For the first time, umbrella companies are heading into formal statutory regulation. The Employment Rights Act 2025 will bring the sector inside a recognised legal framework from April 2027, with the Fair Work Agency taking direct oversight of how umbrella companies treat workers.

While some operational details are still being developed through secondary legislation and consultation, the direction is settled. Umbrella companies will be regulated entities, and the question for recruitment agencies is whether your supply chain will be ready when the rules land.

What the Employment Rights Act 2025 Confirms

The Employment Rights Act 2025 extends the legal definition of “employment business” to include umbrella companies. This places umbrella employers inside the Employment Agency Standards framework, giving the Fair Work Agency direct oversight powers.

According to the FCSA, the regulatory framework is expected to cover:

• Transparency of worker terms and pay arrangements
• Holiday pay calculation and record-keeping obligations
• Statutory Sick Pay compliance
• Prohibition on unlawful deductions from workers’ pay

The Fair Work Agency will have inspection powers, the ability to impose financial penalties, and a six-year recovery window for underpaid amounts. These are not advisory standards but enforceable obligations.

The specifics of how the FWA will operate, what its investigation procedures will look like, and what documentation it will expect are still being consulted on.

How This Links with April 2026 PAYE Changes

Umbrella regulation in 2027 should be viewed alongside the separate PAYE changes that came into effect in April 2026.

From April 2026, new rules make agencies (or end clients where there is no agency) responsible for accounting for PAYE and Class 1 National Insurance where workers are supplied through umbrella companies. Those tax changes are separate from employment rights regulation, but they point in the same direction: stronger accountability in umbrella labour supply chains.

In simple terms:

• The 2026 PAYE changes focus on tax compliance
• The 2027 umbrella regulation focuses on employment rights, transparency and worker protection

Together, they create a much tougher compliance environment for umbrella companies, recruitment agencies and end clients.

Why Agencies Cannot Wait Until 2027

There is a temptation to treat the 2027 changes as a future problem. The industry has already absorbed joint and several liability (live from 6th April 2026), the Fair Work Agency’s launch, and the overhaul of Statutory Sick Pay. Another regulatory change can feel distant.

But as the FCSA points out, compliance infrastructure is not built overnight. The umbrella companies that will navigate 2027 most effectively are those building the right processes now, not those that attempt to retrofit them in the months before the rules come into force.

For agencies, this means reviewing your preferred supplier lists well in advance. A weak umbrella supplier can create reputational, operational and financial risk. The safest approach is to treat umbrella due diligence as an ongoing governance process, not a one-off onboarding form.

What Agencies Should Look For in Umbrella Partners

When evaluating umbrella companies on your preferred supplier list, agencies should look for evidence of robust compliance processes. This is not just about removing obviously non-compliant providers but building a defensible due diligence process.

Key areas to assess include:

Transparency and Communication:

• Clear pay illustrations showing assignment rate, gross pay and net pay
• Transparent payslips and reconciliation statements
• Plain-English explanations, not just technical payroll terminology
• Evidence that workers understand who employs them and who is responsible for their rights

Payroll Compliance:

• Accurate calculation and treatment of holiday pay
• Correct treatment of Statutory Sick Pay and other statutory pay rights
• Lawful deductions only
• Accurate payroll records with clear audit trails

Operational Standards:

• Robust onboarding processes
• Clear contractual terms
• Responsive worker support
• Clear processes for resolving pay disputes
• Documented complaints handling

Evidence and Accountability:

• Independent assessment or accreditation (such as FCSA)
• Financial stability
• Willingness to provide compliance evidence
• Records that can be produced quickly if requested

Agencies should be able to show why they accepted an umbrella company, what checks were carried out, how often those checks are refreshed, and what action is taken if a worker raises a concern.

Red Flags to Watch For

When reviewing umbrella suppliers, watch for warning signs that indicate poor practice:

• Unclear or missing payslip breakdowns
• Unexplained deductions
• Take-home pay that looks too good to be true
• Payments from more than one company
• Loan-style arrangements or requests to sign additional tax-related agreements
• Frequent changes in employer name or PAYE reference
• Poor responses when questions are raised
• Inability or unwillingness to provide compliance documentation

Any of these should trigger immediate further investigation or removal from your preferred supplier list.

The Role of Independent Accreditation

Industry accreditation is not a substitute for legal compliance. A badge does not remove statutory responsibility, and it should not be treated as a complete due diligence exercise.

However, independent assessment against a recognised compliance standard can be valuable. The FCSA’s Codes of Compliance were developed to set the standard that regulators should ultimately expect. Umbrella companies that have been independently assessed under that standard will enter the 2027 regime from a position of demonstrable compliance.

For agencies, accreditation should be one part of a wider due diligence process, supported by live checks, contractual protections, payroll transparency, worker feedback, financial stability checks and clear escalation routes where something looks wrong.

The key question is not simply “Is this umbrella accredited?” but rather “Can this umbrella prove, with evidence, that workers are being paid correctly and treated lawfully?”

Action Timeline for Agencies

While April 2027 may seem distant, agencies should start preparation now. Here’s a practical timeline:

July 2026 onwards (Now):

• Review current umbrella preferred supplier list
• Identify suppliers that may struggle with increased scrutiny
• Begin enhanced due diligence on all suppliers
• Document your evaluation process and criteria

Q3-Q4 2026:

• Engage with umbrella partners about their 2027 preparation
• Request evidence of compliance processes and documentation
• Update agency-umbrella contracts to reflect new regulatory environment
• Begin removing suppliers that cannot demonstrate readiness

Q1 2027:

• Finalise preferred supplier list ahead of April implementation
• Brief internal teams on new compliance requirements
• Update client communications about supply chain standards
• Ensure contractor-facing materials reflect regulatory changes

April 2027:

• New regulations come into force
• Fair Work Agency begins oversight and enforcement
• Agencies with prepared supply chains can operate confidently

How SmartWork Is Preparing

At SmartWork, we’ve built our business on a compliance-first approach. We welcome regulation that raises industry standards and protects workers.

We are:

• FCSA accredited, independently assessed against recognised compliance standards
• SafeRec Certified for real-time auditing and transparency
• APSCo Trusted Partner with the highest quality operating procedures and ethical practice in the recruitment sector
• Actively preparing our processes and documentation for Fair Work Agency oversight
• Investing in payroll transparency and worker communication systems
• Building audit trails and record-keeping that will withstand regulatory scrutiny
• Engaging with agencies now to ensure a smooth transition into the new regime

Our view has always been that strong, independently verified standards protect workers, benefit legitimate operators, and give agencies the confidence to build supply chains they can stand behind.

What This Means for Your Agency

Umbrella company regulation is not just another compliance update. It is a structural shift in the governance of the temporary labour market.

For agencies, the message is clear: the choice of an umbrella can no longer be treated as an administrative detail. It is a supply chain risk issue. The trend in both tax and employment regulation is moving towards wider accountability across the labour supply chain.

The agencies that will navigate 2027 most effectively are those acting now: reviewing their supplier panels, strengthening due diligence processes, engaging with compliant partners, and treating umbrella governance as an ongoing priority rather than a one-time exercise.

The question is no longer whether regulation is coming. The question is whether your agency will be ready when it arrives.

Next Steps

If you would like to discuss how SmartWork can support your agency through the regulatory transition, or if you have questions about our compliance processes and FCSA accreditation, please get in touch with us. We’re here to help you build a supply chain you can rely on.

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Sources:

• FCSA
• GOV.UK