Contractor Doctor: Can my agency withhold pay if I left the contract without notice?

Dear Contractor Doctor,

I am an IT contractor and earlier in the year I was awarded a six-month contract with a London-based client via an agency. However, due to personal circumstances, I was unable to complete the full contract and had to leave without giving notice.

Although I had my last timesheet signed and submitted correctly, the agency is now telling me that not only won’t I be paid for my last week working on the contract, but they may actually sue me for breach of contract.

Can my agency withhold pay if I left the contract without notice?

Thanks

Gary

Contractor Doctor says:

According to Roger Sinclair from contractor legal specialist Egos, if the contractor was opted in to the Conduct Regulations, the agency cannot legitimately withhold payment for work that the contractor has done, irrespective of whether or not the client pays the agency. So the simple answer to Gary’s question is that the agency cannot withhold pay for time worked, even if the contractor leaves the contract early.

However, the Conduct Regulations would not prevent the agency from mounting a separate legal action to claim damages from the contractor for failing to complete the entire contract. Sinclair explains: “The contractor’s claim for payment and the agency’s claim for damages are both subject to the law of contract.”

The Law of Contract

“A contract creates mutual obligations, setting in stone that which parties to the contract choose to agree,” continues Sinclair. “A contract creates expectations, and the expectation is that each party can put reliance on the commitment of the other party, and that the parties will fulfil their respective commitments.

“If one party fails to meet an obligation, the other party may suffer a loss as a result. Provided that loss is a reasonably foreseeable consequence of the breach, the innocent party can claim damages in respect of that loss.”

Sinclair further explains that by failing to meet an obligation set down in a contract, the party not fulfilling their end of the bargain is in breach. In this case, the contractor Gary is in breach, and the other party who has been let down – the agency – could sue for damages. In law, this is a separate matter from the agency failing to pay the contractor the final week’s fees.

Breach of contract can lead to damages

“The basis for assessing damages for breach of contract is to put the innocent party into the position they would have been in if the contract had not been breached,” says Sinclair. “Damages are expressed in financial terms; so, if it cost the innocent party – the agency – more to complete the contract, there is a case for the additional costs to be claimed from the party in breach. Similarly, if the innocent party lost money as a result of the failure to complete the contract, there is a case for that loss to be claimed from the party in breach.”

In this case it appears the contractor failed to perform the final part of the contract and was in breach of contract. The measure of loss to the agency in this case would probably be the agency’s margin on the work Gary should have completed – or, if it engaged someone else but at higher cost to complete it, the additional cost of hiring that replacement.

Overriding legislation – the Conduct Regulations

“Contract law can be overridden by other legislation and the Conduct Regulations are one example of legislation that overrides contract law,” explains Sinclair. “Unless the contractor had expressly chosen to opt out of the regulations before being introduced to the end-user client by the agency, then the contractor is within scope of the Conduct Regulations for any assignment with that client, regardless of subsequent statements to the contrary.”

The Conduct of Employment Agencies and Employment Businesses Regulations 2003 were introduced by the last government, and sets out to provide workers and hirers with minimum standards they could expect from private-sector recruitment agencies and employment businesses.

“If the contractor is covered by the regulations and has performed the work, the agency cannot legitimately withhold payment for work done, and the contractor should remind the agency of its obligations under the regulations,” continues Sinclair. “Should the agency fail to pay, the contractor may have recourse to the Department of Business, Innovation and Skills (BIS) for the agency’s breach of the regulations.” Whether the client pays the agency or not is not the contractor’s problem; the contractor should still get paid.

The Conduct Regulations do not prevent the agency from pursuing its claim against an opted-in contractor for damages.

A negotiated solution

Sinclair suggests that a negotiated solution may always be an alternative to legal action: “The parties may attempt to negotiate a reasonable settlement, particularly if the Conduct Regulations are a factor that could place the contractor in a stronger position.”

But Sinclair warns that the payment basis will also determine how much a contractor can expect to receive. If a contractor walks out at lunchtime, they should not expect to be paid for any part of that day, and similarly if the contractor had quoted a fixed price to complete the project over a month and only completed two-thirds, they should not expect to receive any payment at all. “Most contractors are paid by the hour or by the day, so under contract law Gary could expect to receive payment in full up to the last day before leaving the contract,” Sinclair adds.

He concludes: “If a contractor is in breach and the conduct regulations apply, then the contractor should still be paid in full for work performed; the agency should deal separately with any claim it may have for damages resulting from the breach. However, if the conduct regulations do not apply, there may be a greater risk of the agency withholding payment, and it may be necessary for the contractor to pursue payment through the courts.”

Good luck with your contracting!

Contractor Doctor

Published: Wednesday, December 15, 2010

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