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What’s the difference between Umbrella and PEO?

Mon 8th Mar 2021

As the IR35 reform draws nearer, many freelancers and companies are searching for ways to manage the transition. One of the ways people are preparing for this change is through working with an umbrella company or PEO.

Working with one of these companies can help contractors organise their finance and administrative concerns. But which option is best for you? Below we outline some of the differences between an umbrella company and a PEO, so that you can know which option best suits you.

What is an umbrella company?

An umbrella company is an organisation which employs contractors who work on temporary assignments or contracts, making them a full-time employee of the umbrella company. This entitles them to the same rights as any other permanent employee.

When choosing which umbrella company to work with, it is important to do your research and ensure that you work with a compliant organisation - in order to avoid any nasty surprises from HMRC. A good guideline for this is to go with a company that is FCSA accredited.

What is a PEO?

PEO stands for Professional Employer Organisation, these work as employment intermediaries who provide a completely outsourced employment solution for recruitment agencies and businesses. The PEO assumes liability for all employment risk and Pay As You Earn (PAYE) reporting to HMRC. In addition to this, PEOs also take care of timesheets, holiday, pension and statutory payments, as well as handling contractor queries and grievances.

This arrangement enables recruiters and businesses to continue to engage contractors without the associated administrative burden, it is in essence a “co-employment”.

What’s the difference?

While umbrella companies and PEOs are very similar, there are advantages to each.

Umbrella firms show all employment costs and deductions on their payslips

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.

Umbrella firms are focused on supporting temporary or fixed-term engagements

Global PEOs often employ a workforce on permanent employment contracts (though they can engage individuals on a short-term or fixed-term basis as well), whereas umbrella companies are generally more focused on employing numerous temporary contractors.

Umbrella firms usually have a B2B relationship with a distinct recruitment firm

The umbrella company does not necessarily have a direct relationship with the client company, they usually work through recruitment firms. On the other hand, a PEO almost always deals directly with the client company.

For more information on our services, or advice on which solution best fits your needs, get in touch today >

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