Contractor Doctor: Is my agency’s restrictive covenant valid after losing PSL status?

Dear Contractor Doctor

I’ve just completed a contract with an agency that has just been dropped from the client’s preferred supplier list (PSL), and so my contract with this agency has not been renewed. The client is keen to retain my services and the agency taking over the PSL would like to hire me. My original agency would offer my services to their replacement, but because they are not on the PSL the replacement agency won’t deal with them.

There is a restrictive covenant in my contract with the original agency. It prevents me from working with the client directly or via an alternative agency for six months. What’s more, my original agency has written a letter accusing me of ‘committing or about to commit breaches’ of my agreement with them, and threatening to withhold payment.

Under the circumstances and following the threats, can the restrictive covenant still be enforced by my original agency?

Thanks,

Alison

Contractor Doctor says:

“In this situation, the contractor has several options. First, by itself breaching the contract by threatening to withhold payment without any lawful reason, the agency by their own actions may have caused the restrictive covenant to be unenforceable. Second, the conduct regulations may also apply,” explains Roger Sinclair of contractor legal specialist Egos.

“However, the contractor’s primary concern should be to get paid for the work she has delivered. So a ‘wait and see’ strategy to see if payment is in fact made on the due date, before making any future commitments, may be her best move.”

The conduct regulations

The first step a contractor in this scenario might take is to look at whether they validly opted out of the Conduct of Employment Agencies and Employment Businesses Regulations 2003.

“For an opt –out to be valid, the original agency must have obtained an express opt out of the conduct regulations from the contractor and from her company, prior to introducing or supplying her to the client,” says Sinclair, “and where there is no valid opt out, provided the engagement constitutes ‘employment business’, the regulations will apply.

“The engagement is likely to be ‘employment business’ if there is some control exercisable on the part of the client, at least over some aspects of the work. And unless the services to be provided are specified in detail in the contract, there is generally likely to be some degree of control, at least over what the contractor does.”

Where the regulations do apply, the agency cannot lawfully withhold payment for time worked, and cannot lawfully impose or enforce a restriction on what the contractor may do after the contract has finished; this would therefore include a restriction which might otherwise operate so as to prevent the contractor from working for the client via another agency.

The very fact that the agency has threatened the contractor with withholding unpaid fees but without any legitimate grounds may itself put the agency in breach of contract

Roger Sinclair, Egos

Sinclair continues: “The Employment Agency Standards Inspectorate, part of the Department for Business Innovation and Skills (BIS), is responsible for enforcing the conduct regulations, and in some situations seems to be willing to take action against agencies that unlawfully withhold payment.”

Sinclair urges any contractor who thinks (s)he may have opted out to check whether or not such opt out is likely to be valid; and, if not, and if their agency is threatening to withhold payment, to contact the Employment Agency Standards Inspectorate straightaway. When facing the prospect of an investigation, some agencies may back down and pay the contractor any unpaid fees without further delay.

‘Anticipatory breach of contract’

According to Sinclair, if the conduct regulations do not apply, or if there is a valid opt out, then the contractor needs to look at their common law position. “The very fact that the agency has threatened the contractor with withholding unpaid fees but without any legitimate grounds may itself put the agency in breach of contract,” he notes.

“By threatening to withhold payment because they merely imagine that the contractor might be about to commit a breach, the agency has said ‘yes, I know the contract says I have to do this but I am not going to do it’. By indicating that it does not itself intend to be bound by the contract, the agency may well be committing what is known as an ‘anticipatory breach’.”

Such a breach of contract on the part of the agency may operate to release the contractor from any further obligation to perform the contract, including any obligation to honour any restrictions in it.

However, the contractor’s primary interest is likely to be in getting paid for work already done, and so Sinclair urges Alison not to reveal her strategy until she has received final payment for the work she has already performed.

Restraint of trade – is the restrictive covenant enforceable?

“A restriction that is in restraint of trade can only be enforceable if it goes no further than reasonably necessary to protect legitimate commercial interests of the party applying the restriction,” says Sinclair.

There are three areas where the agency might have legitimate commercial interests. The first two, confidential information and trade secrets, would not generally apply in contractor agreements, but the third category, business connections, may be applicable.”

But Sinclair points out that the agency no longer has a business connection with the client, because it has been removed by the client from the PSL: “Wholly independently of the contractor, the client has declared that it no longer wishes to deal with the agency. For that reason, the contractor could argue that there is no longer any business connection between the agency withholding payment and the client, and so the restriction should not be enforceable.”

Is the restrictive covenant duration fair?

Sinclair also suggests looking at the duration of the restriction: “The contractor should compare the duration of her most recent contract with the agency, not the total length of time she has worked with the client.

“My own rule of thumb would generally be that, in a contract for 3-12 months, the restriction should last no longer than the contract which imposes it. So, for example, if the restriction is for six months and the most recent contract was for three months, then the agency is probably being too greedy, and for that reason alone the restriction may fail.”

In conclusion, Sinclair draws attention to the contractor’s objectives of being paid and continuing to work for the client: “Even where it appears that the contractor is on good ground, the reality is that the agency still has the money. It may be unwise for the contractor to alert the agency that (s)he plans to breach the restriction, without first securing unpaid fees.”

Published: Thursday, September 5, 2013

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