- Wednesday, 06 November 2013 08:45
- Written by Andy Vessey
What are the IR35 implications of being paid a retainer fee?
From time to time contractors may be offered retainer fees by clients who wish to utilise their expert services at the client’s behest.
Typically a retainer will involve a fixed, guaranteed payment made by a client which effectively puts the contractor on 'stand-by', to be called upon as and when the client requires them. The retainer may be paid for a set period of time but again enabling the client to access the contractor’s services when the need arises.
There are different types of retainer fees. For example, a client may agree to pay a fixed fee each month which purchases a certain amount of a freelancer's time. Depending on the nature of the agreement, any unused time will either be lost or carried forward to the next month. A retainer could be a single advance payment or a recurring payment (e.g. monthly). Whatever the arrangement, the client is paying for the right to access the services of the contractor.
The retainer system is particularly favoured in the legal profession where a client makes an advanced payment to the lawyer before the lawyer begins work on their case. This is akin to a down payment, from which the lawyer can draw funds for their fees and costs as the case progresses.
An IT contractor, having built a particular system for a client, may be offered a retainer to maintain that system because it is more cost effective than the client employing someone to undertake the task.
Whatever the basis of the retainer agreement it is most likely to give rise to mutuality of obligation (MOO). This is because the very nature of the arrangement attaches to it obligations, i.e. for the client to pay the freelancer an ongoing fee in return for the expectation by the client for the contractor to make themselves available, normally at short notice.
Basis of payment can, in some cases, be important in deciding employment status but on its own is not conclusive. What may however point towards a contract of service is what underlies the method of a retainer payment, i.e. does it enable the engager to exercise control over the worker? If, for instance, the retainer fee enables the client to dictate the time the services are to be provided then this may afford them a right of control over the freelancer. Where the contractor has some discretion over the provision of the services, i.e. the when, where, what and how, then this should be sufficient to demonstrate that the right of control swings in the freelancer's favour.
MOO is likely to be present in a good number of contracts nowadays as the emphasis is on MOO during the contract, as an absence of MOO post contract carries little weight. This therefore should not dissuade contractors from accepting an offer of a retainer fee. Should such an arrangement afford the client the right to exercise control over the freelancer however, then unless there are other employment status factors that clearly place the arrangement outside of IR35, the contractor should attempt to re-negotiate terms that are more favourable to themselves. Easier said than done though sometimes.