Simplifying the process

In a world of changing payments and regulations, the professional employer organisation is here to help.

The word ‘nuanced’ could have been created for the contracting and freelance workforce in the UK, especially when it comes to payment with differing rules, exemptions and requirements to contend with. And a nuance is one short hop from a grey area, which in the temporary work market, can easily turn into a lack of transparency.

Turning to an intermediary to take care of matters, such as an umbrella company, has hence been a natural step for contractors and the agencies and employers who manage and pay them. But, in a sector that continues to be unregulated, the bad as well as the good stories are well documented.

Enter the professional employer organisation (PEO), which aims to bring more transparency for all parties involved. Like an umbrella, a PEO is an employment intermediary, which provides recruitment agencies, contractors and small to medium-sized businesses with an outsourced HR and payroll solution. The PEO, which first became popular in the US, takes on responsibility for all the typical employer services like tax, National Insurance Contributions (NICs), compliance and all other legislative and administrative requirements. This includes contracts of employment and in some cases, if operating a worker model, contracts for service.

We understand the growing demand in the temporary labour market for a range of payroll options, and that is why we have taken the decision to work with the FCSA to be accredited for both our umbrella and PEO models of pay” Steve McDermott, business development manager at New Red Planet

Where it differs from an umbrella set-up is that it provides the contractor with a simplified picture of how their pay is presented. Under a typical umbrella model, the employee would see deductions such as Employer NICs, Apprenticeship Levy and the margin amount retained by the umbrella for its services on a reconciliation statement, which if not properly made clear – as is required by the Freelancer and Contractor Services Association (FCSA) – can cause confusion.

Under the PEO model, these deductions are charged to the hiring company separately. Hence the contractor sees just their gross pay rate rather than the increased amount or “the uplifted rate”, usually called “the assignment rate”, which is charged by the umbrella to cover these extra costs.

In some cases, but not all, the agency may advertise the uplifted rate to the contractor who then doesn’t always understand why the received rate is lower. “Under the PEO model, the contractor should know exactly what rate they will be getting as it’s not advertised at a higher rate,” explains Deborah Murphy, head of operations of the FCSA. “If operated correctly, it can be a clearer model, but that being said, if the umbrella model is operated correctly and transparently that, too, shouldn’t cause confusion.”

Julia Kermode, CEO of payroll compliance service provider, PayePass Solutions, explains that recent off-payroll changes have caused confusion for contractors who are now being engaged via umbrellas, particularly in relation to assignment rate versus gross pay rate. She agrees the PEO model simplifies these financial arrangements.

HMRC guidance

HMRC provides guidance on the supply of staff and VAT on the site. These two links in particular may be useful for recruitment agencies considering using an umbrella or professional employer organisation (PEO).

HMRC’s policy on supplies of staff is set out in VAT Notice 700/34 (see information on joint employment in section 3.2.)

In the medical sector, a relief applies for some of these employment businesses and you can find out more about this in VAT Notice 701/57 (Section 6).

“Umbrellas can be confusing by comparison as their payslips are accompanied by a breakdown of the assignment rate (the uplifted umbrella rate), which shows all employment costs and overheads in addition to the worker’s gross pay.

“The PEO model brings extra clarity to the pay rate for temps and contractors. It is very logical as it charges overheads to the recruitment company on top of workers' gross pay.

“The main advantage of a PEO is that temps and contractors should always know how much their gross pay rate is. This clarity is important because it should mean that there are no surprises when it comes to payday.”

The FCSA-accredited Orbital Payroll Group felt that during the Covid-19 period there was a backlash to the way furlough was operated on umbrella PAYE – for example, the contractual nature of workers only being entitled to the National Minimum Wage (NMW). “This highlighted the need for a fully outsourced PAYE alternative that could give a bit more rounded service than the traditional bureau service,” says Jonathan Myatt, director, Orbital Payroll Group.

He adds: “The advantages are a simple PAYE structure and a free service for workers. It also gives recruiters a different PAYE option to umbrella PAYE, but it does need employment costs factoring in, whereas with umbrella PAYE the employment costs are rolled up into the rate.”

Those registered and paid by Orbital through any of its models also have an added level of reassurance as the company uses the Payslip Buddy, which checks and verifies the payslip to make sure all deductions are correct and ethical. The check looks for tax fraud and any illegal practices like NMW violations, as well as practices that might not be illegal but are seen as unethical for financial gain. Myatt says all workers get a report emailed to them every week plus the opportunity to use their Payslip Buddy login to view historic reports.

New Red Planet (NRP), which is also FCSA-accredited, says it has seen demand for the PEO model continue to grow over the past couple of years.

“This is especially the case in public sectors, such as education and social care, where contractors and the supply chain in general prefer the simplicity provided by the PEO model to the worker,” said Steve McDermott, business development manager at NRP.

The main advantage of a PEO is that temps and contractors should always know how much their gross pay rate is” Julia Kermode, CEO of payroll compliance service provider, PayePass Solutions

“We understand the growing demand in the temporary labour market for a range of payroll options, and that is why we have taken the decision over the past couple of years to work with the FCSA to be accredited for both our umbrella and PEO models of pay.”

He explains that crucial to the ethos of NRP is having an understanding and acting upon the needs and demands of all parties – agencies, contractors and end clients – so it works to ensure it understands the nuances within the different sectors. Many of NRP’s PEO clients operate in the public sector where there is an increasing desire for workers to be paid through a standard PAYE model, explains McDermott. “Rather than this forcing an agency to run in-house PAYE, the PEO model allows the agency to continue their main focus on recruitment while working with a payroll partner to provide the employment and payroll solution that is perfect for their supply chain.”

NRP managing director Phil Whelan, was a teacher and headteacher for 15 years prior to taking the helm. He maintains regular contact with his public sector colleagues to ensure the company maintains an understanding of current legislation and requirements within education and beyond. “Having worked with schools, agencies and workers on both sides of the fence gives a unique insight into what is desired and required in the public sector environment. PEO gives teachers, and many other such contractors, agencies and end clients, the payroll choice and solution that meets the demands of the whole supply chain.”

The FCSA only accredits those companies operating a single employment PEO as opposed to a joint one. In a joint offering, two or more organisations – for example, the recruitment agency and the hiring company – partner with the PEO and both share responsibility and control of the worker.

In 2021, FCSA took the decision to remove the joint employment model from its Accreditation Codes in the interests of promoting transparency and fairness within the contracting industry. The chief concern, said Murphy, head of operations with FCSA, was the potential for circumventing VAT. “Whilst we appreciate that there are some instances where VAT exemptions may apply, such as the medical sector around the supply of registered nurses etc, there were just too many unknowns, which in turn created a larger risk.”

She concedes it is perfectly possible to operate a PEO without the central aim being to circumvent VAT but discussions with HMRC confirmed that while the joint employment model is in line with regulations, it is subject to case-by-case evaluation. “It introduces uncertainty and we don’t like uncertainty as it could leave employers in a precarious position, unsure if their employment structure would withstand scrutiny by HMRC. The entire temporary workforce suffers from a lack of transparency,” she says. “And the other question you have to ask is, OK, there might be benefits to cash flow for the companies but what are the benefits for the contractor?”

Kermode adds that joint employment can be difficult to do compliantly, and that recruiters need to be aware that it is a very different way of working.

An HMRC spokesperson told Recruiter that the VAT treatment of joint employment arrangements depends on each case. “HMRC will challenge any arrangements set up to deliberately avoid paying the right amount of tax.”

Whether the PEO model proves itself as a simplified and more transparent model for contractors will become clearer over the coming years, but it provides contractors and agencies with an alternative to the traditional umbrella. As Myatt says, it provides the workers with a welcome “what you see is what you get” straight PAYE rate, removing the confusion of an uplifted umbrella PAYE rate. And, as Whelan says, the hope is that the benefits are felt by all parties, as well as the economy: “At NRP, we firmly believe that giving contractors and agencies the payroll choices they desire, will lead to a more settled and efficient contracting world.”

Advice to recruitment agencies

As Julia Kermode, CEO of PayePass, says, the PEO model can appear “quite mysterious” because it isn’t being widely used yet, and underlines the issue that might exist if it operates on a joint employment basis. “Recruiters need to be aware of this because it involves certain legal responsibilities which they may have previously outsourced.”

The FCSA’s Deborah Murphy advises recruitment agencies to do their due diligence on the PEO just as they would a standard umbrella offering. “Check that the company is the company they’re meant to be, ensure you get references and expect a high level of transparency and open communication from them. Also, be aware of what the risks are: for example, what happens if the PEO can’t meet its obligations? And what happens in the case of an employment tribunal – is the agency responsible? And what about insurances?”

Meanwhile, Jonathan Myatt of Orbital Payroll Services has this advice: “When factoring in total costs for engaging a PEO worker, be sure to know the amount of maximum hours that someone could work as this will give a clear idea on the employment costs involved. If you work on a minimum amount of hours to save costs then this could be a shock if someone does more than you initially priced on. It’s also worth factoring in extra costs for things like workers enrolling into a pension scheme after 12 weeks, which will incur an extra cost. What should recruiters be alert to when dealing with them?”

Image credit | iStock

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