Recruiters must clamp down on tax abuse and exploitation of workers via umbrella companies, the industry’s lobby group has told its members, amid growing pressure for regulation of temporary labour. So-called umbrella companies, used by recruiters and employers to pay temporary workers, have attracted growing scrutiny from MPs and unions following reports of abuses across the industry and investigations by the Guardian and the BBC that raised concerns about agencies supplying the NHS test-and-trace scheme. The Recruitment and Employment Confederation (REC) said on Thursday that HM Revenue and Customs should set up a new hotline to report wrongdoing by umbrella companies, and wrote to its members urging them to check that the companies they use are compliant with the law. Umbrella companies are used to pay workers at arm’s length from the recruiters or companies that hire them. They are the named employer on payslips, meaning hirers do not run the risk of a big tax bill for workers found to be employed directly by them. An estimated 600,000 people are on umbrella company payrolls, ranging from cleaners and warehouse workers at or near minimum wage to nurses, teachers, GPs and highly paid contractors. The use of umbrellas is legal, but unscrupulous providers have been found to skim money from workers through dubious means like hidden fees or holding back holiday pay. The Guardian has reported fears of widespread tax fraud using related mini-umbrella companies in the government’s pandemic test-and-trace system. Abuses by umbrella companies are thought to be costing workers and the exchequer as much as £4.5bn every year. “There are many compliant umbrella companies out there – but clearly there are some which act unethically and exploit loopholes in the law,” said Neil Carberry, the REC’s chief executive. “These bad-faith companies have been allowed to thrive alongside legitimate businesses for too long.” The issue has caught the attention of MPs, unions and campaigners. On Monday, former Conservative ministers Sir Iain Duncan Smith and David Davis were among those who put forward an amendment to a bill in parliament that would have regulated umbrellas. The amendment had been expected to attract cross-party support from the Labour and Scottish National parties, but it was not selected for a vote. The amendment’s failure means regulation must come directly from the government, according to Rebecca Seeley Harris, chair of the Employment Status Forum, and James Poyser, chief executive of contractor software company inniAccounts, both of whom are campaigning for reform. Seeley Harris earlier this month wrote to Jesse Norman, the financial secretary to the Treasury, detailing the need for urgent action. Regulation would give “greater protection to the some 600,000 people who are being exposed to employment rights abuses and lost income through unethical, but not yet illegal payslip skims and scams”, they said. The call to action was backed by Labour’s Ruth Cadbury, the SNP’s Owen Thompson, and Matthew Taylor, the influential chief executive of the Royal Society for the Encouragement of Arts, Manufactures and Commerce who examined the labour market for Theresa May’s government. The Trades Union Congress has argued that there is no reasonable justification for umbrella companies to be used. It believes workers should either be employed directly or treated as independent contractors.