Umbrella Company: What is it and How does it Work?
Discover why certain businesses partners with an umbrella company to onboard, hire, and pay workers in the United Kingdom and the United States.
Janelle Watson provides content marketing for the international team at Justworks. With a background in higher education and journalism, Janelle helps tell stories that make international expansion and EOR accessible.
Businesses ready to take the leap into the global marketplace may have already started considering an umbrella company. Below we’ll explore exactly what an umbrella company is, how they work, and their benefits and risks.
What is an umbrella company?
An umbrella company is an organization that acts as the legal employer for employees who are performing duties with the umbrella company’s client.
Umbrella companies, also referred to as umbrella agencies or umbrella organizations, take responsibility for HR processes such as withholding taxes, administering benefits, and making payments. They usually control multiple businesses employing foreign nationals at the same time.
Umbrella companies are much more common in the United Kingdom and the EU, whereas PEO services remain popular in the US and Canada.
What is an umbrella company in the UK?
The term has a different meaning in the UK, where umbrella companies are seen as strategic partners for navigating payroll taxes, insurance, pension contributions, and other employee benefits. They engage with employees as individual contractors.
Due to IR35 and off-payroll working regulations, an umbrella company will directly employ contractors, making them appealing for international businesses with operations in the UK.
Risks in the UK
Classifying workers as independent contractors in the United Kingdom can be tricky. Employers need to remain compliant with tax and labor laws, as dictated by Her Majesty’s Revenue &
Customers (HRMC), which manages misclassifications, penalties, employee contributions, and back-paying taxes. The umbrella company is responsible for things like correctly calculating take home pay.
Individual workers are responsible for paying some of their own taxes.
Who uses an umbrella company?
Umbrella companies are popular with clients in construction and government agencies, but can be used by organizations looking for workers on a temporary basis.
Benefits of using an umbrella company
For companies looking to hire a large number of workers, employing the staff themselves can be arduous and time consuming. Umbrella companies and recruitment agencies expedite the process of filling seats.
Other important benefits include:
Not needing to open an entity
Compliance support
Streamlined onboarding for workers
Tax benefits
Risks of using an umbrella company
Working with an umbrella company can come with risks, too. In general, you want to avoid working with a company that outsources most or all of its services. You will also want to avoid structures that allow you to pay workers in loans, as opposed to wages. Umbrella companies tend to be barebones when it comes to payroll services, which doesn’t make it a good option for administering complex benefits, such as stock options, private healthcare, and 401(k)s.
How do umbrella companies work?
Unlike an EOR service provider, an umbrella company usually focuses on short-term or seasonal work.
They usually work with recruitment firms or staffing agencies. The umbrella company’s end client usually pays for their own recruiting.
How to work with an umbrella company
Umbrella companies partner with staffing agencies to help clients find workers
Staffing agencies recruit workers abroad for the client, who is usually based in a different country
Independent contractors sign a contract with the umbrella company, who becomes their employer on paper and ensures employees are paid
Once signed, contractors can begin working for the client company
The client company maintains day-to-day managerial oversight of the contractors’ employment, including signing timesheets and approving reimbursements
When it comes to payment, umbrella companies invoice the staffing firm. The client pays the recruiting firm, who sends payment to workers via the umbrella company
All services need to be outlined in the employment contract, especially regarding method and frequency of payment.
What is an umbrella company in the US?
In the United States, an umbrella company has a slightly different meaning.
In the US, an Umbrella Company, or an Umbrella LLC (limited company), allows entrepreneurs and business leaders to keep assets from brother companies separate while also reducing the number of tax returns the business needs to file at the end of the year.
Pros of Umbrella LLC
Major brands like Bank of America and JP Morgan are technically Umbrella LLCs, though with far more subsidiaries than an entrepreneur-led business. An Umbrella LLC allows multiple business lines to work for one parent company, while also keeping finances discrete and sheltering each individual LLC or subsidiary from legal or compliance issues. This saves subsidiaries from expensive litigation costs and other expenses.
Cons of Umbrella LLC
Opening an Umbrella limited company in the US does have a few disadvantages. Multiple LLC filings leads to higher costs. Taxes can get complicated as well, especially if assets between brother companies or different subsidiaries get mixed up.
Subsidiary vs. Umbrella company
Technically speaking, an Umbrella company can own one or more subsidiaries. A subsidiary is a company that is majority or wholly owned by another party, which is often an umbrella company.
Umbrella company vs. PEO vs. EOR
If you’re hiring highly skilled knowledge workers for ongoing engagements, such as web developers and UX designers, partnering with a PEO or EOR service provider is probably the better move. The choice will depend on whether you already have an entity setup abroad.
No matter which path is route right your business, you will want to consider:
Costs/fee structure
Scalability
Your company’s industry and background
Resources for making international payments
Whether you will receive on-the-ground support
PEO
Unlike an umbrella company or an EOR, PEO or professional employment organizations act as co-employers. To partner with a PEO to run payroll and HR processes, your business will still need an entity, which requires opening a local bank account, registering with government institutions, and establishing a physical presence in the country.
If you have an entity and want a partner that provides robust support for payroll, then a PEO might be a better option than partnering with an umbrella company. Most PEO’s provide client companies with a dedicated customer support manager, which is often lacking in umbrella companies.
EOR
If you’re hiring highly skilled knowledge workers for ongoing engagements, such as web developers, teachers, and UX designers, partnering with an EOR service provider is probably the better move, especially if you don’t have time to go through the hassle of opening an entity abroad.
When you partner with Justworks EOR, you receive ongoing support from an account manager, who helps you navigate through challenges related to immigration, payments, visas, and benefits. The EOR ensures that your hiring processes remain compliant so that you can focus on the day-to-day operations of your business.
How Justworks Can Help
Justworks’ global EOR is the solution for small businesses looking to easily hire talent in countries where they don’t already have a legal presence.
Justworks has direct entities in 11 countries, with the ability to hire in 100+ additional countries upon request through our trusted local partners. You can fearlessly handle HR essentials like payroll, benefits, local compliance, and more.
Learn more about our EOR services, and get started today!
FAQ
What does the umbrella company do?
In the UK, an umbrella company employs workers for their clients, which means administering benefits, making payments, and managing tax compliance.
What is an umbrella company in the US?
In the US, an Umbrella Company, or an Umbrella LLC, allows entrepreneurs and business leaders to keep assets from brother companies separate while also reducing the number of tax returns the business needs to file at the end of the year.
What is an umbrella holding company?
In the US, an umbrella company often contains within it multiple brother companies or subsidiaries. In the UK, an umbrella company oversees the workforce for multiple companies.
Are umbrella companies a con?
It depends. While working with an umbrella company in the UK can help streamline the hiring process, you want to make sure that you’re working with a reliable partner.
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