Understanding the laws surrounding contracts is vital for contractors. Many agencies and clients adopt the ‘one size fits all’ approach to contracts and will offer you the same default contract that they offer all of their other contractors. These can vary across all agencies and clients in terms of quality and dangers to look out for, so seek professional advice.
Here, Dave Chaplin, CEO founder of ContractorCalculator, discusses what businesses should bear in mind when employing self employed staff.
What is a contract?
A contract is a legally-binding engagement between your limited company and the agency or the end-user client if contracting direct.
Under UK law, there are three essential elements to all contracts, and these normally form part of a written contract:
- Agreement: An agreement between the parties to the contract – usually the contractor and agency, or the contractor and client
- Charge/fee: A consideration – a legal term which means a confirmation of what the agency or client will pay the contractor
- Intent: An intention to form legal relations by all parties, whereby it is clear from correspondence that the contractor and the agency or client were planning to agree on a contract.
If one of these key elements of contract law is missing, and the dispute ended in court, a judge would rule that there was no contract between a contractor and the client or agency.
Unsigned contracts – worth the risk?
Although mutual intent will generally be indicated where both parties sign the contract, most contracts do not need to be in writing to be enforceable. Anybody who tries to claim that a contract isn’t enforceable simply because it isn’t signed doesn’t know the law.
Where a contract is unsigned – which isn’t all too unusual – but the parties have acted in a way consistent with the provisions of the document, the courts may treat those actions as evidencing the formation of a contract.
Written agreement always wins
This reinforces another benefit of having a signed contract in place, as it will solidify the arrangement and state that the written agreement overrides any prior agreements. A contract for services contract will typically contain a statement along the following lines:
This Agreement contains the whole agreement between the Parties in respect of the provision of the specified services and supersedes and replaces any prior written or oral agreements, representations or understandings between them relating to such subject matter.
Contract law in practice – look for patterns
Naturally, being subject to the principles of common law, volumes of contract law and case law have been created. However, specific areas tend to come up again and again in contracting. A contract is an agreement to do something in exchange for a consideration, usually a payment. When you accept an offer, you agree to a contract.
If you receive an offer, and make a counteroffer, the other party may accept and a binding contract is the result. Usually the acceptance of an offer is indicated by the signature of a contract, which is described as a fully-executed, or ‘live’, contract when both parties sign. Both parties must enter into the contract freely before it is binding.
This is important for contractors, because what you agree to do has to be carefully described in the contract. You should not agree to perform vague or general work, you must agree to provide specific services for a specific fee, which is the consideration. Having a contract relating to a specific project is essential if a contract is to remain outside of IR35. The last thing you want to do is agree to an unknown project where the client decides what you will be working on once you have turned up onsite.
Approach contract variations with caution
Once the contract has been executed, if you are asked to do more things than are listed in the contract, you have a legal right to refuse. Of course you could re-negotiate the contract or even have an additional contract specifying a separate consideration for the additional work. Similarly, if you wish to vary a contract already in existence, this will generally constitute a contract in itself, and so will require the same list of essential ingredients.
If you come across anything in a contract that you don’t understand, or find odd, examine it. Get it checked by a legal expert if need be, and make sure it isn’t detrimental to you. Never allow yourself to be told that it’s ‘normal,’ or ‘standard;’ If you don’t like it, have it taken out or renegotiate it.
If the contract is revoked
Beware, there is always a possibility that the agency or client might revoke the contract offer before you’ve had a chance to accept it. Revocation of an offer doesn’t have to be in any particular form, as long as the communication is clear in its meaning and reaches the contractor before they have communicated their response to the initial offer. Signing contracts long before their start date poses similar risks for contractors, as it effectively ties your hands for a prolonged period during which the agency or client can terminate without notice.
Getting the contract right
Many contractors, particularly if it is their first, wait until they have signed a contract before they start addressing IR35, significantly increasing their chances of being caught by IR35.
If you sign the contract without considering its IR35 status you will eliminate any opportunity to negotiate the contract and get changes made to help you for IR35 compliance. And there are no excuses, because you can check the contract yourself to determine your IR35 status using online tools – it takes about 15 minutes and is free. Then if your contract does not pass you can consider hiring professional legal help to get the changes made to operate on an outside IR35 basis. All this needs completing before you sign the contract or agree to it verbally.
If the contract is not genuine (ie you are working as an employee, whatever the contract might say); has been copied and presented as a ‘standard contract’; or is a ‘do it yourself IR35 contract’, HMRC will identify it, and disregard it as not being ‘a live contract’. For example, in one case a judge ruled that the substitution clause was ‘window dressing’. So beware and take care!
Don’t sign until a specialist says so!
Although HMRC will consider the notional contract, that is the real relationship between the contractor and the client, it also makes sense for contractors to get their written contracts analysed by an IR35 specialist lawyer before they sign it. A poorly worded contract will immediately attract HMRC’s attention and could result in an unnecessary prolonged investigation. To note, avoid buying ‘IR35 proof’ contracts to present to agencies, as they are unlikely to accept a new contract replacing theirs.
Most agencies and clients use their own forms of standard contracts, so it is difficult to do more than tinker around the edges and to change the contract schedule. But that should not prevent you from seeking a professional legal opinion and making the attempt to negotiate out any particularly ‘unfriendly’ clauses.
In the event of an investigation by HMRC – and later on a judge if it goes to court – your case for being outside IR35 will be strengthened if it can be seen that both you and the client have made a special effort to come to a specific agreement for this particular project. You may create a different one for a different project, or you may use a similar one, but the contract should reflect the specific intentions of you both.
Negotiating with the client or agency
Negotiating with the agency, or client if direct, is the only way to remove risky IR35 clauses from the contract. Most agencies who place high end contractors are used to this process, and so it shouldn’t be too much of a laborious procedure. There are certain factors that will influence your negotiation position, including:
- Market conditions
- Whether the contract is new or a renewal
- Whether you have already signed the contract
- Whether it is a private or public sector placement.
Lessons to be learned from past tribunal cases
In the light of the High Court’s ruling in 2008 on Dragonfly Consulting Ltd, if you have a series of contracts with a client renewed over time, but that were not correct from the start, HMRC (and subsequently a judge) can take this to mean later contracts were purely cosmetic or ‘window dressing’, as the judge in that case called it. So it is vitally important to get the contract correct, right from the start.
It is also important to ensure contracts remain valid throughout the course of each contract, particularly if you are working on a project or series of projects that last many years. In the 2011 JLJ Services ruling, the contractor was found to be outside of IR35 for the first three years of his contract as he worked on a series of discrete projects. The tribunal judge then found him to be inside IR35 after the first three years because he did not update the contract – it was kept rolling over without reflecting what the contractor was actually doing.
It’s equally vital that you ensure your working practices are consistent with the contract itself, otherwise the paperwork could be deemed worthless.
Contracting mindset tips
Deliver what you promise or expect to pay the price
Employees have employment contracts and multi-level disciplinary procedures before they get fired. Contractors have a legally binding contract for services, so if they don’t deliver, the client or agency can withhold payment and sue for damages.
Would you pay someone if they walked out leaving the job unfinished?
You’ve hired a designer to make over your bedroom for a fixed price. Halfway through the job, she walks out. Do you pay her pro rata, or less because you need to find someone else to finish the work?
Let’s say you have a house sitter, being paid a day rate for looking after your home and feeding the pets while you are on a two-week holiday. He only turns- up for the first week. Should you pay just for the first week, or sue him because the goldfish died?
The gardener hurts her back and takes a month off, but sends her brother to mow your lawn instead. It’s never looked so tidy. Do you care who does the work as long as the weeding gets done? And will you still be happy to pay?
Employment contracts are not binding business-to-business agreements
If you resigned from your employment half-way through completing a project for one of your employer’s clients, it’s your employer’s problem to find a replacement to finish the job, not yours.
Say you didn’t get round to finishing a project for one of your employer’s customers and it cost the customer money. The customer wouldn’t sue you for damages; it would sue your employer.
When you’re employed, your employment contract is an agreement between you personally and your employer. So, for example, you can’t decide you fancy a couple of months off and instead send someone else in to do the work in your place.
Contracts are binding agreements entered into willingly
As a contractor, things are different. If you have willingly entered into a fixed contract, whereby you must provide your client with specific deliverables, and you then fail to deliver, then you are in breach of contract. As such, your client can withhold payment for you failing to complete the entire project, and could even sue you.
Contractors on a day rate who unilaterally end the contract early should be paid for work already satisfactorily completed. However, the client could sue the contractor’s limited company for the cost of hiring another contractor to complete the job.
Assuming your contract allows it, if you find for whatever reason that you can’t complete the contract yourself, then you can send a substitute in your place. That’s because the contract with the client is one of service with your company, and not one of employment with you.
Contractors enter into binding legal agreements when they take on a contract: failure to deliver will have financial consequences.