Recruitment companies often operate preferred supplier lists of umbrella companies they work with. Here we consider how a PSL works in reality, and what happens if a candidate wants to use a different umbrella.
What is a preferred supplier list (PSL)?
A preferred supplier list (PSL), as the name suggests, is a list of companies that a business recommends clients use for external services (services not managed in-house).
For example, if you book a holiday through a travel agent, the agent may not provide travel insurance, but will probably have a few insurers on a PSL that they are happy to recommend to you.
The same happens in the recruitment industry, most commonly when referring candidates to an external payroll provider (such as an umbrella company).
Using the recruitment agency and umbrella company scenario, here’s how a PSL is likely to work:
In most cases, a temporary worker finds an assignment through a recruitment agency and is told they need to register with a PAYE umbrella company for payroll purposes.
More and more agencies rely upon umbrella companies to process the payroll of candidates because running in-house agency payroll is too expensive and time-consuming.
Assuming an umbrella company is required, responsible agencies will present candidates with a preferred supplier list (PSL) – a list of umbrella companies the worker can join to manage their payroll.
Why do recruitment agencies have strict PSLs?
There are several reasons why recruitment agencies have strict preferred supplier lists in place, and the most common are summarised below.
1. To help workers with their payroll
Many temporary workers are new to umbrella companies and don’t fully understand how they work. Therefore, by having a trustworthy PSL in place, an agency can refer a candidate knowing they’ll be in safe hands.
Assuming all the umbrellas on the agency’s PSL are compliant and have good customer service, the worker is more likely to have a positive experience.
By referring candidates to the best umbrella companies in the marketplace, recruitment agencies can argue that they provide added value.
2. To protect the agency
Recruitment agencies are responsible for the referrals they make. If they point candidates toward non-compliant umbrella companies or tax avoidance schemes, they could be in serious trouble with HMRC.
The Criminal Finances Act (2017) was introduced to hold irresponsible staffing agencies responsible for referrals.
To put it simply, an agency can be held accountable if a single candidate is referred to an unscrupulous third-party payroll provider – even if it was done by mistake or by a rogue consultant.
The consequences could land the agency with significant fines, and senior staff (directors) could even land jail time.
Considering the above, it’s understandable why the best recruitment agencies ensure they have a compliant and carefully vetted PSL to distribute to their candidates.
3. To protect the candidates
Agencies have PSLs to protect themselves but also to protect their candidates. With over 500 umbrella companies in the UK, the marketplace is saturated with service providers.
Tax avoidance is wrong and can land you in serious trouble. This won’t come as a surprise. However, the number of tax avoidance schemes preying on UK workers might come as a shock.
To make matters worse, many of these companies pretend they’re fully ‘compliant’ with UK tax legislation – leading temporary workers down a perilous path.
With a dependable PSL in place, agencies can ensure that their candidates choose a trustworthy PAYE payroll provider.
While some tax avoidance schemes may technically be legal, HMRC is actively going after and punishing those who have engaged with them in the past.
Therefore, you should never be tempted to use a scheme promoting higher pay retention than PAYE because it could land you a life-changing tax bill in the future.
Do some recruitment consultants financially benefit from having a PSL?
Yes, some agencies financially benefit by referring candidates to specific payroll providers – and here’s how they do it.
It is common for businesses in the UK to offer rewards if you refer a friend to their service.
For example, energy suppliers sometimes run promotions that guarantee you a cash reward if you refer a friend and the friend goes live with their services.
The same occurs in the contractor payroll sector.
Not all, but some umbrella companies offer rewards to recruitment agencies in exchange for referrals.
While morally questionable, many agencies have strong relationships with the businesses on their PSL but also receive “rewards” for each successful referral.
Most commonly, the reward is likely to be a cash amount that’s payable once the contractor’s pay has been processed an agreed amount of times (to ensure the umbrella has made some money from the margin before having to pay out a reward).
Referral rewards can be paid to agencies in a different form – rebates.
Rather than pay the agency a fixed amount, a rebate is a sum of money owed to the agency each time a referred candidate is paid.
For example, the umbrella may offer a £5 per week rebate to the agency every time a candidate is paid.
£5 may not sound much, but consider this: if an agency places 50 candidates with an umbrella and a £5 rebate is applied for each weekly payment, the agency could pocket up to £3,000 in just 12 weeks (50 x 5 x 12 = £3,000).
Rebates are more controversial than upfront cash rewards because the rebate is almost certainly coming from the margin the umbrella is deducting from workers to cover their administrative responsibilities.
Therefore, it’s the worker who effectively pays and not the umbrella.
For example, if an umbrella usually has a £15 per week margin, but an agency wants a £5 per week rebate, the umbrella may offer referred workers a £20 per week margin to ensure the agency gets what it wants without the umbrella being out of pocket.
What should you do if you don’t want to use a payroll provider on your agency’s PSL?
If you trust your agency and they have a good reputation within the sector, any PSL you receive from them is likely to be trustworthy, and you shouldn’t have anything to worry about.
However, you must carry out due diligence and check each company you’re considering is compliant and will provide you with good service.
A recruitment agency cannot force you to register with a payroll provider if you don’t want to. However, most agencies are very strict and will not let you engage with a provider that isn’t on their PSL.
If you refuse to use a payroll provider on an agency’s PSL – they may refuse to work with you, meaning you will need to find work through a different agency.
Recently, a case occurred where a contractor gave their agency an ultimatum – “let me use an umbrella of my choice or I’ll give up the role”.
The contractor won and was allowed to use an umbrella which was not on the agency’s PSL.
Recently, contractor Paul Sheraton started a new petition – ‘Allow contractors the right to choose the umbrella company they want’ – gaining over 50 signatures already.
“The law needs to change around this to allow contractors the choice over which Umbrella company they choose.”
With the above in mind, if you want to use a payroll provider not on your agency’s PSL – speak to your recruitment consultant and explain your situation.
There is every chance the agency will consider adding the umbrella you recommend to their PSL – assuming the umbrella meets their high standards. However, this is not guaranteed, and you could simply be told “no”.