Duty to Pay Could Reshape Umbrella Risk

Guaranteed pay under consultation

The government’s consultation on modernising the agency work framework floats a guaranteed pay or duty to pay proposal that would require umbrella companies to pay workers for all completed work even if the agency or end client has not yet paid. Supporters say this could strengthen pay certainty for contractors. Yet the measure could also reposition umbrellas’ financial role in the labour supply chain at a time when their commercial model is built on narrow fixed fees, not on underwriting credit risk.

Follow the money: how umbrellas operate today

Umbrella companies typically charge a small margin, often between £10 and £20 per week or around £80 to £100 per month, to cover payroll processing, statutory compliance, insurance and operational overheads. That fixed margin underpins a high-volume, low-risk model in which the umbrella acts as the legal employer for tax and employment law purposes while relying on timely upstream payments from agencies or end clients to fund gross pay, tax, and National Insurance. The financial design assumes that cash received for invoiced work flows through quickly, with the umbrella’s margin paying for service delivery rather than creating a cushion for non payment. When invoices are disputed or delayed, umbrellas typically pause disbursements until funds are cleared because their working capital is not structured to absorb prolonged or significant arrears.

What changes under a duty to pay

If the duty to pay is imposed, umbrellas would be compelled to pay workers promptly for completed assignments regardless of whether invoices are paid, disputed or withheld upstream. In practical terms, that transforms umbrellas from payroll intermediaries into de facto unsecured lenders to agencies and end clients. The umbrella would have to finance gross wages, statutory deductions and employment costs from its own reserves while pursuing recovery later. Even a single sizeable non payment could wipe out months of margin income, and repeated failures would quickly erode working capital. Because umbrellas neither control the end client’s credit assessment nor the contractual enforcement of timesheets, milestone acceptance or payment terms, this setup creates a structural imbalance: risk migrates to the party with the least control over credit outcomes.

The strain of advance funding expectations

Market practice already exacerbates liquidity pressure. Some agencies request advance payments for workers, effectively asking umbrellas to release wages before receiving corresponding funds. Under a guaranteed pay rule, these expectations would intensify, compounding cash outflows right when upstream receipts are uncertain. The umbrella is not a bank and is not capitalised to manage systemic payment risk across a supply chain. Its fixed weekly margin is calibrated for compliant payroll operations, not for underwriting disputed invoices, end client insolvency, or protracted payment cycles.

Margins versus risk: a fragile equation

The arithmetic is stark. A £15 weekly margin might cover software, payroll staff, employer insurances and compliance frameworks, but it cannot absorb a single missed multi week assignment payment without jeopardising cash flow. If end client disputes or delayed approvals prevent invoices from being paid, the umbrella could face large unfunded wage runs. Replicating this over several contractors or assignments would turn a routine payroll cycle into a persistent funding gap, increasing dependence on costly credit lines or equity infusions and raising insolvency risk.

Sector-wide consequences if risk is reallocated

If guaranteed pay arrives without parallel reforms that strengthen agency payment protections, escrow mechanisms or client liability, umbrellas will face a higher probability of cash crunches and write offs. Smaller providers with thinner reserves could be disproportionately affected, potentially triggering consolidation as better capitalised firms absorb market share. To survive, umbrellas may raise margins, introduce funding surcharges, or tighten onboarding criteria through stricter client and agency selection, which could reduce contractor choice and increase costs borne by workers. Compliant operators who will not compromise on payroll standards may simply exit the market if they cannot justify materially higher exposure. In aggregate, the sector could narrow, competition could decline, and the market could become skewed in favour of larger firms with access to cheaper capital, even if those firms are not necessarily delivering better compliance outcomes.

A balanced path forward

There is scope to enhance worker protection without turning umbrellas into unwilling lenders. Policymakers could explore mandated payment security such as agency or client-held escrow for approved timesheets, statutory trust accounts, joint and several liability for upstream non payment, compulsory credit insurance at the agency or client level, or regulated payment timeframes with automatic interest and enforcement. Aligning guaranteed pay with upstream protections would keep wages reliable while placing credit risk nearer to those who negotiate rates, control terms and manage client relationships.

Contractor News view

Contractor News recognises the aim of improving pay certainty for contingent workers. However, any duty to pay must be matched by robust upstream safeguards so that umbrellas are not required to fund the supply chain from slender margins. A well designed package that couples guaranteed worker pay with agency and client payment security would protect contractors, preserve compliant operators and support a competitive market. We encourage open engagement across government, agencies, umbrellas and end clients to calibrate reforms that strengthen protections without destabilising the sector.

Sources

Make Work Pay: modernising the Agency Work Regulatory Framework

Umbrella Company ‘Kickback’ Ban: How The 2026 Regulatory Overhaul Could Change Your Payslip