Contractors should beware of accepting at face value standard contracts from agents and clients, because they will almost certainly be created and structured in favour of the other parties.
However, because most contractor contracts have the same purpose – to hire a contractor to work on a specific project for an end-user client – they should include the same kinds of information, albeit structured differently.
And because a small investment in professional legal advice before signing the contract can potentially save thousands in the long run if things go wrong, there is no substitute for seeking a contract review from a specialist lawyer or legal consultant.
Contractor contracts – basic structure
Firstly, contractors should understand and ensure that they are receiving a contract “of services” between their limited company or contractor umbrella company and the agent and end user client.
Any contract that looks like a contract of employment, or contract “for service”, should instantly be filed in the bin, because this suggests the contractor is being employed and is therefore immediately inside IR35. IR35 is a piece of tax legislation introduced in 1999. The financial impacts of being caught by IR35 are significant, so contractors should make every effort to not get caught in it's net.
Any contract that looks like a contract of employment, or contract for service should instantly be filed in the bin
The contractor should typically expect to see two main parts to their contract:
- The standard or permanent section
- The schedule.
The standard or permanent section normally appears first and, as its name suggests, includes standard information that does not change and that relates to both parties. This includes things like jurisdiction, liabilities, termination and so on.
The schedule contains the information specific to the contract or project that the contractor will be working on. It should include things like dates, rates and deliverables.
Clauses that should be included
In consultation with a legal adviser, contractors should ensure that their contract includes all the key clauses and information that can protect them in the event of a dispute. Key features and clauses include:
- Parties – ensuring that the contractor’s limited company/umbrella and the agent/client are correctly identified
- What’s on offer? – the hourly or daily rate the contractor will get paid
- Timings – the start and end dates of the contract
- Terms – when and how will the contractor get paid, eg weekly on provision of timesheets, monthly, on 30 days, etc
- What specific services/deliverables must the contractor provide – this means a contractor can (and should) say no to any old work the client feels like chucking their way
- A termination clause that works both ways, allowing the contractor the ability to leave part-way through the contract
- A right of substitution
- A clause clearly stating there is no mutuality of obligation
- Liability and indemnity – there has to be one, so best it’s on the contractor’s terms and, if possible, is not too far-reaching
- Intellectual Property (IP) Rights – contractors often bring their own IP into a contract and it should be set out at the start who owns what
- Governing law – ideally this should state that the jurisdiction is the UK; contractors may find that their Professional Indemnity cover does not apply to contracts from some jurisdictions, particularly the USA
- Confidentiality – this generally works both ways, but the ‘field’ of the confidential material should be carefully checked
- Force majeure – included in most contracts, this allows for the unforeseen and unexpected. If the client’s offices are destroyed by a tidal wave, for example, contractors should not expect to be able to enforce their rights in the contract.
Clauses to challenge or remove
In addition to ensuring the overall contract is one “for services”, and not one of employment, the contractor should negotiate out the following key clauses, many of which point to the contractor being an employee and therefore within IR35.
Clauses to remove include:
- The client has control over the contractor, a common occurrence in standard agency contracts and one that must be removed
- The contractor is obliged to take any work provided by the client, which suggests there is mutuality of obligation between them and the client, meaning that again the contractor could fall within IR35
- Holiday and sick pay, which is a strong indication that the contractor is actually an employee
- Ongoing contracts, or reference to ongoing work, which suggests that the contractor is not in fact working on specific projects but taking any work; this implies there is a mutuality of obligation
- Automatic renewal clauses are not only a bad idea because they do not allow the contractor to re-negotiate rates and terms, but also suggest that there is a mutuality of obligation between the contractor and the client.
Always seek professional advice
In addition to following this checklist, contractors should always make the relatively small investment required to get their contracts checked by a legal specialist and to act on the changes that their adviser suggests.
Contract reviews by legal experts who specialise in the contracting sector can cost from a few tens of pounds to not more than a few hundred, depending on the complexity and potential value of the contract. Such a review is almost certainly a good investment, when contracts are first negotiated, when they are renegotiated or when they are up for renewal.
The average contractor will earn the cost of their contract review in their first few hours working on the new contract. However, if things go wrong and the contractor is caught out because they overlooked a key clause, they could be paying for the consequences for many years.