Make Work Pay: Overhauling Agency Work Rules

The backdrop to reform

The UK Government has launched Make Work Pay - Modernising the Agency Work Regulatory Framework, a consultation proposing the most far-reaching overhaul of the Conduct of Employment Agencies and Employment Businesses Regulations 2003 in two decades. Against the rapid growth of umbrella companies, increasingly complex labour supply chains and persistent concerns about non-compliance, the Government intends to close loopholes, modernise enforcement and reduce administrative burdens while strengthening worker protection and pay clarity.

Scope expansion and the new regulatory perimeter

Bringing umbrella companies within scope

At the core of the proposals is a reset of the regulatory perimeter. The consultation signals that umbrella companies will be brought within scope of regulation through changes to the definition of employment business under the Employment Rights Act 2025. Practically, this treats the umbrella as an active intermediary responsible for worker engagement and pay administration, not merely a payroll conduit. By recasting the definition, the Conduct Regulations and related enforcement tools can be applied directly to umbrellas.

• Umbrella companies would be subject to the same fundamental duties as employment businesses, including payment obligations, record keeping and information provision.

• The change addresses a longstanding gap where enforcement bodies could not readily sanction umbrellas for detriment occurring downstream of agencies.

• Expect transitional guidance on how umbrella corporate structures map to the new definition, including franchise or platform models.

Standout point: The perimeter move turns umbrellas from an adjacent actor into a primary regulated entity.

Joint and several liability for tax compliance

The Finance Bill 2026 is set to introduce joint and several liability to tackle tax non-compliance in labour supply chains. The focus is on non-payment of PAYE, NICs and umbrella-related schemes that depress PAYE through opaque deductions or disguised remuneration.

• Liability is proposed to cascade where a party knew or should have known about non-compliance.

• End hirers, agencies and umbrellas may face shared exposure where due diligence is weak.

• This will intensify supplier vetting, contract warranties and audit rights.

The intention is to address a systemic enforcement gap and align incentives so that every party has skin in the game when policing compliance risk.

Security: pay certainty, risk allocation and temp-to-perm

Strengthening Regulation 12 - pay for work done

The Government proposes to amend Regulation 12 so that umbrella companies must pay workers for all work done even if they have not received payment from an employment business. Today, Regulation 12 protections can be blunted where umbrellas argue non-receipt upstream. The reform would explicitly close this gap.

• Umbrellas become the payer of last resort for time worked and approved.

• Workers recover arrears from their employer of record without being caught in tripartite disputes.

• Agencies are incentivised to resolve client credit issues quickly because umbrellas will price in the risk.

Commercially, this represents a material shift in risk towards umbrellas. Where agencies historically absorbed client credit risk, umbrellas now shoulder primary payroll continuity risk for their employees. That will drive premium pricing for higher-risk sectors and tighter debtor controls in umbrella-agency contracts.

Contractual implications for agencies and umbrellas

Expect a re-balancing of master services agreements and schedules between agencies and umbrellas:

• Payment terms - acceleration, escrow or direct-to-umbrella workflows to reduce cash drag.

• Indemnities - targeted indemnities for client disputes, time-sheet fraud and clawback scenarios.

• Evidence standards - clearer sign-off protocols for approved hours to trigger uncontested payroll runs.

• Security - parent guarantees or insurance-backed protections for arrears exposure.

Umbrellas will seek audit rights over agency billing and client solvency indicators so they can predict arrears risk. Agencies, in turn, will demand competitive umbrella rates and operational responsiveness.

Financial exposure for umbrellas

The reform increases the probability of arrears liability, especially in volatile sectors. Additional costs are likely to include:

• Larger working capital buffers and invoice finance facilities.

• Compliance uplift for payroll controls, reconciliations and dispute management.

• Credit insurance or hedging to stabilise exposure to client default.

• Higher reserve provisioning for contested deductions and back pay.

Umbrellas will need to model worst-case arrears across portfolio clients and adjust margins accordingly. Some smaller umbrellas may exit riskier verticals, consolidating the market toward well-capitalised providers.

Transfer fees and temp-to-perm - a fresh look

The consultation includes a review of transfer fee restrictions and temp-to-perm arrangements. Today, the Conduct Regulations allow agencies to charge transfer fees or require an extended hire period when a hirer engages a temp directly. The Government is considering whether to relax or refine these rules to support labour mobility and reduce frictional costs.

• Relaxation could boost conversions to permanent roles, supporting productivity and retention.

• Removal or tighter caps could compress agency revenue streams, prompting changes to mark-up strategies.

• Retention of current rules would preserve established models but may be seen as limiting worker progression.

Agencies will evaluate the trade-off between transfer fees and higher front-end margins. Hirers will lobby for fewer constraints on direct hiring after a fair introduction period. Workers typically prefer clearer paths to permanency without financial drag.

Transparency: from confusing KIDs to meaningful clarity

The Key Information Document has not delivered

The Government’s conclusion is blunt: the Key Information Document has not provided meaningful clarity to workers. In practice, KIDs are often generic, dense and out-of-date moments after issue. Many contain illustrative numbers that mask real take-home pay and do little to aid informed choice.

Expect a pivot from long-form templated disclosures to concise, standardised facts that are validated at engagement and updated dynamically.

Simplified pre-engagement information

The consultation proposes streamlined information requirements before work-finding services begin. At minimum, the following would be provided in a standard format:

1. Contract status - contract of service with umbrella, contract for services via PSC, or direct agency contract.

2. Gross pay rate - the assignment rate and the worker’s gross pay rate where different.

3. Deductions - statutory (PAYE, NICs, student loan), optional (pension, benefits) and umbrella margin, each separately itemised.

4. Identity of the hirer - legal entity name and trading style.

5. Working time pattern - guaranteed hours, variable hours, or assignment-based hours.

6. Holiday entitlement - accrual method and how paid.

7. Expenses - eligibility and approval routes.

8. Payment timing - pay frequency, cut-offs, and dispute escalation.

The aim is to inform decisions before a worker commits to a route. Agencies and umbrellas will need to integrate data so that figures reconcile to real payroll outcomes rather than illustrations.

Representative breakdowns of margins and deductions

Umbrella companies would be required to provide a representative breakdown of margins and deductions. This moves from illustrative KIDs to engagement-specific numbers that mirror payroll records. Operationally, umbrellas must:

• Align payroll system data fields with the disclosure template.

• Version-control any changes to margins or deductions and push updates to agencies and workers.

• Provide audit trails that show how the assignment rate converts to gross pay and net pay.

This is a documentation uplift. Providers with modern payroll platforms will adapt; legacy systems may need refactoring to expose structured data and to generate worker-friendly statements at offer stage.

Will transparency improve understanding or shift risk?

Better data can improve worker understanding, but it can also shift compliance risk to the party issuing the figures. Misstated deductions could create claims for underpayment or misrepresentation. To mitigate this:

• Agencies and umbrellas should agree a single source of truth for rates and deductions.

• APIs or secure portals should feed real-time data into offer letters.

• Staff training should emphasise plain-English explanations of assignment rates versus gross pay rates.

Tackling kickbacks: fees, margins and take-home pay

The Government is focused on so-called kickbacks between umbrellas and agencies that reduce worker pay. Two regulatory options are on the table.

Two options under consideration

• Option A - Prevent umbrellas from passing on certain costs to workers where these arise from payments to agencies or third parties for access to the assignment pipeline.

• Option B - Restrict employment businesses from charging umbrellas fees for inclusion on preferred supplier lists or for volume allocations.

The goal is to eliminate incentives that erode take-home pay through non-transparent flows. To help stakeholders assess impacts, the table below compares the two approaches.

Which better protects take-home pay? Option B aims upstream and may be more robust, but it is harder to police where value transfers are indirect. Option A is simpler to verify through payroll records, but could leave residual incentives for off-payroll rebates unless audits extend into commercial ledgers. A hybrid approach may emerge: narrow prohibitions on agency-to-umbrella fees combined with explicit bans on passing any residual third-party access costs to workers, backed by disclosure and audit powers.

Transparency alone may not be sufficient where incentives are misaligned. Structural prohibitions, coupled with audit and penalties, are more likely to shift behaviours at scale.

Choice: genuine routes, fewer lock-ins

Amending Regulation 5 - no forced umbrellas, connected persons

The Government proposes to amend Regulation 5 so that employment businesses cannot make work-finding services conditional on using a specific umbrella company. Umbrella companies would be treated as connected persons for regulatory purposes, limiting bundling of recruitment and payroll under a single economic group.

• Agencies must present a choice of compliant payroll routes and avoid tying candidates to in-house or preferred umbrellas as a condition of representation.

• Frameworks may allow curated PSLs based on due diligence criteria, but compulsion would be restricted.

Smaller agencies that lack in-house payroll may need to implement neutral vendor models or multi-umbrella panels, coupled with clear information about differences in cost, benefits and service levels.

Extending detriment protection - Regulation 6

Detriment protections under Regulation 6 would be extended to workers engaged under contracts of service with umbrella companies. This matters because detriment has often been felt by umbrella employees where pay disputes, holiday accrual issues or deductions arise.

• Workers would gain clearer routes to redress where a refusal to use a nominated umbrella or a dispute over pay leads to withheld assignments.

• Umbrellas would face conduct risk similar to agencies for any action that disadvantages workers for asserting rights.

Restricting or removing the opt-out - Regulation 32

The consultation examines restricting or removing the opt-out under Regulation 32, which currently allows certain work-seekers, including those operating through personal service companies, to opt out of the Conduct Regulations.

• The Government is floating a statutory definition of a personal service company to reduce gaming and ensure genuine business-to-business arrangements can still operate.

• Removing or narrowing the opt-out would bring more PSC engagements within Conduct protections around information, payment and detriment.

Implications for contractors operating via limited companies are significant. More PSCs could be treated effectively as work-seekers under Conduct, increasing pre-contract disclosures and potentially reshaping how assignment rates and deductions are presented. Care will be needed to avoid conflict with IR35 status determinations and off-payroll rules.

Interplay with the Agency Workers Regulations and new hours rights

Revisiting the 12-week qualifying period

The Government signals a potential review of the Agency Workers Regulations 2010, including the 12-week qualifying period for equal treatment in basic working and employment conditions.

• Reducing or removing the qualifying period would accelerate equal pay and conditions alignment for agency workers.

• Hirers could face earlier cost equalisation, prompting closer forecasting and budget approvals.

Guaranteed hours under the Employment Rights Act 2025

The reforms also interact with new guaranteed hours rights under the Employment Rights Act 2025. If more assignments include guaranteed hours, then both pay security and worker scheduling stability may increase. But compliance architecture multiplies when combined with Conduct transparency and payment obligations.

• Hirers must align scheduling systems with agency call-off terms that reflect guaranteed hours.

• Agencies will need contract templates that reconcile equal treatment under AWR with guaranteed hours commitments.

The risk of cumulative complexity

The direction of travel enhances protection and clarity but risks regulatory layering. The Government will need to streamline guidance and templates to ensure net simplification. Otherwise, hirers may perceive rising friction costs that dampen demand for flexible labour.

Stakeholder impact deep-dive

Umbrella companies - higher exposure, tighter controls

Umbrellas become primary regulated entities with direct payment duties and disclosure obligations. Key impacts include:

• Regulatory exposure - Conduct compliance audits, potential licence-style oversight, increased risk of enforcement action where pay is delayed or deductions opaque.

• Financial liability - arrears under strengthened Regulation 12, with possible penalties for misstatements of deductions.

• Documentation - representative deductions schedules, real-time rate statements and archived version control.

• Systems - investment in payroll APIs, reconciliation engines and workforce portals for disclosure.

• Insurance - consideration of arrears cover, fidelity guarantees and civil liability policies.

Operationally, umbrellas will professionalise treasury and credit functions, negotiate faster agency-to-umbrella settlement, and adopt standardised data schemas so that disclosures match payslip outcomes.

Employment businesses - compliance architecture and commercial reset

Agencies face material adjustments:

• Compliance - pre-engagement information must be accurate and consistent with umbrella disclosures.

• Restructuring - evaluate PSLs with new anti-kickback rules and choice obligations.

• Contracts - rework MSAs to share arrears risk fairly and to document validated time approval.

• Payroll strategy - consider in-house payroll for core segments or deepen partnerships with a multi-umbrella panel.

• Revenue - potential compression of transfer fee income if rules relax, requiring margin recalibration and value-add services.

Agencies should design playbooks for assignment pricing that map assignment rates to worker gross rates transparently, with automated checks that reconcile offers to invoices and payslips.

Contractors and agency workers - clarity, choice and enforcement

For workers, the reforms promise clearer pay pathways and firmer enforcement. Benefits and potential downsides include:

• Improved take-home clarity - itemised disclosures on margins and deductions, aligned to real payroll.

• Choice of payroll route - reduced compulsion to use a specific umbrella, with PSL transparency.

• Faster redress - clearer detriment protections and payment obligations.

• Possible narrowing of umbrella extras - some optional perks may be trimmed if margins tighten.

• Market consolidation - smaller umbrellas could exit, reducing variety but improving baseline quality.

Workers should expect fewer surprises in net pay and stronger complaint routes where deductions look unusual or holiday pay is mismanaged.

End hirers - due diligence, supplier risk and cost implications

Hirers remain central to compliance success. The joint and several liability model and Conduct extension to umbrellas will raise expectations:

• Due diligence - deeper checks on umbrellas and agencies, including audit rights over deduction methodologies and holiday pay policies.

• Cost modelling - potential increases in day rates where agencies and umbrellas price in arrears and compliance costs.

• Contractual controls - clauses to prevent kickbacks and to require real-time data sharing for transparency reporting.

• Workforce planning - earlier AWR equal treatment, guaranteed hours interactions and a need to forecast budget impacts of accelerated cost convergence.

Hirers that update vendor risk frameworks early will gain pricing stability and fewer disputes.

Contracts, data and processes - what needs to change

Re-engineering the commercial stack

To comply with the proposed regime, parties should rebuild their commercial stack around a single source of truth. Essential components include:

• Data standards - a common schema for assignment rate, worker gross rate, deductions categories and holiday accrual rules.

• Rate governance - approval workflows that lock rates pre-assignment and sync to payroll.

• Dispute resolution - clear SLAs for time-sheet challenges and pay queries, with escalation paths across all three parties.

Payroll and documentation workflows

Umbrellas and agencies should invest in:

• Self-service portals - workers can preview net pay based on live assignment data.

• API integrations - agency Vendor Management Systems feeding umbrella payroll engines directly.

• Dynamic disclosures - regenerated at each material change in rate or deductions, with version stamps.

The operational prize is fewer pay disputes and lower admin costs through straight-through processing.

Risk, enforcement and funding models

Enforcement evolution

With umbrellas within scope and joint liability on tax, regulators will have broader levers. Anticipate:

• Targeted thematic reviews on holiday pay, kickbacks and deductions clarity.

• Penalty regimes calibrated to deter systemic non-compliance rather than isolated errors.

• Public guidance with worked examples to reduce ambiguity in rate presentation.

Funding compliance without eroding take-home pay

The sector will look for ways to fund stronger compliance while protecting net pay:

• Move to subscription-style service fees charged to hirers for premium compliance features.

• Pass some costs into assignment rates rather than worker deductions.

• Offer modular benefits workers can opt into transparently.

Comparing stakeholder readiness and actions

Case studies - practical scenarios

Scenario 1: Agency disputes hours, umbrella must still pay

• Worker completes 80 hours in a month using an approved time-sheet platform.

• Agency contests 10 hours due to client query.

• Under the strengthened Regulation 12, the umbrella pays for the 80 approved hours based on available evidence and seeks recovery from the agency later.

• Contract fallback: escrow and dispute timelines activate. The worker’s pay is not held hostage to the agency-client dispute.

Scenario 2: Preferred supplier list under kickback rules

• An agency runs a PSL of five umbrellas. Historically, each umbrella paid a per-placement marketing fee.

• Under Option B restrictions, such fees are prohibited. The agency introduces objective quality criteria and charges hirers a higher introduction margin instead.

• Worker take-home stabilises as umbrellas no longer load margins to recoup agency-side fees.

Scenario 3: PSC contractor and the shrinking opt-out

• A senior IT contractor operates through a PSC. The opt-out is restricted and a new PSC definition applies.

• The contractor is brought within more Conduct protections: clearer pre-engagement information and restrictions on detriment.

• IR35 status remains a separate determination. The agency updates documentation to avoid mixing IR35 rationale with Conduct disclosures.

Legal intersections and watchpoints

Interaction with IR35 and off-payroll rules

Bringing more PSC work within Conduct scope does not change IR35 tests but does affect documentation and the clarity of worker choice. Agencies should avoid implying that Conduct protections equal employment status for tax.

Holiday pay calculations and rolled-up approaches

Transparency will surface miscalculations. With representative breakdowns required, umbrellas must show the basis for holiday pay. Where rolled-up pay is used, disclosure must be explicit and methodologically sound within prevailing law and guidance.

Data protection and information sharing

Sharing pre-engagement information and payroll-linked breakdowns increases data processing. Agencies and umbrellas must align on lawful bases, retention periods and subject rights under UK GDPR. Worker portals should implement privacy-by-design principles.

Will simplification really offset burden?

The consultation’s promise is to modernise and reduce administrative burdens. In truth, the short-term effect is an increase in operational tasks as systems are retooled. Over time, the combination of standardised disclosures, data integrations and prevention of kickbacks can reduce disputes and rework, delivering net efficiency. The balance will depend on how precisely the final regulations define templates, timeframes and audit expectations.

• Tight templates and safe harbours reduce ambiguity and speed adoption.

• Vague duties risk uneven implementation and protracted disputes.

Preparing for April 2026 - strategic recommendations

For umbrella companies

• Build a cash-flow model for arrears under the new Regulation 12 and size your working capital facility accordingly.

• Implement real-time disclosure generation tied to payroll master data, not spreadsheets.

• Recut MSAs with agencies to require fast settlement, audited time-approval and recovery mechanisms.

• Establish a compliance committee with board oversight and MI on deductions, holiday pay and complaint resolution.

For employment businesses

• Replace KID-heavy packs with a single-page, pre-engagement factsheet plus a dynamic link to live rates and deductions.

• Reassess PSLs against kickback options and set objective, published selection criteria.

• Train consultants to explain assignment rate versus gross pay rate clearly and to present umbrella choice neutrally.

• Model revenue diversification if transfer fee income reduces and consider in-house payroll for stable verticals.

For contractors and agency workers

• Ask for the representative breakdown and compare take-home across umbrellas on a like-for-like basis.

• Check who your legal employer is, what hours are guaranteed and how holiday is calculated and paid.

• Use the published complaints routes if deductions appear opaque or unexplained.

For end hirers

• Refresh supplier due diligence, including attestation on no-kickback policies and visibility of deduction categories.

• Build audit clauses that allow sampling of payslips and deduction logic without overreaching privacy rules.

• Forecast the impact of earlier equal treatment and guaranteed hours on budgets and headcount planning.

Next step: Form a cross-functional taskforce now to design templates, data flows and contract updates ready for piloting by Q4 2025.

What to watch in the final regulations

• The precise statutory wording that brings umbrellas within the ERA 2025 definition of employment business.

• The delineation of joint and several liability in the Finance Bill 2026 and the knowledge thresholds.

• The format and timing of the representative deductions breakdown and whether safe-harbour templates are issued.

• The extent of any prohibition on agency-to-umbrella fees and the treatment of value-in-kind benefits.

• The final position on the Regulation 32 opt-out and the statutory definition of a PSC.

• Any adjustment to the AWR 12-week period and guidance on interaction with guaranteed hours.

Contractor News view

The Make Work Pay consultation is the most significant reform of the Conduct Regulations in twenty years. Its twin goals are clearer worker pay and sharper accountability across the supply chain. Success hinges on practical templates, realistic timelines and proportionate enforcement that targets bad actors while allowing compliant firms to thrive. Stakeholders should engage constructively with the detail and plan early pilots to de-risk implementation ahead of April 2026.

The road ahead - engage before 1 May 2026

Looking ahead, the direction of travel is firm: umbrellas inside the regulatory perimeter, strengthened payment security, cleaner disclosures and curbs on kickbacks. If executed with clarity and proportionality, the reforms can raise standards, compress bad margins and improve trust in flexible work. Agencies and umbrellas that invest in data integrity and contractual hygiene will be well placed to compete on service rather than opacity. The consultation window is a genuine opportunity to shape workable rules. Submissions close on 1 May 2026. Now is the time to stress-test your models, quantify arrears exposure and redesign your information flows before the new regime lands in April 2026.