Contractors who work with umbrella companies should understand the fact that the latter is also essentially an employer. Thus, it is mandatory for them to sign a Contract of Employment—also known as a contract of service. The Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance (1968) is often cited by HMRC for assessing the existence of a contract of employment. The case assisted the authorities to pinpoint three important conditions. These conditions require compliance from umbrella companies while creating the contract of employment.
- The worker acknowledges providing his skills and work in return for a wage or any other type of remuneration.
- The worker acknowledges that the other party has a certain degree of control in the complete performance of the agreed service, thereby making the other party as a master.
- All the provisions of the contract are in line with a standard contract of service.
Other than this, umbrella companies have to consider their tax relief for travel and subsistence expenses as well as ensuring the presence of an over-arching factor in these contracts. An over-arching contract covers the details of an umbrella company’s strategy for mutual obligations during the assignment gaps. The HMRC has made it clear that umbrella companies involved in an over-arching contract and providing travel and subsistence expenses must make adjustments in their contracts so employees can receive pay between assignments. An umbrella company must also look on how it plans to deal with the holiday pay, which is entitled to an employee via the EC Working Time Regulations. This is important because umbrella companies will not receive acknowledgement for fulfilling their obligations for assignment gaps if they only provide holiday pay. It is also crucial for an umbrella company to recognize that the calculation of the entitlement would be determined by a single-contract. Additionally, the HMRC would not allow payments where there is an underlying assumption that a monthly or weekly salary would factor in the holiday pay. The paid holidays of an employee must be clearly written on the payslip. To comply with the HMRC easily, it is necessary to understand that the employee contracts mirror reality. The HMRC has also cited the Autoclenz v Belcher & Others (2011) case. In that case, a tribunal pondered if the exact contents of a written contract reflected the realistic goals and expectations of both stakeholders; this consideration did not only included the creation of the contract, but also the entire lifecycle. Thus, umbrella companies have to make sure that their contracts have an over-arching element along with the consideration that the internal processes are reflective of realistic contents.