Why is there a need for umbrella companies?

The answer is very well also the answer to the question whether a contractor working under an umbrella company can solve the unemployment problem of a country...

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The answer is very well also the answer to the question whether a contractor working under an umbrella company can solve the unemployment problem of a country.

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Here is all that you want to know about umbrella companies

In the simplest of terms, an umbrella company is one that employs contractors for a fixed term of employment or for a particular assignment...

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Here is all that you want to know about umbrella companies


What is an umbrella company?

In the simplest of terms, an umbrella company is one that employs contractors for a fixed term of employment or for a particular assignment. The laws of agency are applicable to the set up where the umbrella company is regarded as the principals and the contractors are the agents for the umbrella company.

Why is there a need for umbrella companies?

Even though the umbrella companies are widely popular in England, the trend is catching up in the whole world. Today, umbrella companies function in most parts of Europe and the Americas and in some of the other countries of the world. The whole idea of employing the contractors through the umbrella companies is to limit their agency liability.  The payment to the contractor is usually made through PAYE (Pay As You Earn) and also gets extra expenses such as allowances for travelling, food and also accommodation. For a more informations on how umbrella companies work click here 

Does it help?

The answer is very well also the answer to the question whether a contractor working under an umbrella company can solve the unemployment problem of a country.

Here is a hypothetical case:

Say Mr. A, who has just graduated from a reputed Management school, wants to start his career. For a starter, he has already taken stock of the condition of the job market and also has spoken to a lot of job prospects and his batch mates who have already been placed through campus interviews. Now, A feels that it is not his cup of tea to work for only one company.

A wants to have a diverse work profile and he wants to learn multiple roles and responsibilities while he is still young and has loads of energy. He thinks that he must take up as much experience as he can when he can actually do it and then at a point of time when he can no longer run about, he can take time to think of a particular job profile and settle down with it.

So, Mr. A approaches an umbrella company who tries to place him with offers for a specific period of employment or gives him a job for a particular assignment based on the set of skills that A possesses. This way, A thinks that not only will he get a great amount of exposure in the various companies that he will work with at various levels but he will also be independent and not really answerable to anyone.

Is an employment contract important?

The umbrella company which acts as a employer for all the contractors, it is extremely important that the terms and conditions of the contract are governed by a valid agreement. In that, the umbrella company covenants to act as an agent and an employer to the contractor who shall act in the capacity of an agent. This contract is also conveniently referred to as the Contract of Service.

Why is the Contract of Service important?

While it is easy to chalk out the relationship of the parties of the contract, it is important that the terms and conditions in relation to the sick and maternity leave that can be availed and also the pay scale and the allowances allowed etc is very clearly and explicitly mentioned in the contract itself in order that there is no confusion in the future and no consequent misunderstanding between the parties.

There is a huge corpus of case laws:

There is a huge collection of case laws that can rest the matter in case there is a doubt in relation to the status and the validity of the contract of service. In fact, the case laws itself can shed enough light on the fact about what constitutes a valid contract for service and how the parties can go about it.

The remuneration cycle:

Since the umbrella company is the one who employs the contractors, it provides a payroll to them and invoices the company that uses the service of the contractor. The client thus pays the umbrella company for the work completed by the contractor and the umbrella company then disburses the payment so received from the client to the contractor after providing for all social contributions and also deducting the tax at source and then pay the remaining amount in the hands of the contractor.

How does the client benefit?

Well, f you are thinking that this kind of set up is beneficial only to Umbrella Company and to the contractor, think again. employing contractors through these companies not only reduces the company’s liability in terms of costs and expenses but also helps provide the client with a workforce that is not only experienced in working in different projects but is also provides them with a worker who is the most suitable for the kind of work in hand.