Legal issues and negotiating contracts

Regardless of whether you use an agency or not, you will require some knowledge of contract law and the ability to negotiate a suitable agreement. IR35 should be at the forefront of your mind throughout this process if you are to keep as much as possible of your pay packet out of the clutches of the taxman.

Negotiating a contract - the basics

On the most basic level, any agreement reached with a client must make clear that you are a contractor and not an employee. This distinction should be clear in both the contract and your modus operandi.

Primarily, your contract should define exactly what you are agreeing to do for the client. In contrast to an employee, whose work may not be defined at all in the contract, you must make sure that the document clearly lays out the service or services that you are to provide.

Unless the contract is particularly short, it is likely that you will want to be paid at intervals during the course of the project. This is another key distinction between employees and contractors; while employees are generally paid monthly, you should be paid on completion of specific ‘milestones’, which should be defined in the contract. This is particularly important for IR35 purposes; in the event of an investigation by HMRC, your payment arrangements will be closely scrutinised.

Although the client will probably have a clear idea of the ‘deliverables’ that they require, an important aspect of contracting is that it is up to you to decide how and where the work is done. Your contract can stipulate that you have the freedom to complete the work in a manner and location of your choice; your working patterns cannot be defined by the client. Again, this is vital in terms of IR35 compliance.

The right of the contractor to determine their own working patterns is an intrinsic part of the distinction between employee and contractor. In legal terms, employees sign a ‘contract of service’, while contractors sign a ‘contract for services’. In a contract for services, the contractor agrees to provide services to the client in accordance with a previously arranged schedule. The contractor is expected to complete the agreed project to the standard stipulated in the contract, and assumes liability for any errors or omissions – hence the importance of insurance.

‘Mutuality of obligation’ is another area to which you should devote significant attention. In an employment contract, the employer is obliged to provide work and the employee is obliged to accept it. In a contract for services, however, there is no such obligation; once the project outlined in the contract has been completed, the client does not have to offer you any more work. If the client does choose to give you more work, you do not have to take it. This must be clearly stipulated in the contract, in order to clarify your position and ensure that the arrangement is IR35 compliant.

Above all, you should avoid any ‘standard’ contracts that might be offered to you. These will almost never pass IR35, and can leave you exposed to unfair clauses and stipulations. Similarly, if there is anything in a contract that you do not understand or are not comfortable with, you should refuse to sign. It is far better to have the offending clauses renegotiated or removed – or, in extremis, to simply refuse the job – than to end up fighting it out in court at a later date.

Agency contracts

Contractors need to consider certain other factors when negotiating contracts with agencies. Primary amongst these is the ‘restrictive covenant.’ These clauses attempt to prevent you taking on any further work direct from the client, thereby cutting out the agency. Agencies will generally insist on leaving these clauses in.

However, some less scrupulous agencies will attempt to include unnecessarily wide-ranging restrictive covenants that place unfair restrictions on the work that you can take on. Generally, a restrictive covenant should apply only to the specific company with which you are doing business – not to any parent or subsidiary companies.

Contract renewals

As explained above, you are never obliged to accept an extension or renewal of your contract. Many agencies will attempt to pressure you into accepting an extension, simply because it is easy commission. You should remember that you are under no obligation to take it. However, if such an offer is made, you are well within your rights to accept it.

If you know in advance that a renewal will be offered, and that you wish to take it, you should start negotiating as early as possible. If your contract is between you and the client, this should not be difficult; unless the client is experiencing financial difficulties (or simply chancing their arm), more often than not you will be able to renew the contract on the same terms – if that is what you want.

However, if you are contracting through an agency you may well find yourself pressured into accepting less attractive terms. The agency may want to increase their margin, or they may want to reduce the rate they are charging the client in order to ensure that they retain the contract. Sadly, there is little you can do in these circumstances save standing your ground. However, by renegotiating early you stand the best possible chance of renewing the contract on mutually acceptable terms.

Contract terminations

Your contract should clearly set out the way in which termination will be governed. As a result of the lack of mutuality of obligation, you do not have to accept any extension of your contract unless you want to. There are, however, occasional exceptions to this; some agents will insist on clauses that will oblige you to renew your contract in the event that a project overruns. These clauses should be avoided wherever possible and, if you have to accept them, you should make sure that you have the right to renegotiate your pay at regular intervals.

Many clients and agents will pressure you into renewing a contract when you have no contractual obligation to do so. Agents are particularly pushy about this; les scrupulous agents may try to persuade you that you are obliged to renew, or that you will find it difficult to get work in the future if you leave your position. You should stick to your guns in these circumstances; the law is on your side.

It is also important to remember that either party can terminate the agreement immediately if a breach of contract has occurred. This might involve a client’s failure to pay, or their failure to provide a safe working environment.

True and clear breach of contract occurs relatively infrequently. You should always seek legal advice before beginning a termination on the grounds of breach of contract, in order to avoid unpleasant repercussions.

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