Can Agencies Tell Workers Which Umbrella Company to Use? Understanding Regulation 5

Are Agencies Allowed to Force Workers to Use Specific Umbrella Companies?

In recent cases, workers—particularly in sectors such as social work—have reported being told:

“If you do not use one of our approved umbrella companies, you will not be able to work in this area again.”

In some instances, this has been presented alongside an alternative:

“You can either use one of our approved umbrella companies or go PAYE directly with us.”

This raises an important legal question: is this lawful under the Conduct of Employment Agencies and Employment Businesses Regulations 2003?

1. What Regulation 5 Actually Prohibits

Regulation 5 is designed to protect work-seekers from being compelled into additional arrangements as a condition of finding work. It states that an agency must not make its work-finding services conditional on a worker using other services or entering into arrangements with a third party connected to the agency.

In practical terms, this includes:

• Umbrella companies

• Payroll providers

• Any intermediary or related service

The purpose of the regulation is to ensure that access to employment is not dependent on engaging with additional services.

2. Applying That to the Scenario

In the situation described—where a worker is told they must either use one of a limited number of approved umbrella companies or go PAYE with the agency—there are still significant legal concerns.

A. Conditional Access to Work

The key issue remains that access to work is being made conditional on how the worker is engaged and paid. In effect, the agency is saying:

• “You must choose one of our approved engagement models or you cannot work”

This creates a restriction because:

• Using a specific umbrella company is an additional arrangement

• Limiting umbrella choice to a closed list removes worker freedom

• The worker is not free to choose an alternative compliant umbrella

Even though PAYE is being offered as an alternative, the restriction still applies to those who wish to operate via an umbrella company. The presence of a PAYE option does not automatically make the restriction lawful.

B. Restriction Within a Payment Model

It is important to distinguish between:

• Allowing different engagement models (e.g. PAYE vs umbrella)

• Restricting choice within a model

An agency may lawfully offer:

• PAYE engagement

• Umbrella engagement

However, if the agency then says:

• “You may only use one of our 10 approved umbrella companies”

this can still amount to a restriction under Regulation 5, because:

• The worker is being prevented from choosing their own provider

• Access to work via that model is conditional on using specific third parties

C. Preferred Supplier Lists (PSLs) and Incentives

As with the original scenario, the use of a Preferred Supplier List raises additional concerns, particularly where there may be commercial relationships involved.

For example:

• The agency receives commission or referral fees

• There are financial or strategic partnerships

• Workers are being directed toward specific providers

This may indicate that the restriction is not purely about compliance, but also about commercial benefit.

3. When Might This Be Lawful?

Agencies often argue that restrictions are necessary for compliance, particularly in relation to tax legislation and avoiding non-compliant umbrella companies.

This can be a legitimate consideration. However, it does not give agencies unrestricted control over worker choice.

A compliant approach would usually involve:

• Providing a list of recommended or vetted umbrella companies

• Allowing workers to use alternative providers, subject to reasonable checks

The critical distinction remains:

• “You may choose PAYE or umbrella, and here are recommended umbrellas” — likely lawful

• “You may choose PAYE, but if umbrella, only from our list” — potentially unlawful

The addition of a PAYE option does not automatically remove the restriction if choice within the umbrella model is still being limited.

4. The Real-World Grey Area

There is a recognised regulatory gap in that umbrella companies themselves are not fully regulated under the Conduct Regulations. This has led to varied practices across the industry.

However, employment agencies remain fully subject to the Conduct Regulations. This means they must ensure that any conditions they impose on access to work—regardless of engagement model—comply with Regulation 5.

5. Industry and Regulatory View

Regulators and industry bodies have increasingly focused on practices involving umbrella companies and PSLs. Key concerns include:

• Restrictions on worker choice

• Lack of transparency in agency–umbrella relationships

• Financial incentives influencing worker direction

The broader regulatory direction is toward ensuring that workers retain genuine freedom in how they engage with the market.

6. What Can Workers Do?

If faced with this situation, workers should take a structured approach.

1. First, gather evidence of the requirement, including:

-Emails or written communications

-The exact wording used by the agency

-Any refusal to consider alternative umbrella companies

2. Report your concern to the EAS:

The Employment Agency Standards Inspectorate (EAS)

The EAS is responsible for enforcing the Conduct Regulations and investigating potential breaches.

7. Key Takeaway

Even where a PAYE option is offered, agencies must be careful not to impose unlawful restrictions within other engagement models. Limiting umbrella choice to a closed list may still engage Regulation 5.

The key question is whether the worker has genuine freedom of choice, or whether access to work is being made conditional on using specific third-party services.

Final Answer

An agency cannot lawfully force a worker to use a specific umbrella company as a condition of being offered work. Even if a PAYE option is provided, restricting umbrella choice to a fixed list may still constitute a breach—or at least a potential breach—of Regulation 5 of the Conduct of Employment Agencies and Employment Businesses Regulations 2003.

Disclaimer: This article is intended as general guidance and not legal advice. Regulations can be complex and fact-specific, so independent advice should be sought where needed.