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Contractor Doctor: Can clients and contractors cut out an agency lying about margins?

Dear Contractor Doctor

I’ve only been a contractor for a few months and have discovered from my client that the agency is taking a 28.6% margin on my day rate. According to the client, it has an agreement in place with the agency that the maximum margin should only be 18%, and it had been told by the recruiter that it had kept to its agreement.

I’m not happy about this and nor is the client. When the contract is up for renewal in a few months I’d like to either contract direct or work via one of the other agencies supplying my client and which abides by its margin agreement, so I get a greater share of my fees. However, the agency is saying I can’t do this because of a restrictive covenant in my contract.

Can the client and I cut out the agency because it lied about margins?



Contractor Doctor says:

“Because it has engaged a contractor on terms that differ from what it has agreed with the client, the agency may be in breach of its contract with the client,” explains Roger Sinclair of contractor legal specialist Egos.

“However, although it may be poor business practice on the part of the agency, that does not necessarily mean that it has also breached the terms of the contract with the contractor. Any restrictions placed upon the contractor by the agency may still apply, provided they do not conflict with restraint of trade principles, and assuming that the contractor has opted out of the conduct regulations.”

Contractors should consider the contractual relationships

According to Sinclair, examining the contractual relationships in place is key: “The contractor’s limited company or umbrella company has a contract with the agency to supply their services. The agency has a contract with the client to deliver a contractor’s services on a specific contract. But there is no direct contract between the client and the contractor’s company or umbrella.”

What this means, says Sinclair, is that by not keeping to its agreement with the client to charge a maximum of 18% margin of the contractor’s fees, the agency may be in breach of the contract it has with the client.

But this may not help the contractor: “the fact that the agency has lied to the client and is in breach of that contract will not necessarily have a bearing on the contract between the agency and the contractor. A breach by the agency of its contract with the client may still not let the contractor off the hook for any restriction in the agency-contractor contract.”

The fact that the agency has lied to the client and is in breach of that contract will not necessarily have a bearing on the contract between the agency and the contractor

Roger Sinclair, Egos

But Sinclair adds a caveat: “With professional legal advice and a thorough analysis of the circumstances and both contracts, a way might be found to release the contractor from his or her obligations.”

Conduct regulations

Although a breach of the agency-client contract might have no bearing on the restrictions placed on the contractor in a restrictive covenant in the agency-contractor contract, the conduct regulations and restraint of trade principles may.

“Unless the contractor and his/her company have expressly opted out of the Conduct of Employment Agencies and Employment Businesses Regulations prior to the contractor being introduced to the client, the regulations will apply,” continues Sinclair.

Regulation 6 of the conduct regulations expressly prevents an employment business from ‘detrimental’ action relating to work-seekers subsequently working elsewhere. That would allow a contractor to choose to contract direct with the client or via a second agency taking a lower margin without fear of legal action by the first agency.”

Restraint of trade principles

The agency’s restrictions placed upon the contractor should not go any further than is reasonably necessary to protect the agency’s legitimate commercial interests. And Sinclair highlights that 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.

“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 restrictions that might prevent the worker from contracting direct or via an alternative agency.”

Risk-averse HR or legal procurement departments

There is one further barrier to the contractor contracting direct or via another agency. “Although the contractor and his project manager might wish to change the contractual relationship, the client’s human resources or legal and procurement departments may not agree,” warns Sinclair. “They may be risk-averse or simply don’t want the hassle.”

Under these circumstances, the contractor may have no option other than to accept the same rate at renewal, or be prepared to lose the contract if a strategy of “pay me the rate I want or I walk away” fails.

Published: 21 September 2012

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