The New Liability Burden: What the Employment Rights Act Really Means for Your Agency

Most recruitment directors I've spoken with this month are still operating under outdated assumptions. The Employment Rights Act has landed with all the subtlety of a brick through a recruiter's window, and I'm watching agencies scramble in real-time.

Most recruitment directors I've spoken with in the last month are still operating under dangerously outdated assumptions. When the Act passed last year, they skimmed the highlights and filed it mentally under "Someone else's problem" - usually their legal team's.

It's not someone else's problem. And this is no ordinary compliance tweak.

The liability shift nobody's talking about

This legislation moved where legal responsibility sits in the recruitment chain.

For decades, agencies operated in a comfortable grey area. When things went wrong with agency workers in the form of unpaid holiday, dodgy deductions and, minimum wage violations, the finger usually pointed at the end client or the umbrella company. The agency could shrug and say "we just made the introduction."

Not anymore.

That changed on 6 April 2026. Under Chapter 11 ITEPA 2003, recruitment agencies are now jointly and severally liable for unpaid PAYE and National Insurance if an umbrella company fails to meet its obligations. HMRC can pursue your agency for the full amount. There's no reasonable care defence: thorough due diligence reduces your risk but won't provide immunity once liability crystallises.

I visited three mid-sized agencies last week. Not one had updated their contracts to reflect this seismic shift.

The umbrella reckoning

This matters because the umbrella sector is... The umbrella sector has had serious compliance problems for years. The good operators have been begging for regulation for years. The bad ones have been making hay while their temporary workforce suffered.

If you're placing contractors through umbrellas, you can no longer wash your hands of how they're treated. The Act gives workers direct legal recourse against both the umbrella AND your agency.

I've worked with dozens of agencies who had absolutely no idea what was happening in their umbrella supply chains. Some were sending workers to umbrellas paying below minimum wage after deductions. Some had umbrellas skimming holiday pay. Some had umbrellas running questionable tax schemes.

All of these practices now create direct liability for your agency.

Contract overhauls needed immediately

I'm not a lawyer. But I've reviewed enough agency agreements to know that most are woefully unprepared for this new reality. Your standard terms probably contain:

1. Weak indemnities from umbrella companies
2. No audit rights over umbrella payroll practices
3. No mechanism for verifying worker treatment
4. Insufficient dispute resolution procedures

These gaps are no longer academic concerns - they're financial liabilities sitting on your balance sheet.

One agency director in Manchester told me last week: "We're having to rewrite every contract with our 23 preferred umbrella providers. It's a nightmare, but the alternative is worse."

Payroll compliance: The new battleground

The most immediate impact will be on your compliance procedures. Under the new Act, "I didn't know" isn't a defence. You're expected to have verified that workers are receiving their legal entitlements.

This means:

• Regular audits of umbrella payslips
• Clear reporting channels for workers to raise concerns
• Documented processes for investigating complaints
• Exit strategies for non-compliant umbrella relationships

I spent yesterday with an agency that's implementing quarterly compliance reviews of their entire umbrella network. It's resource-intensive but necessary.

The risk calculus has changed

Some agencies are drastically reducing their umbrella provider lists. Others are bringing payroll in-house despite the administrative burden. The calculations around risk and reward have fundamentally shifted.

Why? Because the Employment Rights Act introduces damages that can exceed just making workers whole. Agencies found jointly liable can face compensation orders that include punitive elements.

One agency owner in Leeds put it bluntly: "We're dropping from sixteen umbrella partners to four. It's not worth the risk anymore."

What must change now

If you're still reading and haven't called an emergency board meeting, here's your actionable checklist:

1. Audit your current umbrella supply chain - Commission a thorough review of every umbrella company you use. Request sample payslips, holiday pay calculations, and pension contributions. Cross-reference against statutory minimums.

2. Rewrite your contracts - Your agency needs stronger indemnities, clawbacks, and warranties from umbrella providers. You need the contractual right to terminate immediately if workers' rights are violated.

3. Create a compliance framework - Document how you'll verify ongoing compliance. Random payslip checks? Worker surveys? Whistleblower channels? Whatever you choose, it needs to be robust and provable.

4. Train your consultants - Your front-line staff need to understand the new liability landscape. They should be able to explain to candidates how their rights are protected.

5. Consider your insurance - Professional indemnity policies may need reviewing. Some won't cover liabilities under the new Act without specific riders.

I know one agency that's created a dedicated compliance role just to manage umbrella relationships under the new legislation. That might be excessive for smaller firms, but the principle is sound - this requires active management.

Who's actually prepared?

Remarkably few agencies, in my experience. The big internationals with in-house legal teams are ahead of the curve. The mid-market is patchy. Small agencies are largely unprepared.

When I asked attendees at a recruitment leaders' roundtable last month if they'd updated their umbrella contracts in response to the Act, just 3 out of 17 had. That's a problem.

And in case you're wondering if this is just legal scaremongering - it's not. The government has allocated additional funding to employment tribunals specifically to handle the anticipated increase in claims under the new Act.

Staff at Gov.uk have published extensive guidance on agency worker protections. They're serious about enforcement.

The opportunity hidden in compliance

There's an upside to all this regulatory upheaval. Agencies that get this right can turn compliance into a competitive advantage.

Candidates increasingly care about ethical treatment. A transparent, compliant supply chain is becoming a genuine selling point. Several forward-thinking agencies are already marketing themselves as "Employment Rights Act Compliant" to both clients and candidates.

If you're looking to revamp your approach to contractor payroll and compliance, the team at The OHub has built tools specifically for recruitment agencies navigating the new legislation.

This isn't just about avoiding tribunals - it's about building a sustainable, ethical business model that will outlast the competition.

But first things first: get your house in order. Because the clock is ticking, and the new liability landscape waits for no one.