Whilst HMRC is confident that its knockout blow on umbrella non-compliance will soon produce dividends, the other side of the coin needs factoring in.
In my previous articles (Perception risk from new umbrella legislation and TUPE fallout from Chapter 11) I set out why big business could be the only winners, innovation stifled, and why ceasing to use umbrella companies will come with its own TUPE problems. I have also written about the potential loss of employment by up to 700,000 agency workers currently employed by umbrella companies. Whilst in reality the number of agency workers losing employment is likely to be much lower because some umbrella companies will probably continue to trade, the cost of dealing with all those laid off could be considerable.
HMRC refers to some 275,000 workers employed by an unknown number of non-compliant umbrellas. Those workers and umbrella companies could be seen as the target, and therefore a more accurate assessment of those likely to lose their employment, so let’s look at that sample.
Most umbrella companies folding will probably have no remaining assets or funds available to pay their employees their legal entitlements. Indeed HMRC itself may find that there are considerable tax debts at the time of closure, which potentially should also be factored in. But any employee who doesn’t get statutory paid notice on termination will be entitled to claim at least one weeks’ pay from the government.
On a simple calculation using the national minimum wage of £12.71 per hour (from April 2026) at 37.5 hours per week each worker would be entitled to pay of £476.63. Multiply that by 275,000 shows the cost to the government for just the one weeks unpaid notice entitlement could be £131.07 million, no small figure. This will be higher where the employee has been employed for two years or more as then entitlement is to one week’s pay for each year of employment. Two year plus employees would also be entitled to redundancy (which currently entitles most employees to pay up to £719 per week).
There is little public data on how many umbrella workers have been employed for two years or more, and it is not clear that HMRC has done the exercise of assessing this. But for the sake of this exercise let’s say 10% are two year plus employees. This gives a figure totalling some £170m.
On top of the actual money is the administration of each claim, not to mention the disruption and worry caused to the agency workers concerned as they lose their existing employment rights.
I have not included any assessment of the less obvious, but nevertheless real, impacts of the legislation. The cost of claims on the government fund if some agencies collapse, as could be one result of JSL. Outstanding irrecoverable tax debts due from the insolvent closed companies. The cost of dealing with TUPE that will affect profits and thus tax. The cost of claims to the employment tribunal where umbrella workers seek to restore their employment rights against the agencies that engaged them through an umbrella. Surprisingly there are no figures showing these costs in the policy paper supporting the new legislation.
Although the figures above are speculative, it can be seen that JSL does not come free of charge. Does the benefit justify the cost not to mention the pain that this will cause everyone?
For further information and discussion on Chapter 11, book your place at a Lawspeed seminar, sponsored by ARC, on 14th January 2026.
