Why do Recruitment Agencies use Umbrella Payroll Companies?

“But as you begin to scale, you need to find people to manage this internally or a solution externally that manages all of this.”

In the past, during the regular business development activities, I was often asked by recruitment agencies “Why should we use an umbrella company”. And this was a standard question at the time, and I had my pitch so streamlined it answered that question the normal follow-up questions, all in one!

However, over my time, it became apparent that while my industry was educating the recruitment sector on the benefits of using an umbrella company. The contractors were not getting the same level of attention. And let’s be honest, it’s the contractor that needs to sign-up for the solution for all of this to work.

Challenges Faced by Recruitment Agencies in the Contracting Market

So, I wanted to create a short article explaining the reason behind the relationship between the recruitment and umbrella industry.

Let me give you an understanding of the main challenges faced by recruitment agencies when they venture into the contracting market. It’s not easy, not only do they need to secure the trust of their clients. But managing the payment process and accepting liabilities to the client and the contractor. Fortunately, the risks may be minimal when you only have 1 or 2 contractors. But as you begin to scale, you need to find people to manage this internally or a solution externally that manages all of this.

Internal Function vs. External Solution

Also, bear in mind, if you build the function internally, what happens if the contracting market goes into a downturn, you may have to lay people off?

And with all these moving parts, this is where an umbrella company comes into play. For a recruitment agency, they remove all the employment liabilities, contractor insurance and payroll management while providing scalable services that move up and down based on the agency’s requirements.

All this while at the same time providing employment rights protection for the contractors and delivering a flexible solution which is available to use as and when required. Adding to the fact that there is next to no financial administration for either party while using an Umbrella company. It’s very much a win-win for both the recruitment agency and the contractor.

Benefits of Using an Umbrella Company

So, to answer the question “Why do Recruitment Agencies use Umbrella Payroll Companies”, the benefits of doing so are many. Some of the benefits for collaborations between a recruitment agency and umbrella companies are:

• Liability Management: Umbrella companies help recruitment agencies manage the payment process and accept liabilities to both the client and the contractor. This reduces the administrative burden and potential risks associated with payment and compliance.
• Scalability: Umbrella companies offer scalable services that can accommodate the agency’s changing requirements as they expand their contractor base. This allows agencies to efficiently handle larger volumes of contractors without the need to build internal infrastructure.
• Reduced Administrative Burden: By partnering with an umbrella company, recruitment agencies can offload various administrative tasks such as payroll management, tax calculations, and legal compliance. This frees up time and resources, allowing agencies to focus on core business activities.
• Risk Mitigation: Umbrella companies assume the employment liabilities associated with contractors, including insurance coverage and compliance with employment laws. This reduces the risk exposure for the recruitment agency, ensuring they are protected from legal and financial complications.
• Flexibility: Recruitment agencies can benefit from the flexible nature of umbrella companies. They can easily engage contractors on an as-needed basis, without the long-term commitment or administrative hassle typically associated with traditional employment models.
• Employment Rights Protection: Umbrella companies provide contractors with employment rights protection, ensuring they receive benefits such as holiday pay, sick pay, and statutory protections. This helps recruitment agencies attract and retain skilled contractors by offering them additional legal entitlements.
• Financial Streamlining: Using an umbrella company streamlines the financial process for both the agency and the contractor. The umbrella company handles invoicing, tax deductions, and payments to the contractor, simplifying financial management and reducing the risk of errors or delays.
• Industry Expertise: Umbrella companies specialise in payroll and contractor management. By partnering with an experienced umbrella company, recruitment agencies can tap into their expertise and industry knowledge, ensuring compliance with ever-changing regulations and best practices.
• Cost Savings: Outsourcing payroll and administrative functions to an umbrella company can lead to cost savings for recruitment agencies. They eliminate the need for in-house payroll staff, systems, and infrastructure, reducing overhead expenses and improving overall cost-efficiency.
• Enhanced Reputation: Partnering with a reputable umbrella company can enhance the reputation of the recruitment agency. It demonstrates a commitment to compliance, contractor welfare, and professional standards, which can attract both clients and high-quality contractors.