Over the years, contractors have been plagued by poorly written contracts that bear little or no relation to the actual work they are doing.
Unfortunately one of the sad facts of contracting is that you’re forced to use whatever contract the agency gives you. If you’re lucky you can get it amended, but if not you are thrust into a position or risk. In this article we cover the most common problematic clauses to look out for.
1. Bad Substitution Clause
The all-important ‘right of substitution’ is the first thing any IR35 expert (or HMRC inspector) will look for in an agreement. The majority of agency contracts will now include such a clause, but unfortunately they are often very badly constructed.
The thorny subject of substitution has confused contractors for years. HMRC say the right should be ‘unfettered’, but what does that actually mean?
The pivotal issue is the end user or agency’s right to refuse a substitute. Clearly nobody would expect a contractor to be able to send any Tom, Dick or Harry to do the work. They would need to be suitable and the end user must be satisfied of that.
However, they should not have carte blanche to say no to any proposed replacement and there is a very thin line between what is acceptable and what will cause a problem.
An acceptable substitution clause will look something like:
‘If the Contractor is unable to perform the services using its initial representative, it will send a suitable replacement. The client may reject such a replacement on grounds related to skills, qualifications or experience’.
A clause worded in this way is good for IR35 and should satisfy the agency and end user. Conversely, a poor clause is:
‘If the Contractor is unable to perform the services it may send a replacement. The client may reject such a replacement in its sole discretion’.
So there’s not that much difference and it’s all in the wording. Sometimes agencies and end users want to include things like handover periods, which aren’t necessarily a problem, but you do have to be extremely careful.
A 100% genuine right of substitution would also state that your company remains responsible for paying any replacement. This is something HMRC consider quite important and, whilst it can be implied, it is better to state it explicitly.
2. Individual Being Party to the Agreement
The whole point of IR35 is to show that it’s a business to business agreement. Therefore it’s always surprising when an agency produces a contract that includes the individual contractor – as well as his company and the agency – as one of the parties. Sadly it happens quite often.
It appears that many agencies simply don’t understand that a contractor using a limited company is a business and not an individual person. The end user is engaging the skills of the limited company and it’s vital that this is understood through the contractual chain.
We commonly see contracts that are between the correct two parties, but require a third signature from the individual. As well as it being negative in itself, it will obviously have a knock on effect for the right of substitution.
So always check that a) the contract is between the agency (or end user if direct) and your company only and b) that it just is signed by those two parties.
Signing things like confidentiality and intellectual property agreements personally is the exception to this rule, but you should always get them checked.
3. Bad Control Clause
Control is another key IR35 issue and one that rears its head in contracts frequently.
As an independent supplier you should clearly not be ‘controlled’ by the client as if you were one if its permanent employees. Control can be split into four main categories: how, when, where and what. These can all be featured in the contract.
Perhaps the most common example of a clause causing control issues is something along the lines of:
‘The Contractor shall abide by the same rules and regulations that are applicable to the Client’s own staff’.
This is very bad for obvious reasons. Whilst it would be preferable not to have any reference to rules and regulations, this clause could be tempered somewhat by changing it to:
‘The Contractor shall observe any reasonable rules and regulations relating to security and health and safety insofar as they are applicable to independent suppliers’.
Also look out for the ‘where’ and ‘when’ aspects. These are more likely to be in the schedule (which we’ll cover in more depth later), under headings like ‘Location’ and ‘Hours’.
Ideally the location at which the services are provided should be mutually agreed. In reality, the likelihood is that you’ll be working on the end user’s systems and therefore based at their site. This is simply by virtue of the nature of the work, so it’s better if it doesn’t appear that the client is dictating it to you. Changing the heading from ‘Location’ to ‘Agreed Location’ is helpful.
Of course, actually working from your own offices is very positive and if it is possible you should ensure the contract refers to it.
It’s a similar scenario with the hours of work: it’s probably easier to provide the services during the end user’s opening hours. Again, try to ensure it appears like this is by agreement. You certainly shouldn’t see things like ‘9:00 to 5:30 with 1 hour for lunch’.
With the 'what' element, just ensure you are engaged to do a specific project and are not moved from job to job.
4. Appraisals
Something that regularly appears in contracts is reference to the contractor having an appraisal or performance review. In practice this may not actually be negative, but the wording distorts it into an indicator of disguised employment.
In a long project you would expect regular progress meetings or similar, but it’s vital you sway away from employment-like wording; ‘appraisal’ and ‘performance review’ are just that.
If it looked like you were given regular appraisals by the end user, HMRC would jump on that pretty quickly.
5. Sneaky Schedules
It’s not uncommon to find yourself with a perfect set of terms and conditions that are ruined by the one page schedule that accompanies them.
The schedule is designed to set out the key points specific to the contract you’re working on. It will give the end user’s details, project dates, nature of services and all other important information.
However, it also serves as a space for the agency and end user to add all sorts information that could cause serious issues from an IR35 perspective. The one page schedule may not seem important, but more often than not something will have been slipped in that should be changed.
You’ll commonly find references to things like ‘line managers’ (very bad) and occasionally agencies will even include extra clauses that are specific to the end client you’re working for.
Always scrutinise your schedule, as it may be hiding many IR35 demons.
“If you’re lucky you can get it amended”.
Maybe in the past, but agencies are a it better now so it’s more a case of “If you’re unlucky you can’t get it amended”.
And if you still don’t like it, you can always walk away.
In the early days of IR35 HMRC actively councilled and in some cases bullied companies and agencies into creating contracts and conditions designed to make it as likely as possible that contractors would get caught.
Agencies who don’t get their contracts written by a solicitor are happy to amend contracts if you get your own solicitor involved.
Many times the agency’s legal person has no legal qualifications that are recognised outside the recruitment industry so when faced with a solicitor they back down.