What’s the Difference Between Umbrella and PEO?


With the reforms for off-payroll working now in place, many of the best umbrella companies and end contractor agencies will be exploring alternative ways to manage their transition to the new reforms. Some contract agencies will look to migrate their existing contractors to the best umbrella company solution possible, however, there are several options available.

One solution which has been in use in the USA for decades and very popular is Professional Employer Organisations (PEO). In this article, we’re going to compare PEOs to umbrella companies and establish the fundamental differences and what steps you need to take when preparing for these IR35 reforms.

What is an umbrella company?

The best umbrella companies will be compliant and they will employ contractors on temporary assignments or contracts, this means they essentially become an employee of the umbrella company. It entitles employees to the same employment rights as permanent employees.

It is absolutely crucial when you choose an umbrella company to select one which is compliant, to avoid any nasty surprises from HMRC. Evolve CS Group are leaders in compliance and we are committed to the highest standards possible.

What is PEO?

As previously mentioned above, PEO stands for Professional Employer Organisation. The way a PEO works is as an employment intermediary providing completely outsourced employment solutions for contract recruitment agencies and other businesses.

The PEO assumes the responsibilities of an employer by employing the worker on a contract of employment. It comes in handy for those businesses that lack an internal payroll department or HR function, it provides an outsourced service for contractors, supplying all the legislative and administrative functions associated with employment.

So far it may seem identical to an umbrella company but there are some key differences.

Pay Transparency

A key difference between PEO and umbrella companies is the type of payslip a contractor will receive. On April 6th, 2020 the UK government aimed to improve pay transparency for agency workers, which originally was first introduced as a result of the Taylor Review of Modern Working Practices in 2017, the Good Work Plan was introduced by the UK Government.

This means the agency workers receive a Key Information Document (KID) detailing all deductions made from the contract day rate, provided to them by the contract recruitment agencies, down to the net take-home pay.

It will include deductions employees didn’t use to see like their National Insurance Contributions, apprenticeship levy and margins kept by the umbrella company which ultimately made payslips convoluted for contractors and hard to establish if they were being paid correctly.

Through the PEO format, costs and deductions from the umbrella company are charged to the end client or contract recruitment agency, as a totally separate transaction. This is a much more straightforward way of presenting things for the contractor, as they see a clear and easy-to-understand payslip, as they only see the given gross pay rate rather than an uplifted umbrella rate inclusive of all employment costs.

We hope this quick run-through helps clarify any uncertainties you may have about the two solutions, either way, you can contact Evolve CS and we will be happy to help answer any questions and help you better understand the best solution for your employment needs.

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Evolve CS Group is a first-class umbrella contracting company provided by top-rated professionals.

Contact us at 0203 744 1229 or email us at hello@evolvecs.co.uk and start your journey today with Evolve CS.