Umbrella Company: Everything to Know

At the present time, work and employment in the traditional way have changed massively and for good, with freelancing as the most preferred option among workers around the world to find and perform their jobs, with no permanent commitment with a unique company or place of work, boss and working schedule that could take several hours of every day.

Of course, being a freelancer may involve plenty of benefits but it also has several disadvantages in general and also in specific, in comparison to more traditional and permanent work options, and this is where Umbrella companies come in as a new working model to provide the best of both worlds, making freelancers and workers direct contractors with specific tasks to do and with related advantages and more extensive work offers.

In the next section we will be addressing in detail, Umbrella companies in relation to definition and purpose, how they work, what the benefits are of this working approach are, along with the thorough explanation about Umbrella contracts and if this type of modality to offer job is legal or not, as a valid question due to its characteristics and possible related setbacks.

What is an Umbrella Company?

In definition, an Umbrella company is the sort of employment business that is specialized in offering work opportunities and jobs to freelancers, contractors and independent people, who, prior have been recruited by recruitment agencies that are engaged to such Umbrella companies in the first place, although in some cases these type of agencies do not have to be intermediaries.


In this way, the contractor or freelancer gets to be a direct employee, in some way, for the Umbrella company and it is the business who is responsible for searching and providing work options and temporary or one time job offerings for them, whilst, at at the same time, having the known advantages of being a freelancer and working independently, such as independent time and work management and more.

Apart from the benefit of keeping the characteristics of freelance work, workers and people in general that look to be employed by Umbrella companies get to enjoy other advantages that are related to more permanent jobs- being actually of the main reasons why this type of job offering approach is having success, especially in countries inside the United Kingdom and overseas.

Such advantages have to do with insurance, holiday pay, maternity pay, reducing administrative work and providing hassle free hiring, along with many more that will be explained in a further section of the article. Now, to work the way they are intended to, Umbrella companies follow a few steps and carry out different procedures, usually in order to achieve their purposes.

How do Umbrella Companies work?


To accomplish the different purposes explained on what Umbrella companies are and why they exist, most of them follow a mapped out route that make the job offering process, hiring and delivery of benefits a lot easier. This is the way that most Umbrella companies operate:

  • First, the Umbrella companies associate directly with recruitment agencies that have contractors and freelancers available for working immediately in the field they need. In some cases, recruitment agencies do not act as intermediaries and the business relationship between Umbrella companies and freelancers is more direct.
  • Since everything must be on paper and legal, Umbrella companies design a contract for freelancers and contractors to sign if they agree with the terms. In this way, they become actual employers of the company but without removing any of the advantages that freelance work has.
  • Umbrella companies┬┤ clients look for these types of businesses to get different jobs done, so usually they are present or supervising contractors and freelancers as they work on their projects.
  • After a project or assignment is finished, it is the responsibility of the contractor to send details about expenses, work hours and resources invested in it, and such information must be sent to the recruitment agency if applies, as well as to the Umbrella company.
  • Then, the Umbrella company will add some other facts, added expenses and more to the details of the finished projects and will send them to the agency, after which, such an agency will then send the information directly to the client to collect payment. In case there is no recruitment agency involved, the process is more direct from company to client.
  • When payment is done, according to the different payment schedule schemes and more agencies deliver payments to the Umbrella companies, which at the same time pay the contractors or freelancers for the job done.
  • Payments carried out by Umbrella companies to contractors usually are deducted through the PAYE or Pay as You Earnscheme, discounting taxes, insurance policies related and involving every hour of work spent. Pay slips showing deductions and payment details are delivered to the contractors.

As you can see, Umbrella companies work in a circle process that also involves contractors, clients and recruitment agencies, if any, by following a few steps that, on paper, may seem complex, but that are actually simple in real life and practice, especially for those freelancers that do not have to worry about administrative work, deduction or tax calculation, along with other managerial processes.

At this point it is important to clarify that the way different Umbrella companies operate may differ from one to another, with regards to steps to follow, contracts and the way they manage tax and deductions.

This is particularly important in relation to the nature of the work done. For example, it is fundamentally different to carry out software development work, since this does not involve tax payments, in comparison to engineering work or similar that does.

What is the benefit of an Umbrella Company?

The benefits provided by an Umbrella company are quite extensive and varied, with great advantages that professionals know and that’s why contractors and freelancers are willing to work, or be employed by these corporations in the first place, being the same case for recruitment agencies that contact Umbrella companies to have a partnership. Advantages of this type of business are:

  • The main benefit of Umbrella companies is the hassle-free approach they embody, since contractors and freelancers can be up and running with actual paid job in a matters of hours, not weeks or even months in comparison to the traditional limited company hiring approach.
  • As said before, Umbrella companies deal with administrative aspects and other managerial processes and not the contractors, so they are free to work without any concern whatsoever. Invoicing, payroll processing, payment chasing, tax and deductible calculation and more are things that Umbrella companies do for their hired freelancers.
  • Umbrella companies also deal with paperwork and other legal and financial aspects of the freelancers and contractors, so they do not have to put up with accountants or any other representative.
  • Through Umbrella companies, independent workers will be able to enjoy of benefits as in any other permanent or traditional job, such as personal and even international insurance, paid vacations in case of having a break, as well as maternity pay, sick pay and other situations that are not usually covered when freelancing or working independently.

Depending on the Umbrella company hiring the independent professional or freelancer, some of the previously mentioned advantages may be included or not, along with other conditions and exceptions that are described in a very important document that is imperative in any business and work relationship between Umbrella corporations and contractors; we are talking about the Umbrella contracts.

Umbrella contracts

In order to employ different professionals, freelancers and contractors are to establish the rules, parameters and characteristics of the work project, in all cases with a document known as an Umbrella contract.

In detail, the Umbrella contract is the paper in which described are all the features of the work to be done, delivery date, quote to pay and other descriptions, situations and exceptions, if any. Being a contract, such paper must be signed by the contractors and they must agree with every term to sign and start a business and work relationship.

This type of contract is very flexible and is possible to be included with individual work or one-time jobs, involving a short period of engagement that is described in the clauses. However, it is also possible for Umbrella companies to design a contract that include a series of work that will mean engagement of the professional for a substantial period of time, until every project is done.

Depending on the type of project to carry out and the nature or discipline may have, Umbrella contracts and related terms may differ from one to another greatly, since this is a document that is related greatly to the work to be made by the freelancer. It is not the same designing a contract for the purpose of drawing a logo by a graphic designer, in comparison to a project that involve the creation of a web page or a translation.

Be that as it may, the Umbrella contract is an important part of the process of finding true capable people and workers to perform different jobs, with fair payment and also offering other benefits and advantages for such professionals, with a document that is created to establish fair conditions between the parties.

Are Umbrella Companies illegal?

Due to the characteristics and nature of the business many people consider Umbrella companies illegal, since it is a relatively new approach with mostly a few years in the UK, as well as they do not usually have information or are not aware of how the system works.

Now, Umbrella companies are not illegal by any means and these are businesses that like many others must meet some requirements and laws to be settled, with the majority of them meeting this mandatory requests in order to start working as an organisation that helps professionals and freelancers to be employed, giving them plenty of benefits in the process.

And like any other business that may exist, Umbrella companies can be illegal or be used to perform actions contrary to the law, but this does not mean that the actual business model is illegal.

For example, when Umbrella companies are not properly following aspects relating to tax regulations or similar legislation that are known with the acronym HMRC, such businesses can be considered illegal and be shut down, because felony is related and not simply due to the fact that it is an Umbrella corporation, though.