Why do umbrella companies operate via an overarching contract of employment?

Basically because HMRC say that we have to. The reasons behind it surround what can and cannot be considered a Contract of Employment. It also considers what constitutes a temporary workplace; if an umbrella doesn’t have an overarching contract of employment in place they cannot allow tax relief on travel & subsistence expenses. Neither can they ensure compliance with AWR.

Overarching Contract of Employment

An overarching contract gives continuity; contractors will effectively become permanent employees of the umbrella company. Therefore each assignment they work on will be viewed as being a temporary workplace.

This type of contract is also required in order to fulfil the obligations of the AWR for PBA. (Pay Between Assignments).

How will you know if this is the type of contract I have been put on for my assignment?

In order for a contract to be considered overarching there must be mutuality of obligation over the duration of the employment. This must be considered even in the gaps between assignments. HMRC believes that the correct legal position is set out in the case Clark v Oxfordshire Health Authority. During which Sir Christopher Slade said; “I would, for my part, accept that the mutual obligations required to find a global contract of employment need not necessarily consist of obligations to provide and perform work. To take one obvious example; an obligation by one party to accept and do work if offered and an obligation on the other party to pay a retainer during such periods as work was not offered would in my opinion, be likely to suffice.” Therefore, if the contract does NOT state that there will be entitled to a regular salary during the course of your employment, and not just when you are on assignment, then it will NOT be considered as overarching, and you will have NO entitlement to tax relief on expenses.

Guaranteed 336 Hours

There must be a guaranteed number of hours work offered in any 12 month period. HMRC accept that 336 hours is acceptable which equates to one working day per week. However, in a recent update to their guidance HMRC stated that the inclusion of such a clause in a contract will not, on its own, be enough to make the contract overarching; there must be mutual obligations in the gaps between assignments (see point 1, above).

Holiday Pay

The contract must contain provision for holiday pay as workers have a right to paid leave under the Working Time Regulations. However, holiday pay will not be considered when determining whether or not there is an obligation on the part of the employer in the gaps between assignments. Holiday pay must be calculated based on the fact the employment is permanent. It must not be looked at on an assignment by assignment basis.

To find out more, please read this article written for ContractorUK by a founder member of AUCAE.