When an umbrella company goes bust or enters liquidation, hundreds of contractors can be left without pay. This worrying scenario can cause umbrella contractors great concern, but there are ways to mitigate the problem by catching the warning signs early.
If your umbrella company fails, you may not get paid. Contractors can become unsecured creditors, so spotting early warning signs and acting quickly is essential.
When contractors work with an umbrella company, they’re essentially employees of the umbrella company. This means that you’re paid by the company, with tax and National Insurance deducted from your payslip.
Legally, you are an employee of the umbrella company — not the end client. This is why payment risk sits with the umbrella, not the client.
You provide the umbrella company with an invoice or timesheet for hours/days worked, which they then pass on to the client. The client pays the umbrella company, which then pays you, after deducting a small margin.
So, when an umbrella company goes bust, you’ve essentially lost your middleman, leaving contractors in a difficult position.
Head of Compliance at Dolan Accountancy and Contractor Umbrella, Zeeshan Anwar, looks at why an umbrella company might get into difficulties, how to spot the warning signs, and what to do if your provider goes under.
Why might an umbrella company go bust?
Umbrella companies can go under for a number of reasons.
One of the most common is insufficient profit margins due to not charging contractors enough for their services or not controlling costs effectively. This results in money simply running out, meaning that the umbrella company is no longer able to continue operating.
Another, less likely, reason could be due to directors taking too much money from the business, causing them to bankrupt the company. However, poor financial management and an unsustainable business model are often the cause of an umbrella company going bankrupt.
What happens if my umbrella company goes bust?
If the umbrella company you’re contracting with suddenly goes under, you may be at a loss as to what to do and feel that you won’t get paid.
The umbrella company should let you know if they’ve gone out of business and provide some information on the process for any outstanding invoices.
However, if this doesn’t happen, you can try to get in touch with clients directly in order to chase payments, informing them of the situation.
However, clients are not usually obliged to pay you directly, as their contract is with the umbrella company, not you.
In most cases, contractors are treated as unsecured creditors in a liquidation. This means you are behind HMRC and other secured creditors when it comes to recovering any unpaid income.
Unfortunately, there are some instances where contractors of an umbrella company simply become creditors who are owed money if the company goes bust. This can result in long payment delays or no payments at all.
Thankfully, there are some warning signs you can look out for, so you can leave the umbrella company before they become bankrupt, avoiding any lost payments.
Warning signs to watch for
One clear signal that a company is struggling is if you’re waiting to be paid for longer than usual. You might find that you’re chasing payments and your umbrella company isn’t as responsive.
If this happens, you can check in directly with the client. If they say that they’ve paid the umbrella company, then that’s a serious red flag and could be a sign that the umbrella company’s struggling.
Another warning sign is if payslips become unclear or inconsistent, or deductions don’t match previous payments.
By staying organised and on top of admin, you can avoid being hit hard if your umbrella company goes bust. Simply ensure that you submit timesheets/invoices in a timely manner each month, staying on top of it to ensure you get paid for the time you’ve worked.
What to do if you suspect your umbrella company is going bust
You’ve spotted the warning signs and suspect that your umbrella company is facing trouble. Here are some steps you can take to avoid losing money:
- Act quickly — as soon as you suspect your umbrella company is in financial difficulty, you should register your debt with the administrator.
- Contact your clients — the next step is to contact any client you’ve done work with as they may have still been paying the umbrella company, unaware that they’ve gone bankrupt. This way, they might be able to pay you directly, meaning you won’t lose out.
- Keep records — keep all unpaid timesheets as records as you might need these when registering any debt you’re owed.
- Check Companies House — look for signs such as overdue filings, charges, or insolvency notices.
- Switch to a new umbrella company — it’s important to switch to a new umbrella company right away, to avoid building up any unpaid invoices.
What to look for in a new company
Don’t let one unfortunate incident put you off contracting through an umbrella company: the benefits can outweigh the risks, as long as you do your research beforehand. Here are some green flags to look out for when choosing your umbrella company:
- They have been in business for a long time — if an umbrella company has, they have experience and can clearly run a successful company.
- Positive reviews — other contractors’ opinions on the company are key. If contractors enjoy working with the umbrella company, then it’s highly likely that they’re trustworthy and reliable.
- Awards — recent awards demonstrate that an umbrella company is getting recognition, giving you peace of mind.
- Personal approach — having a dedicated point of contact at the company shows that they value each and every one of their contractors and are happy to help.
Given the ongoing scrutiny of the umbrella sector and upcoming regulation, choosing a compliant and well-established provider is more important than ever. You can also compare your options in our guide to limited or umbrella company.
Contracting through an umbrella company can save you a great deal of time and hassle, giving you the benefits of a full-time employee with holidays and sick pay.
However, it can be stressful if a company goes bust. Hopefully, our top tips will help you spot the warning signs early on and help you find a reliable umbrella company for the long term.