The 2026 Regulatory Pivot: Enforcing Better Practice On Construction Recruitment Agencies

As of April 2026, the Joint & Several Liability (JSL) legislations will mean if you’re using a recruitment agency or umbrella company that doesn’t prioritise compliance, you could pay the price – literally.

Compliance in construction recruitment has never just been a ‘nice to have’, yet for some organisations, increasing their profit has taken priority over taking care of their workers and customers. ‘Deliberate mistakes’ that might have been ignored in the past will have financial and reputational consequences that could impact your entire supply chain. 

At P.I.E.R, we’re trying to make sure our clients avoid costly mistakes by understanding the issues with umbrella companies in our industry and why these issues need to be resolved.

The Current Landscape: Financial Misuse and Market Abuse

A large proportion of the UK’s construction workforce are temporary workers, and many are engaged through recruitment agencies. Recruitment agencies often rely on umbrella companies to officially employ their workers. 

An umbrella company will employ workers through an employment contract, operate PAYE, and deduct Income Tax and National Insurance Contributions (NICs). When the umbrella company is the legal employer of a worker, it is their responsibility to provide and manage holiday pay, statutory sick pay (SSP) and workplace pension auto-enrollment.

Sadly, the construction sector is often victim to agencies and umbrella companies trying to maximise their profit margins by failing to follow compliant processes and attempting to avoid paying the correct tax.

In 2022-23, at least 275,000 workers were engaged at some point by umbrella companies that failed to comply with their tax obligations.

With the introduction of JSL in April 2026 and additional changes to the Employment Rights Bill coming in 2027, we believe two of the major concerns for construction companies should be:

1. Does the recruitment agency you work with give workers a choice of umbrella companies? If not, is the owner of that agency connected to the umbrella company in any way?

Agencies will have to offer their workers the choice of more than one umbrella company to use. Called ‘independent oversight’, this change will ensure workers cannot be forced to use an umbrella company owned by the recruitment company they are engaged by. If there are any connections between the owners or Directors of a recruitment agency and an umbrella company, alarm bells should be ringing. Now is the time to ensure you have an ethical supply chain -before the new legislation comes into play.

2. If you don’t work with a recruitment agency, and instead, you communicate directly with an umbrella company, or an organisation that looks like an umbrella company, are you sure that the organisation is compliant?

To simplify this question, ask yourself who pays your sub-contractors? If workers are paid by a payroll bureau and don’t go through a recruitment agency, the intermediary could be seen as an umbrella company, and treated accordingly. HMRC are likely to use the ‘duck test’: if it looks like a duck, swims like a duck, and acts like a duck – it is a duck. In this instance, if HMRC assumes an intermediary is an umbrella company, they will apply the rules of JSL to the end client.

Why Does the Construction Industry Rely on Umbrella Companies

The construction industry relies on umbrella companies because the sector is full of assignment based workers or temporary workers. Using an umbrella company will reduce administration costs due to the more complicated nature of payroll for construction workers, transfer responsibilities for tax compliance and IR35 assessments to a third party, and make it easier to hire skilled tradespeople for specific projects.

The government has been warning employment agencies about non-compliant umbrella companies for years, but as we move closer to April, it’s more important than ever that you know every element of your supply chain.

Not all umbrella companies are non-compliant, but there are several common signs that suggest an umbrella company is attempting to avoid paying the right amount of tax.

Incentivised Supply Chains

In some cases, supply chains can be formed of preferred supplier lists (PSLs). These lists mean workers must only choose umbrella companies to work with that have been pre-approved by agencies. There could be several reasons why an agency limits the umbrella companies a worker could use:

1. Umbrella ownership: If a recruitment agency “owns” an umbrella company and uses it for the workers they engage, they are at higher risk of JSL legislation infringements. Forcing workers to use a specific umbrella company and removing their right to choose can be a clear indication that the agency is gaining financially from a certain umbrella company.
2. Kickback payments: The PSL itself can be manipulated by umbrella companies that pay large ‘kickbacks’ to secure a place for themselves on these lists. In this instance, umbrella companies could be given a place based on a financial incentive, rather than merit. As well as cash incentives, agencies, or Directors of agencies, might be offered holidays or home improvements in exchange for a place on a PSL. These costly bribes are funded by the higher margins an umbrella company can maintain due to a lack of compliance.

Financially Exploiting Workers

As with many non-compliance issues, more often than not, it’s the workers that suffer the greatest loss. Many of the workers who become embroiled in an umbrella company’s fraudulent activity do so unknowingly.

Unscrupulous umbrella companies have no regard for their workers, and they may withhold some of a worker’s pay, skim their wages beyond the agreed fee, or withhold holiday pay that a worker has accrued. Instead, this money is lost to a worker and becomes profit for the umbrella company.

Withholding money due to workers isn’t always straightforward. Umbrella companies can also manipulate the pay structure to protect their own cash flow. Non-compliant umbrella companies will pay a basic salary of National Minimum Wage (NMW) and include any additional pay as a ‘bonus’. A payslip structured in this way gives the wrong impression of a worker’s wages, and will create problems if a worker needs proof of their wages to apply for a mortgage or loan for example. In this case, umbrella companies will then base the worker’s holiday pay rate on the NMW element of their pay, rather than the wage as a whole.

Recruitment agencies can also directly mislead workers through their advertised ‘assignment rates’. The rates shown to a worker to entice them to sign up will often include the total cost to the client, rather than the actual pay a worker will actually receive when legitimate deductions, such as National Insurance, Apprenticeship Levy, and umbrella fees have been deducted.

Tax Fraud 

Tax fraud could also be even more blatant.

A worker could be paid their wages in the form of a non-taxable loan. If an umbrella company pays a worker using a loan, the worker will unknowingly become vulnerable to large tax bills from HMRC. This form of disguised remuneration (DR) is more common than you might think: £500 million was lost to disguised remuneration (DR) tax avoidance schemes in 2022-23, almost all of which was facilitated by umbrella companies.

Mini umbrella companies (MUCs) might be created to split a large workforce into hundreds of tiny companies. This would enable the umbrella company to fraudulently claim Employment Allowance and abuse the VAT Flat Rate Scheme. According to a BBC investigation, 48,000 mini umbrella companies (MUCs) were launched in the UK within a 5-year period, and HMRC has since deregistered tens of thousands believed to be involved in fraud.

The 2026 Regulatory Pivot: Enforcing Better Practice

As of April 2026, the new Joint & Several Liability (JSL) legislation will place greater legal responsibility on the top of the supply chain. The government has decided that self-regulation isn’t working, and at P.I.E.R, we couldn’t agree more. 

Responsibility for PAYE will Change

Accounting for Pay As You Earn (PAYE) will move from the umbrella company to the recruitment agency that supplies the worker to the construction firm. If no recruitment agency is involved the responsibility will lie with the construction company, also known as the ‘end client’.

If an umbrella company does not deduct the right tax and NI, HMRC will go to the recruitment agency or end client to recoup the rest of the money. This prevents agencies or clients being able to outsource the tax risk.

New Legal Definitions and Oversight

The government is bringing umbrella companies within the remit of the Employment Agency Standards (EAS) Inspectorate by formally redefining the term ‘umbrella company’. A move within EAS will also move them within the remit of the Fair Work Agency.

Umbrella companies will also be subject to regulations that are similar to the Conduct of Employment Agencies and Employment Business Regulations 2003. A focus will be on pay transparency, handling of holiday pay, and banning financial ‘kickbacks’.

How to Avoid Non-Compliant Construction Recruitment Agencies

All construction companies must now pro-actively examine their supply chain to make sure they avoid any financial loss or reputational damage that could be brought on by choosing non-compliant partners.

Enhanced Due Diligence Framework

All construction recruitment agencies should ask their partners to provide evidence of the following completed checks on any umbrella companies they use within their supply chain:

1. Corporate Legitimacy: Verify by confirming an active UK registration on Companies House, including verification of directors and persons of significant control. At this stage, you can check to see if names of recruitment agency directors are the same as those who own an umbrella company they are connected to.
2. Financial Transparency: Run credit checks. UK based business bank accounts should be verified and checked against the equivalent record on Companies House.
3. Tax Compliance: Find proof of VAT registration and evidence that Real Time Information (RTI) submissions match payslips.
4. Operational Policies: Holiday pay and expense policies should be reviewed. Ensure that workers are not forced to ‘opt out’ of Conduct Regulations.
5. Director History: Check that no company directors have a history with a failed or non-complaint phoenix company.

Red Flags for Non-Compliance

While it’s not always easy to spot non-compliance, there are several red flags that should act as a warning for construction firms that work with agencies or umbrella companies:

Unrealistic Pay

If pay rates look too good to be true, for example, an 80 – 90% take-home pay, they probably are. Often, an unrealistic pay will be a sign of payment via loan schemes or disguised remuneration.

Offshore Directors

Offshore Directors can be used to claim Employment Allowance, or simply as a way to try and prevent HMRC collecting what is owed.

Lack of Transparency

If workers don’t have a Key Information Document (KID) before they begin work, there’s something amiss.

Excessive Preferred Supply Lists (PSL)

If an agency cannot tell you why an organisation is on their preferred supplier list, or simply states’ commercial agreements’, be wary.

Your Guide to Proactive Supply Chain Management

Begin by asking for complete transparency across your supply chain. Recruitment agencies should be able to tell you everything about every organisation within their supply chain. It’s really important to remember that if you’re not using a recruitment agency and are dealing with an umbrella company directly, or a company that looks like an umbrella company, you are at even higher risk of being impacted by the new JSL.

Even if an industry accreditation is in place, you must conduct your own random checks of payslips and contracts. You can’t be passively compliant, you need to know everything is correct. While updating paperwork might seem a chore, you should also update all contracts you hold with recruitment agencies to include clauses that relate to the compliance of any third-party payroll providers they use.

When it comes to your workers, make sure they all receive a Key Information Document (KID) that clearly shows the dedications between the rate per assignment and their net pay.

Get Ready for the Future of Compliance in Construction

The upcoming changes create a shift in liability that prevents construction companies outsourcing the risk of employment to recruitment agencies and their umbrella companies.

Updating and enforcing compliance across your supply chain now will prevent your business facing financial penalties, enduring reputational damage, and instead, will ensure you support a fair and compliant labour market. 

References

• https://www.gov.uk/government/consultations/tackling-non-compliance-in-the-umbrella-company-market/outcome/tackling-non-compliance-in-the-umbrella-company-market-government-response-accessible
• https://www.gov.uk/guidance/warning-for-employment-agencies-using-umbrella-companies-spotlight-64
• https://www.tuc.org.uk/research-analysis/reports/umbrella-companies-why-agencies-and-employers-should-be-banned-using-them
• https://www.gov.uk/government/consultations/tackling-non-compliance-in-the-umbrella-company-market/outcome/tackling-non-compliance-in-the-umbrella-company-market-government-response-accessible
• https://www.bbc.co.uk/news/uk-57021128