What is an umbrella company?
Companies hiring workers remotely or internationally have a few choices to make about worker status, management and payment. Hiring as an employee brings a lot more complexity and cost for your company, so hiring a contractor may look like a better option. But hiring a contractor directly (or transitioning an employee) has some risks for your company, and one solution is to use an umbrella company.
What is an Umbrella Company?
An umbrella company is a third party entity in the work relationship, handling payment, tax withholding and social contributions for the worker, so that your company does not have to worry about administering the relationship. If the contractor came from a recruitment agency, they are also involved in some stages of managing payment and performance.
How Does an Umbrella Company Work?
If you want to use an umbrella company to hire your contractor, here is how it works:
- You let your worker know this how you want to set up the relationship
- If they agree, either you or the contractor can contact a reputable umbrella company
- The umbrella company then contracts with the contractor/agency for the project or position, facilitating terms and payment periods
- Upon completion of the project or payment period, the contractor will submit their timesheet to the umbrella company (or agency if there is one)
- Your company is then invoiced by the umbrella company for the agreed payment
- The payment is transferred to the contractor, after taxes and contributions are withheld
This shows you how the umbrella company acts as an intermediary, and removes uncertainty about project terms, payment and compliance with tax regulations. This is especially helpful if you are hiring a new contractor, or if they are in a foreign country where you are unfamiliar with local laws.
When and Why Might You Use an Umbrella Company?
Here are a few situations that might lead you to consider using an umbrella company:
- You’re a company that wants to transition an employee to work as a contractor or self-employed, but the person doesn’t want to handle their own payment, taxes and contributions.
For example, if you have an employee at your home base in the UK, and they want to move to Japan and work abroad remotely as a contractor, then hiring them is easier if you use an umbrella company. This still gives them the administrative convenience of being an employee, with the autonomy they want of being self-employed.
- You’re a company that doesn’t want to engage a contractor directly and would like a degree of separation.
Some companies don’t want the risk of directly engaging a new contractor, especially if they are international. If you have a US tech startup that needs to hire a remote IT worker in India, using an umbrella company will remove the uncertainty around payments and contract terms. You will know that you will get the work that you pay for, and the contractor will have assurances as well.
- Your company is worried about compliance when hiring a contractor abroad.
Every country has different rules when it comes to worker classification and qualifying as self-employed. For example, if you are using a contractor for sales in your own country, and now you want to send them to Germany, then they might not meet the self-employed criteria there, which are very strict. The umbrella company in that case, might end up being their German ‘employer’, and take care of all tax and worker compliance.
An Umbrella Company Won’t Always be the Right Fit
In some instances, an umbrella company might not be the best for your company or the contractor.
- You’re a company that wants to pay contractors directly through services like Transferwise, Paypal or Payoneer.
If you have a good history with the contractor and they are happy to handle their own self-employment tasks, then you do have the option of just paying them directly on a third-party payment platform under agreed contract terms.
- You’re hiring workers that have their own company or are already self-employed
Experienced contractors may have their own limited company or operate as self-employed, and they are able to do their own invoicing, contracting and taxes on their own. In that case, the umbrella company may not seem necessary, but you still need to find ways for verifying project parameters and payment.