Director Umbrella structures have proven to be highly popular in the Irish market, and at first glance it’s easy to see their appeal. In fact, a high percentage of contractors have continued to sign up and join these questionable support structures. One reason for this is that it’s easy to add a contractor to the structure without major problems. Moreover, this quick and easy process to a new joiner setup appeals to both the contractor as well as to certain recruitment agencies. These agencies strongly advocate contractors to join umbrella structures as part of the engagement process for new projects. The recruitment agency matches up a contractor for a specific job, signs the contract and closes out on the accounting solution. From their point of view the contract is sealed and the job is done. Unfortunately, the process is more complex, and the outcome for the contractor could be extremely uncertain.
Historically these structures are known as managed services companies, or simply “shell companies.” They are run and controlled by umbrella/accounting firms. The advantages these companies offer include a very low ongoing cost for the firm involved by not having to set up a new company every time a contractor wants to have his own company established. It should also be noted that these umbrella structures have been banned in the UK (in the UK they are known as Managed Service companies) for over a decade due to non-compliance. The reason for this ban is that the umbrella structure is basically a disguised employment entity. In other words, a contractor who is using the structure to be “self-employed” has no autonomy and no control over the company he is involved in and is really employed by it. Thus, from an accounting point of view, there are legitimate issues with the use of such structures.
Nor does it make sense from the corporate governance perspective, A corporate director must personally be aware of every company director and what that employee is doing for his organization. However, If the company’s work force consists entirely of independent contractors who are working on different assignments and don’t know each other, the rationale for a corporate organization disappears.
Moreover, it doesn’t seem to work from a GDPR point of view. For example, if the business data of a Director within the umbrella structure is hacked (a gated breach) there is an obligation to inform all relevant Directors with 72 hours. However, if the hacked director doesn’t know who the other directors in the structure are, it would be impossible to carry out that regulation in a timely manner. There are also privacy issues related to consent and the right to be forgotten when it comes to GDPR. For example, if the Director leaves an Umbrella structure, he has a right to have his data deleted. Yet from the accounting and audit perspective this could be impossible to carry out. In summary, it remains unclear how this structure can work with GDPR.
Finally, a contractor may find that his initial contract has evolved into multiple concurrent contracts of service or a more regularised business. As a result, the contractor may ultimately want his own independent company (personal Limited company). In time, he may employ people and become a viable business with goodwill attached.