What contractors should do if their umbrella company goes bust

Contractors should quickly cut their losses and move on if their umbrella company goes bust. However, according to Rob Crossland, chief executive of umbrella solutions provider Parasol, contractors can be doing things before their umbrella collapses to mitigate the impact on their personal finances.

“When an umbrella solutions provider goes bust, it is usually because the business has run out of cash,” says Crossland. “So it is unlikely that contractors will ever see any monies owed, simply because there won’t be the cash in the failed business to pay them.”

Derek Kelly, Managing Director of contractor accountant ClearSky, agrees: “When an umbrella goes bust, it is usually very quick and very messy, so contractors who take steps to mitigate the impact and move on quickly will minimise their financial loss.”

Kelly is also realistic about their chances of seeing any cash: “Just because umbrella company contractors are employees and not suppliers, which should in theory put them higher up the list of creditors, it makes no difference if there is no cash or assets to liquidate; they’re still unlikely to see any of their money owed.”

Look for warning signs and mitigating losses

There can be warning signs, and Crossland says one of the first of these is to look out for deals that look too good to be true: “The government decides how much tax a contractor pays, not umbrella companies, so when you strip out fees and expenses, all contractors should take home pretty much the same percentage of contract value. So beware of umbrella companies making extravagant claims, as they may not be what they seem and the contractor’s hard-earned pay may be moved offshore, and thus out of reach.”

Another obvious warning sign is late or non-payment. “If a contractor does not get paid and the umbrella claims it is due to non-payment by the agency or client, this should set alarm bells ringing, because it suggests that the umbrella has a cashflow problem,” Kelly says.

Contractors can easily check with their agency or client whether their umbrella company has been paid for work they have completed; and if the umbrella has been paid and is lying to the contractor, this could mean the worst case scenario could be imminent.

By simply keeping on top of their administration, contractors can reduce to a minimum any losses they might suffer if their umbrella company goes bust. Kelly says: “If a contractor stays bang up-to-date with timesheets and submits them regularly, chances are the most they could lose is a week’s or a month’s pay.”

“Switch umbrella company immediately” if it gets into difficulty

“Umbrella companies’ contractor clients are usually the last people to find out that there is a problem, and then mainly because the umbrella company’s customer services staff stop answering the phone,” says Crossland. “If that happens, contractors should not wait for any official confirmation but should switch umbrella company immediately. Waiting for the appointment of an administrator is leaving it too late.”

He recommends that in such circumstances the contractor should resign from their existing umbrella company immediately and inform their agency of the situation, so that it can end the contract with the umbrella and stop making further payments to it.

“Hopefully, by acting swiftly, the contractor will have lost only a single week’s or month’s money, and some agencies may actually pay twice to avoid any issues with the client,” says Crossland.

Contract restrictions to contacting agencies and clients

An umbrella company in trouble can effectively cease to exist overnight, and that means all bets, and contracts, are off, as Kelly explains: “Contractors’ employment contracts often feature clauses that might normally prevent them from contacting agencies and clients directly.

“But if an umbrella company has ceased to exist, so have the contractual restrictions preventing contractors from acting swiftly and changing to an umbrella company that is solvent and will pay them what they are owed.”

Any delay in contacting the agency or client could lose a contractor even more money, because the agency or client is often unaware that the umbrella company is experiencing financial difficulties and will continue to pay the umbrella for work completed by the contractor.

Attempting to secure payment from the administrator

Kelly says that the former contractor employees of the umbrella company will eventually learn, either directly via a letter or by using business announcement services such as the London Gazette, which insolvency practitioner has been appointed as the administrator of the umbrella company.

Contractors should ensure that their debt has been registered with the administrator, who will attempt to realise sufficient cash from any assets in the business to first pay their fees and then distribute the balance to creditors.

“Contractors can wait 12 to 24 months or even longer to see any money owed, and even then it might only be a few pence in the pound, or nothing at all. The best approach is to mentally write off the unpaid work and any cash they subsequently receive is a bonus,” Kelly adds.

Why umbrella companies can go bust

According to Crossland, umbrella companies usually go bust because their margins are squeezed by not charging contractors enough, by not controlling costs and by paying out too much to agencies in timesheet levies.

“Umbrella companies should be cash positive businesses,” he explains. “If they’ve run out of cash it’s because their business model is unsustainable. Low charges to contractors and high outgoings in the form of timesheet levies to agencies and staff costs squeeze margins to the point that the margins are too small and the business simply runs out of cash.”

Crossland points out that on rare occasions the directors of the business may have acted inappropriately by taking high salaries and large bonuses. In some cases the administrator may be able to chase down the directors personally, but often the directors have themselves spent the money and have no personal assets to seize.

“As soon as the warning signs appear or contractors get wind of trouble, they should act decisively and swiftly to mitigate the impact of impending insolvency on their earnings,” says Kelly. “Failing to act could leave contractors seriously out of pocket, which could have further negative impacts on a contractor’s personal and family finances.”