Holiday Pay for Umbrella Contractors

Umbrella firms provide an essential service to workers who need the flexibility of working on multiple contracts, but the stability of being employed. But the lack of regulation in the industry often causes controversy, as disreputable firms will look for ways to exploit workers.

Find out more about how sneaky umbrella firms have historically used holiday pay to boost their profits… 

Those working with umbrella firms can’t fail to have noticed that holiday pay has been a big industry topic of late. With Pimlico Plumbers making the news yet again, having recently lost in the case against a former employee who is now entitled backdated holiday pay, compliant umbrella firms are standing out to show that they take their responsibilities towards contractors very seriously.

But how does holiday pay work for umbrella contractors and what should contractors be looking out for?

How are umbrella contractors paid holiday pay?

Umbrella firms act as the contractor’s employer, contractors who work with them are entitled to holiday pay. But because umbrella companies function slightly differently to other employers, the way they pay holiday entitlement also functions slightly differently.

There are two ways that umbrella contractors are usually paid holiday pay:

• Accrued (saved) – holiday pay is set aside by the umbrella and paid when the worker takes holiday, or when they leave the umbrella company
• Rolled up (paid in advance) – holiday pay is “rolled up” into the weekly pay, making the holiday pay always up to date. This means that the worker should set aside the pay themselves so that they have it to cover any future time off. This is the most commonly used method.

How do umbrella companies calculate holiday pay?

Holiday pay is calculated after employment costs are taken off the contract rate. Employment costs include things like Employers NI and the Apprenticeship Levy. The amount remaining, before income tax and NIC, is the Total Gross Pay, and this amount is divided by your annual leave entitlement. 

Annual leave entitlement for umbrella workers is 28 days unless the end client requests additional holidays. 

The final holiday pay is considered taxable income, just like regular pay.

What responsibilities do umbrella firms have?

Umbrella firms sometimes operate on a use it or lose it holiday pay system, giving the contractor one year to claim holiday pay or lose the entitlement. This often resulted in boosted profits for the umbrella when unknowing contractors left the umbrella company with holiday pay outstanding or if they missed the deadline to claim.

In the latest court ruling for Pimlico Plumbers, this practice was deemed unethical and backdated holiday pay is now due to the contractor in question. 

As a result of this ruling, umbrella firms can no longer insist that contractors take their holiday pay within the year. If it is not claimed, the amount will accrue.

In addition, umbrella employers have a responsibility to let their contractors know what to expect when it comes to holiday pay and make sure that they are paid what they are due.

The takeaway…

Reputable umbrella firms will always ensure that contractors are paid fairly, including holiday pay. Ship Shape favour the rolled-up method of holiday pay, so their contractors can rest assured that their holiday pay is always up to date.

If you have any questions about how Ship Shape calculates and pays holiday pay, get in touch!