What’s the Difference Between Umbrella and PEO?

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As the reforms to off-payroll working draw ever nearer, many agencies and end hirers are looking for different ways to manage the transition. Naturally, some agencies are looking to simply migrate their contractors to an umbrella solution, but there are several solutions available.

One solution that has been popular in America for decades is the use of Professional Employer Organisations (PEO). PEO is one of the many options available to agencies and end hirers and could be a solution for you. In this article, we explore what exactly umbrella and PEO solutions are, what are the differences and the steps you need to take when getting ready for the IR35 reforms

What is an umbrella company?

You may be wondering, what is an umbrella company? A compliant umbrella company employs contractors working on temporary assignments or contracts, this means that the contractor becomes an employee of the umbrella company. This gives them many of the same employment rights as any other permanent employee.

When choosing which umbrella company to work with, it is critical to choose a compliant organisation, to help ensure you, or the contractor, don’t get any nasty surprises from HMRC. Parasol are market leaders in compliance and are committed to raising standards across the industry, this is why Parasol is a fully accredited and founding member of the FCSA.

What is PEO?

We go into more detail here, but PEO stands for Professional Employer Organisation. Simply put, a PEO is an employment intermediary who provides a complete outsourced employment solution for recruitment agencies and other businesses.

The PEO employs the worker on a contract of employment and so assumes the responsibilities of an employer. This is particularly useful for businesses that do not have an internal payroll or HR function for outsourced contractors, as the PEO supplier bears all the legislative and administrative responsibilities associated with employment.

As you can tell, there are several similarities between PEO and an umbrella company, but there are some key differences.

Pay transparency

One major difference between PEO and an umbrella company is the payslip the contractor will receive. In other words, how contractors’ pay is presented to them. As a result of the Taylor Review of Modern Working Practices in 2017, the Good Work Plan was introduced by the UK Government. The Good Work Plan first introduced the Key Information Document as an amendment to the conduct regulations.

This legislation, introduced on 6th April 2020 aimed to increase pay transparency for agency workers. Specifically, it means that agency workers will receive a Key Information Document (KID) that details all the deductions made from the assignment rate given to them by the recruitment agency down to net take-home pay.

This will include deductions that employees do not usually see like employer’s National Insurance contributions, apprenticeship levy and the margin retained by the umbrella company, this can be confusing for contractors. For many people starting their contracting journey, this seems like a lot of deductions as they are used to a PAYE payslip from traditional employment. Therefore, some contractors may be expecting a greater take-home pay than what they receive.

How payslips are presented is one major difference between umbrella and PEO. Through the PEO solution, the costs and deductions from the umbrella company are charged to the end hirer as a completely separate transaction. This means that from the contractors’ point of view they see a more straightforward payslip and are only ever given the gross pay rate, rather than the uplifted umbrella rate which is inclusive of all employment costs.

We’re with you all the way

Here at Parasol, we have a number of options including umbrella and PEO. Our team is on hand to discuss a bespoke approach tailored to you or your contractors’ needs. If you would like a free no-obligation call, request a callback and a member of our team will be in touch.