If you’re currently engaging your contractors directly through Agency PAYE, there are a number of good reasons to outsource employment to a specialist expert. In this article we’ll look in detail at two popular models for doing this; umbrella company employment, and the PEO (Professional Employment Organisation) model.
Why do recruiters outsource employment?
Whether you choose to use the PEO model or umbrella company employment, you’re involving another company, and its profit margin, in your supply chain and you need a good reason to do that. So why do recruiters choose to outsource?
- The administrative burden of running compliant payroll is shifted onto the other company.
- The cost of statutory payments, including sick pay, maternity and paternity pay is outsourced as well.
- Your contractors get full employment rights, and continuity of employment across and between assignments.
- You get expert help with changing legislation, and responsibility will often fall entirely on the outsourced employer rather than your agency.
- You get a single point of contact for contractor management, which simplifies communication and improves efficiency.
Umbrella company employment
In umbrella company employment, the umbrella company employs the contractor, and charges you an agreed contract rate for their work. You in turn charge them out to your client at a profit.
The rate you pay the umbrella includes the umbrella’s margin and costs, which the umbrella will deduct before paying the contractor as their employee. Where the employment costs vary – for example if the threshold for employer’s NI is sometimes not reached – this will lead to variations in the contractor’s gross pay.
The contractor’s pay documents will detail the whole calculation, starting at the amount you pay the umbrella and showing deduction for the umbrella’s margin and costs to reach the gross pay figure, and then showing PAYE deductions like a standard employee payslip.
The PEO model
The PEO model is the same as umbrella, but the contractor’s pay and the margin and employment costs are billed separately, so you will be invoiced once for the contractor’s pay, and again for the margin and employment costs.
This has two main effects:
- The contractor receives a standard employee payslip, starting from their gross pay and showing PAYE deductions. This gives you fewer details to explain to the contractor, and there are fewer opportunities for misunderstandings about their pay rate.
- Where the employment costs vary, the amount billed to you will be adjusted, rather than showing as variations in the contractor’s pay.
Responsibility for employment and statutory payments
In both cases, responsibility for employing the contractor, including all the cost, risk and work associated with compliant employment, is outsourced to the umbrella company/PEO.
This includes responsibility for statutory payments like sick pay and maternity/paternity pay, for administering holiday pay and running auto-enrolment into a workplace pension scheme.
Comparison between Agency PAYE, Umbrella Employment and PEO
| The model | Responsibilities | Employment costs | Statutory payments | |
| Agency PAYE | You engage the contractor directly and run payroll through your PAYE system | You are entirely responsible for the cost, risk and work of employment | You are responsible for all employment costs. | You must cover the cost of statutory sick pay and maternity/paternity pay. |
| Umbrella company employment | The umbrella company employs and pays the contractor. You pay them an agreed contract rate. | Responsibility for employment is outsourced to the umbrella company | The umbrella pays the employment costs, and these are included in the contract rate you pay to them. | The umbrella company covers the cost of statutory sick pay and maternity/paternity pay. |
| PEO | The PEO employs the contractor and you pay them separately for the contractor’s pay and the PEO’s margin and costs. | Responsibility for employment is outsourced to the PEO | The PEO pays the employment costs and bills you separately for them. | The PEO covers the cost of statutory sick pay and maternity/paternity pay. |
Additional benefits
Before you choose your umbrella company/PEO partners, it’s worth finding out what other benefits they can offer your contractors. For example, Fair Pay Services offer a wide range of employee benefits and services designed to help them make their money go further, care for themselves and their families and get more out of life as a contractor, and these are available to all our employees whether they’re umbrella or PEO. This improves satisfaction and engagement, so it’s easier for you to attract and retain the best contractors for your clients.
If you have questions or if we can help in any way, please call our expert team on 01604 360222 or email [email protected].
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