regulation was promised some years ago, there are sceptics.

IR35 reform driving increased umbrella working

The strategy also examines the drop in the number of self-employed workers since the start of the pandemic. It concedes that the introduction of IR35 reform “is likely to have contributed to this trend.”

This fall in self-employment – which incidentally has now recovered to its highest level since the pandemic (4.3m) – coincided with a rise in umbrella working. Many contractors with contracts considered ‘inside IR35’ were expected to operate via an umbrella company by their client. 

Indeed, the report – citing HMRC estimates – suggests that there were as many as 500,000 umbrella company workers in 2020/21, compared to just 100,000 in 2007/08, and says that 

“the early indications are that IR35 changes may have accelerated this growth.”

These findings show the need for umbrella industry regulation, with concerns that “employment intermediaries, such as umbrellas, as a risk for workers.”

Confusion over employment status in the gig economy

“In response to the recommendation to have a clearer outline of the tests for employment status, the Government stated it would take forward further work on the case for legislative change and potential options for reform. We are still awaiting direction from government on this.”

Following on from the Taylor Review, the Labour Market Enforcement Strategy underlines the “need to clarify the line between ‘worker’ status and self-employment” as workers in these roles are at the “greatest risk of vulnerability and exploitation.”

However, the enforcement bodies are awaiting direction from the government on any legislative change and reform options related to employment status – leaving gig workers and businesses engaging them in limbo.

The strategy document also estimates that somewhere between 2.8m and 4.4m people have undertaken work in the gig economy – around 15% of working adults. 

Acknowledging that “while such roles can offer flexibility”, it highlights a number of compliance issues that workers are exposed to. These include “concerning evidence of labour abuse and exploitation” as well as “rates of pay, lack of income security, [and] lack of clarity over worker status and rights.”

Additionally, the document explores the risks of “misclassification” of employment status, including gig economy workers “being excluded from employment rights such as the national minimum wage and entitlements such as holiday pay.”

The promise to introduce the Single Enforcement Body (SEB)

“I join my predecessors in wholeheartedly supporting the creation of a SEB.”

Beel stated in her introduction that the aim of the strategy document was “to pave the way towards the SEB.”

The document sets out the “once-in-a-generation opportunity to bolster existing labour market compliance and enforcement efforts” through the introduction of the Single Enforcement Body (SEB).

As such, this section of the strategy offers hope that the SEB will be introduced at some point under this government, despite recent comments made by Grant Shapps about the SEB during his time as Secretary of State for Business, Energy and Industrial Strategy (BEIS).

The report also sets out the timelines for the delivery of the SEB, calling it a “significant undertaking involving more than simply placing the three existing enforcement bodies under one roof.”

In summary, the Labour Market Enforcement Strategy for 2022/23 offers hope that the government and the enforcement bodies are committed to protecting workers and supply chain operators. 

The ambition to introduce the Single Enforcement Body remains, which would help to resolve some of the major challenges the sector faces, including potentially the issue of employment status in the gig economy and clamping down on rogue operators in the umbrella industry.

Qdos Contractor
Written by
Qdos Contractor
Award-winning providers of insurance for the self-employed, Qdos are the leading authority on IR35, offering industry-leading employment status services to ensure the flexible working industry thrive. Qdos are the Best Contractor Insurance Provider 2022 and won the Queen’s Award for Enterprise in Innovation 2022 and 2017. 

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