The current threat of IR35 in the public sector, combined with the prospect of private sector reform further down the line has understandably put contractors on high alert.
Without the power to set their own IR35 status in the public sector, many independent workers have taken it upon themselves to have their contract reviewed by an IR35 expert, in the event that a client wrongly decides they should be caught by the rules.
As crucial as an IR35 contract review is, commercial contracts usually cover a number of other key areas too, and this varying list of other contractual obligations are often just as financially significant as IR35.
Notwithstanding this, our research tells us the majority of contractors do not have each contract commercially reviewed, which is why you might find it useful to have a better understanding of what your next contract should include.
It’s important to make sure your contract contains clear payment terms, to include a detailed breakdown of the fees, the payment procedure and when fees can be withheld and or delayed.
Most agencies or clients have their own individual payment terms, which may include requirements such as authorised time-sheets and valid VAT invoices being submitted by a certain time or date. Make sure you’re up to speed with all of this to avoid any delays in payment. For example, your client and agency’s own payment terms could mean that – due to your start date – your first invoice won’t be paid for almost two months.
In the event you fail to comply with the payment terms, there’s also the chance that your client or agency could withhold payment. So, needless to say, it’s vital you familiarise yourself with each and every payment term in your contract.
When it comes to late payments, it’s worth bearing in mind that you can legally charge a client or agency interest, which is 8% plus the Bank of England base rate for business to business transactions. This is all explained on the Government website, here. However, if the contract states a different rate of interest, this 8% isn’t a given.
Firstly, your contract should contain a ‘term’ which, in other words, is a start and end date. This also matters for IR35 purposes, reflecting that you are providing a temporary service to your client, and one that resembles self-employment, not employment.
Your contract should also include information around termination for a number of reasons. The working relationship you have with the agency or client might not be a healthy one, you might receive another offer elsewhere, or you might want to stop working on a particular project or through an agency because of late payment.
It’s therefore vital you have an idea of how to legally terminate a contract with a particular client or agency, along with the repercussions of doing so.
Our research does suggest contractors are on top of this, with the vast majority (86%) of contractors already working with termination clauses in place, compared to just 7% who don’t, and another 7% who aren’t sure.
Without wanting to dive too much into legal terminology, ‘restrictive covenants’ can appear in commercial contracts to protect the agency and or client post-termination.
In simple terms, these clauses are included in contracts to protect the agency’s and or the client’s own business interests, and to stop you (amongst other things) from working directly for the client or with a client’s competitor for a set amount of time once the contract has finished.
Although the rationale behind restrictive covenants is perfectly legal, these must be reasonable and not enforce a ‘restraint on trade’ – an idea which derives from case law and which gives everyone the right to trade freely.
Nearly half of contractors have clauses containing rules around working directly for clients once the agency arrangement has been completed, while 34% do not, and 18% are unsure.
Keep an eye out for ‘indemnities’ in your commercial contract. In essence, an indemnity is a contractual obligation of one party to compensate the other party for a loss. For example, let’s imagine you make a mistake, or you are alleged to have made a mistake, which leads to the agency and or client losing out financially – in many cases, your contract will hold you liable.
A contract handed to you by your client or agency will usually include an indemnity clause, which is important to pay close attention to. After all, damages can lead into their millions.
In some circumstances, clients or agencies will not engage a contractor unless they have indemnity insurance in place, which is there to cover any legal fees or resulting fines or compensation. It’s likely you’ll notice a clause in your contract that sets out the specific insurance policies required.
It’s also a wise move to make sure you are not in breach of a contract, should you be unable to fulfil your contractual obligations through no fault of your own.
If you fall ill or have an accident, needless to say, you do not want to be in breach of the terms of the contract by not carrying out the work. Your contract should outline the length of delay allowed before possible termination. Failing this, you might want to consider including the right to provide a substitute, which is also an indicator that your working arrangement should belong outside IR35.
Regardless of the terms of your contract, it’s crucial that you’re comfortable with the specifics. When you have an offer on the table and you’re eager to get started, it can be tempting to agree to the T&Cs without ever really understanding the legal and financial implications.
With a firm grip of exactly what to look out for, and possible clauses to include, you can start your new contract from a position of strength.
Qdos Contractor provide a Commercial Contract Check service which will provide you with a report indicating the key commercial clauses you need to be aware of as part of your contractual agreement, explained in plain English what they mean, and how they may impact your business, to ensure you are fully equipped to understand your contractual risk.