Wikipedia defines an umbrella company as
a company that acts as employer to independent contractors who work under temporary contract, usually through a specialist employment agency
So an umbrella company provides a third party payroll solution for contractors who come under the "employ" of the umbrella company and get paid through them for contract work they carry out for their employment agency or clients.
Independent contractors have two routes to take when it comes to payment structure for the contract work it carries out for its employment agency or client:
- They can set up a limited company, get paid through their own limited contracting company and do all the administrative work of running their own limited company; or
- They can use an umbrella company service provider take care of their payroll and leave all the administrative work such as expense accounting, income tax payment, and insurance contributions to the umbrella company service provider to manage on their behalf.
The latter payment structure is a new innovation.
Thus, an umbrella company service provider takes care of the contractors' payroll as if the contractor worked for the umbrella company and would receive certain employment benefits that are almost similar to regular employees. However, the difference being that a normal employee would not be able to claim on expenses incurred during the duration of the their employment where as a contractor employed under an umbrella company may be able to make claims on certain expenses that it has incurred in the course of carrying out its contract work.
What are the requirements of setting up an umbrella company in PNG?
In PNG there are no strict guidelines on the organizational structure and the setting up of an umbrella company. The point to remember though is that an umbrella company is an institution set up to act as an employer for independent contractors who carry out a work for their agency or client that is only temporary. For an umbrella company to be able to fulfill its role to its contract employees there must be efficient and experienced finance, payroll and human resources teams in place as you would find with a regular large employer.
Some of the Acts or Institutions that regulate the setting up and operation of an umbrella company include:
- The Companies Act 1997 - This takes care of the legalizing of the umbrella company whether it is PNG incorporated or an overseas umbrella company extending its service into PNG.
- The Investment Promotion Act - for Foreign Certification of the overseas umbrella company service provider that is extending its service into PNG.
- The IRC. All companies carrying on business in PNG are subject to Income Tax laws regulated by the Internal Revenue Commission. So an umbrella company service provider must apply for a Certificate of Compliance (COC), get a VAT number, as well get a Group Employer number
- Work permits for foreign contractors as well as other labor related issues dealing with contractor employment and grievances will apply. Labor and Employment Department will cater for this.
- Immigration Laws will also apply if contractor is a non-citizen.
Some of the key benefits for a contractor using an umbrella company include:
- Contractors avoiding time and trouble of operating a limited company, especially where the contract may be only temporary. After a simple set up, the contractor completes timesheets and forwards to the umbrella company to process.
- Contractors being reassured that money is lodged into their bank account and documents are sent to them explaining how the payment is worked out. No need to be involved with running a spreadsheet, VAT returns, payroll matters, company accounts, taxation, etc.
Some examples of umbrella companies in PNG include: