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Contractor Doctor: Can I contract directly with a customer of my former employer?

Dear Contractor Doctor

I’m an IT consultant and have been maintaining the network, working mostly onsite, for one of my employer’s customers for about ten years. I am currently considering starting my own limited company and supplying my services directly to the customer as a contractor.

The staff handbook says I can’t solicit business from my employer’s customers for 12 months after leaving the company. However, there has never been a contract in place between the customer and my employer.

Can I contract directly with a customer of my former employer?

Thanks,

Phil

Contractor Doctor says:

According to Roger Sinclair, of contractor legal specialist Egos, the first question is whether or not there is in fact any restriction at all as a term of the current contract; the fact that it is stated to be in the staff handbook is not necessarily of itself sufficient to prove the point.

“It would be for the employer to show that the restriction was in fact part of the contract,” he says. “This would be assessed according to normal contractual principles.

“If it is an actual term of the contract, then the next key issue is, who is in control of what the worker does, the employer or the customer?” continues Sinclair. “Is the individual working for and under the control of someone other than their employer?”

If the worker is working for and under the control of the customer, then the conduct regulations are likely to apply, and affect whether or not any restriction is enforceable; if the conduct regulations apply then that alone should determine the issue, and it should not be necessary to move on to consider issues relating to restraint of trade principles.

If, on the other hand, control rests with the employer, then the conduct regulations will not apply, and any restriction must be assessed according to restraint of trade principles.

“In addition to the would-be contractor’s legal position, the customer’s relationship with the employer should also be considered, as there may be restrictions placed upon the customer.”

The Conduct Regulations

“If the worker was working for and under the control and supervision of the customer, then the employer is likely to be acting in the capacity of an employment business,” continues Sinclair, “in which case the conduct regulations may apply.”

As Sinclair notes, since the contract pre-dates the introduction of the Conduct of Employment Agencies and Employment Businesses Regulations in 2003, then the worker cannot opt out and is automatically considered to be in scope. In any case, since the worker is an employee of the employment business, he could not opt out. That means the restrictions in the worker’s contract of employment cannot be enforced.

“The provisions of Regulation 6 of the conduct regulations expressly prevent an employment business from ‘detrimental’ action relating to work-seekers subsequently working elsewhere,” says Sinclair. “The worker would be free to do what he/she chose, and the former employer could not prevent the individual from contracting directly for their former employer’s customer.”

Restraint of trade

If, however, the employer was providing a managed service to its customer, and controlling the worker itself, then the conduct regulations would not apply. However, the restrictions in the workers contract of employment could be open to challenge under restraint of trade principles.

Clients sometimes decide not to hire contractors directly, or at all, because they simply do not wish to risk legal action from any source

Roger Sinclair, Egos

Sinclair explains: “Any restrictions should be assessed in terms of the scope, ie what it says the worker can’t do, and the duration of the restriction. The restrictions should not go any further than is reasonably necessary to protect the employer’s legitimate commercial interests. And mere stifling of competition is not such a legitimate commercial interest.”

If the restrictions do not go any further than is reasonably necessary, then the restrictions may be enforceable, and the individual would not be able to contract directly for a customer of their employer without fear of their employer taking legal action.

“But if the restrictions go too far, then it would be necessary to work through each of them and cross out the wording insofar as it is unreasonable, and keep crossing out until what’s left makes sense. Sometimes this results in the complete removal of those restrictions which might prevent the worker from contracting direct,” adds Sinclair.

Restrictions on the client

Although in this case the customer has no written contract with the worker’s employer, which might have contained explicit restrictions preventing a direct relationship with its supplier’s staff, Sinclair points out that the customer may prefer not to hire the worker because it is simply risk-averse.

“In my experience, clients sometimes decide not to hire contractors directly, or at all, because they simply do not wish to risk legal action from any source,” he says. “The contractor may have done nothing wrong, but loses out nonetheless.”

Introducing an agency to help mitigate the risk might offer the worker and client a solution. However Sinclair suggests that the contracts between the agency and the contractor’s limited company and the agency and the client would have to be examined carefully to ensure no new restrictions were included.

IR35 implications

Whilst the worker is still employed, there will be no IR35 issues, as the worker is likely to be paying income tax and National Insurance Contributions (NICs) at source under Pay As You Earn (PAYE).

“Whether IR35 will apply if the worker contracts directly with their former employer’s customer will depend on whether the worker uses a company as a trading vehicle in between him/herself and the client,” says Sinclair. “If he does, then IR35 implications would need to be considered, as the risks will fall on that company.”

Published: Wednesday, September 19, 2012

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