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Umbrella Company: How it Works

Jun 21st, 2022

What is an umbrella company?

An umbrella company is an organization that acts as the legal employer for employees who are performing duties with the umbrella company’s client. Umbrella companies, also referred to as umbrella agencies or umbrella organizations, take responsibility for HR processes such as withholding taxes, administering benefits, and making payments. They usually control multiple businesses employing foreign nationals at the same time.

Umbrella companies are much more common in the United Kingdom and the EU, whereas PEO services remain popular in the US and Canada.

What is an umbrella company in the UK? What you need to know

While umbrella company is sometimes used interchangeably with PEO, the term has a different meaning in the UK, where umbrella companies are seen as strategic partners for navigating payroll taxes, insurance, pension contributions, and other employee benefits. They engage with employees as individual contractors.

Due to IR35 and off-payroll working regulations, an umbrella company will directly employ contractors, making them appealing for international businesses with operations in the UK.

Risks in the UK

Classifying workers as independent contractors in the United Kingdom can be tricky. Employers need to remain compliant with tax and labor laws, as dictated by Her Majesty’s Revenue & Customers (HRMC), which manages misclassifications, penalties, employee contributions, and back-paying taxes. The umbrella company is responsible for things like correctly calculating take home pay.

Some tax compliance, such as the UK trading allow, is the responsibility of the individual worker.

Who uses an umbrella company?

Umbrella companies are really popular with clients in construction and government agencies, but can be used by organizations looking for workers on a temporary basis.

Benefits of using an umbrella company

For companies looking to hire a large number of workers, employing the staff themselves can be arduous and time consuming. Umbrella companies and recruitment agencies expedite the process of filling seats.

Client companies don’t think it makes sense to employ temporary or fixed-term staff themselves. They would rather that the recruitment agency take care of it.

Other important benefits include:

  • Not needing to open an entity

  • Compliance support

  • Streamlined onboarding for workers

  • Tax benefits

Risks of using an umbrella company

Working with an umbrella company comes with risks, too. In general, you want to avoid working with a company that outsources most or all of its services. You will also want to avoid schemes that allow you to pay workers in loans, as opposed to wages. Umbrella companies tend to be barebones when it comes to payroll services, which doesn’t make it a good option for administering complex benefits, such as stock options, private healthcare, and 401K’s.

How do umbrella companies work?

Unlike an EOR service provider, an umbrella company usually focuses on short-term or seasonal work.

They usually work with recruitment firms or staffing agencies. The umbrella company’s end client usually pays for their own recruiting.

How to work with an umbrella company

  1. Umbrella companies partner with staffing agencies to help clients find workers

  2. Staffing agencies recruit workers abroad for the client, who is usually based in a different country

  3. Independent contractors sign a contract with the umbrella company, who becomes their employer on paper and ensures employees are paid

  4. Once signed, contractors can begin working for the client company

  5. The client company maintains day-to-day managerial oversight of the contractors’ employment, including signing timesheets and approving reimbursements

  6. When it comes to payment, umbrella companies invoice the staffing firm. The client pays the recruiting firm, who sends payment to workers via the umbrella company

All services need to be outlined in the employment contract, especially how employees will get paid.

What is an umbrella company in the US?

In the United States, an umbrella company has a slightly different meaning.

In the US, an Umbrella Company, or an Umbrella LLC (limited company), allows entrepreneurs and business leaders to keep assets from brother companies separate while also reducing the number of tax returns the business needs to file at the end of the year.

Pros of Umbrella LLC

Major brands like Bank of America and JP Morgan are technically Umbrella LLCs, though with far more subsidiaries than an entrepreneur-led business. An Umbrella LLC allows multiple business lines to work for one parent company, while also keeping finances discrete and sheltering each individual LLC or subsidiary from legal or compliance issues. This saves subsidiaries from expensive litigation costs and other expenses.

Cons of Umbrella LLC

Opening an Umbrella limited company in the US does have a few disadvantages. Multiple LLC filings leads to higher costs. Taxes can get complicated as well, especially if assets between brother companies or different subsidiaries get mixed up.

Subsidiary vs. Umbrella company

Technically speaking, an Umbrella company can own one or more subsidiaries. A subsidiary is a company that is majority or wholly owned by another party, which is often an umbrella company.

Umbrella company vs. PEO vs. EOR

If you’re hiring highly skilled knowledge workers for ongoing engagements, such as web developers and UX designers, partnering with a PEO or EOR service provider is probably the better move. The choice will depend on whether you already have an entity setup abroad.

No matter which path is route right your business, you will want to consider:

  • Costs/fee structure

  • Scalability

  • Your company’s industry and background

  • Resources for making international payments

  • Whether you will receive on-the-ground support


Unlike an umbrella company or an EOR, PEO or professional employment organizations act as co-employers. To partner with a PEO to run payroll and HR processes, your business will still need an entity, which requires opening a local bank account, registering with government institutions, and establishing a physical presence in the country.

If you have an entity and want a partner that provides robust support for payroll, then a PEO might be a better option than partnering with an umbrella company. Most PEO’s provide client companies with a dedicated customer support manager, which is often lacking in umbrella companies.


If you’re hiring highly skilled knowledge workers for ongoing engagements, such as web developers, teachers, and UX designers, partnering with an EOR service provider is probably the better move, especially if you don’t have time to go through the hassle of opening an entity abroad.

When you partner with an EOR like Via, you receive ongoing support from an account manager, who helps you navigate through challenges related to immigration, payments, visas, and benefits. The EOR ensures that your hiring processes remain compliant so that you can focus on the day-to-day operations of your business.

Why companies choose Via

Many companies want to hire employees abroad, but are unsure of how to navigate challenges like holiday pay abroad, national insurance contributions, sick pay, employment contracts, and other HR logistics. Via makes hiring international talent seamless. With our-easy-to-use platform, Via manages the local HR processes for employment such as work visas and permits, benefits, payroll, background checks, and more. Our team of local labor lawyers and on-the-ground experts ensure that your company remains compliant while expanding abroad. As your employer-or-record/entity, Via assumes responsibility for employment liability, so that you can focus on what matters: recruiting and managing your team.

With Via’s transparent pricing, you can pay full-time employees or contractors across borders with no hidden set-up fees, no foreign exchange or transaction fees, and no minimums–start with 1 employee and scale up at your own pace.

Need help building your global team?

Janelle Watson
Janelle Watson
My name is Janelle Watson and I'm a Colorado native. I have a BA in English from University of Colorado Colorado Springs and an MA in English from University of Colorado Denver. Before moving to blog and copywriting, I was an English teacher for 3 years at the University of Colorado in Denver. Prior to writing for Via, I wrote reviews and content for a local concert and promotion company in Denver.

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