Umbrella Company Regulation 2027: The Employment Rights Act Changes Every Client and Agency Needs to Track

Umbrella company regulation under the Employment Rights Act takes effect in 2027, not 2026. The Act defines umbrella companies as employment businesses for the first time and places them under the Fair Work Agency. It runs alongside Joint and Several Liability, a separate tax measure that already took effect on 6 April 2026.

Why are there two sets of umbrella rules, and what is the difference?

Two different regimes target two different problems.

Joint and Several Liability is a tax measure. It sits in Chapter 11 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003, was introduced by Finance Bill 2025-26, and took effect on 6 April 2026. It lets HMRC recover unpaid PAYE and National Insurance from the recruitment agency or end-client when an umbrella company fails to pay. Read the full analysis in the Joint & Several Liability April 2026 guide.

Umbrella regulation is an employment law measure. It sits in the Employment Rights Act, amends the Employment Agencies Act 1973, and takes effect in 2027. It defines umbrella companies in statute for the first time, brings them under the Conduct of Employment Agencies and Employment Businesses Regulations 2003, and places enforcement with the Fair Work Agency.

A single umbrella placement can breach both regimes. The agency or client carries tax risk under JSL and conduct risk under Employment Rights Act regulation. The two must be audited together. Our IR35 off-payroll rules resource covers the third 2026 contractor-engagement regime that runs in parallel.

What does the Employment Rights Act actually do to umbrella companies?

The Act introduces four material changes, all operative from 2027 subject to consultation outcomes.

Statutory definition. The Act amends Section 13 of the Employment Agencies Act 1973 to include umbrella companies within the definition of "employment business". Before this, umbrella companies were regulated only indirectly through tax legislation and consumer protection law.

Conduct Regulations extension. Umbrella companies will be subject to the Conduct of Employment Agencies and Employment Businesses Regulations 2003. Government has opened a consultation running until 1 May 2026 on whether those Regulations need amendment to address umbrella-specific harms including pay transparency and enforcement of employment rights.

Workers' rights alignment. Workers engaged through umbrellas will have equivalent rights and protections to those engaged directly by an employment business, including limits on opt-out and restrictions on withholding payment where the end-client has not paid the agency.

Fair Work Agency enforcement. The FWA replaces the Employment Agency Standards Inspectorate and absorbs the Gangmasters and Labour Abuse Authority. From 2027, it will take on umbrella regulation enforcement, with powers to inspect, require document production, and issue civil penalties.

What will the Fair Work Agency do from April 2026 onwards?

The Fair Work Agency was established on 7 April 2026 under the Employment Rights Act. Its first year of operation is transitional.

From April 2026, the FWA already holds enforcement of the Employment Agencies Act 1973 and the Conduct Regulations 2003, Gangmasters licensing and modern slavery and labour abuse enforcement, and National Minimum Wage enforcement, run through the existing HMRC enforcement team until April 2027.

From 2027, it will add umbrella company regulation and holiday pay enforcement. Statutory sick pay enforcement will follow on a timeline still to be confirmed.

For agencies and end-clients, the practical effect is a single enforcement body with powers running across supply chain conduct, wage compliance, and agency regulation simultaneously. That concentration of enforcement changes the risk calculus. A single inspection can surface issues across several regimes at once.

How should clients and agencies prepare for 2027?

The five-step sequence below mirrors the preparation Scantec is completing across its own supplier base during 2026.

1. Step 1: Audit every umbrella on your supplier list against FCSA or Professional Passport standards. Remove any umbrella that cannot evidence current third-party audit and a clean payroll history.
2. Step 2: Map pay transparency end-to-end. Every worker should receive a Key Information Document before engagement and a payslip with no unexplained deductions. Pay transparency is the central harm the 2027 regulation targets.
3. Step 3: Check contract terms for opt-out language and payment-withholding clauses. Umbrella contracts that let the umbrella withhold worker pay because the end-client has not paid the agency will not survive the 2027 framework.
4. Step 4: Respond to the open consultation before 1 May 2026. End-clients with complex labour supply chains have a commercial interest in the final shape of the Conduct Regulations applied to umbrellas.
5. Step 5: Align your JSL and Employment Rights Act due diligence into a single supplier audit cycle. A separate tax audit and employment audit doubles workload. A combined audit captures both regimes on the same cadence.

What has not been confirmed yet?

Three provisions have been widely reported but are not yet in law and should not be assumed.

Mandatory HMRC reporting of umbrella arrangements by agencies. The consultation discusses reporting obligations but the final shape is pending.

Prohibition on specific contract types with umbrellas. Some commentary has framed this as "illegal to contract with non-compliant umbrellas". The legal position is that civil penalties apply to agencies and end-clients who breach the Regulations, not a blanket contract prohibition.

Mandatory umbrella licensing. Some stakeholders pushed for a licensing regime similar to the Gangmasters Licensing Authority. Government has so far rejected mandatory licensing in favour of Conduct Regulations extension.

Scantec tracks all three and will update this resource as government confirms final positions through the consultation response and secondary legislation.

How Scantec protects clients across both regimes

Scantec signed the FCSA Recruiter Accreditation in 2017 as the first UK employment business to do so. Every umbrella on the Scantec Approved Supplier List holds current FCSA or Professional Passport accreditation and is subject to annual third-party audit.

Scantec uses SafeRec, an independent payslip audit platform, to verify every single payslip issued by supplier umbrellas in real time. That means tax, National Insurance, and holiday pay are validated against HMRC rules on issue, not retrospectively.

Three capabilities sit under this combined approach. Dual JSL and Employment Rights Act due diligence cycles are run as a single supplier audit rather than two parallel workstreams. Every Scantec umbrella placement carries a documented audit trail retrievable on demand for HMRC or FWA enquiry. Client reporting includes supply chain risk indicators updated after each supplier audit.

The wider engineering contract market context driving demand for compliant placements sits in our analysis of key trends impacting the technical engineering recruitment market. Contact the compliance team via contract and temporary recruitment, our Payroll Models guide, or directly at legislation@scantec.co.uk.

Frequently Asked Questions

When do umbrella company regulations take effect?

Umbrella regulation under the Employment Rights Act takes effect in 2027. The separate Joint and Several Liability tax measure took effect on 6 April 2026. Both regimes apply to the same supply chains but address different risks.

Who will regulate umbrella companies from 2027?

The Fair Work Agency, which replaces the Employment Agency Standards Inspectorate and absorbs the Gangmasters and Labour Abuse Authority. The FWA was established on 7 April 2026 and takes on umbrella oversight from 2027.

Is there a statutory definition of an umbrella company?

The Employment Rights Act amends the Employment Agencies Act 1973 to include umbrella companies within the definition of "employment business". This is the first statutory definition and forms the gateway to regulation under the Conduct Regulations 2003.

What is the government consultation on umbrella regulation?

Government opened a consultation in late 2025 on how the Conduct of Employment Agencies and Employment Businesses Regulations 2003 should apply to umbrella companies. The consultation closes on 1 May 2026 and covers pay transparency, opt-out provisions, and enforcement of employment rights.

How does umbrella regulation interact with Joint and Several Liability?

JSL is a tax measure under Chapter 11 ITEPA 2003, live since 6 April 2026. Umbrella regulation is an employment law measure under the Employment Rights Act, live from 2027. The same umbrella arrangement can trigger liability under both regimes simultaneously, so supplier due diligence must cover tax and conduct risk together.

Will umbrella companies need a licence from 2027?

No. Government rejected mandatory licensing in favour of extending the Conduct of Employment Agencies and Employment Businesses Regulations 2003. Umbrellas will be regulated similarly to recruitment agencies rather than through a licensing framework like the Gangmasters Licensing Authority.

Speak to our compliance team

If you want to combine your JSL and Employment Rights Act due diligence into a single supplier audit cycle, Scantec's compliance team can review your supplier list, contracts, and payslip audit position against both 2026 and 2027 requirements. Email legislation@scantec.co.uk or visit our consultants page to start a confidential conversation.

Author

Peter Bates founded Scantec in 1990 and still leads the business today. Over 35 years, he has built a specialist engineering, manufacturing and scientific recruiter on four principles: delivery, integrity, transparency and compliance. His focus remains consistent, placing the right people, running a compliant operation and developing a team equipped to do the same.

Last reviewed: 20 April 2026 | Next review: 1 June 2026 (aligned to consultation close)