Contractor Doctor: Can I renegotiate a poor rate mid-way through the contract?

Dear Contractor Doctor,

I’m currently contracting through an agency, via my contractor limited company, for a large engineering firm. I’m working on a much lower rate than normal, which the agent justified as a result of the recession. I accepted the rate, having been out of contract for a while, but the client is making profits and taking on more contractors to meet demand.

I suspect the agency is taking a very large cut out of my rates, and I have asked the agent about an increase, but they have done nothing. I’m not really in a position to walk away from the contract but can’t afford to stay on the low rate for much longer.

Can I renegotiate a poor rate mid-way through the contract?

Thanks

Graham

Contractor Doctor says:

“There is nothing in the law that says a contractor cannot ask for a rate increase during a contract,” explains Roger Sinclair of specialist contractor legal consultancy Egos, “and this may be best approached on the principle that those who don’t ask, don’t get!”

Indeed, as Sinclair points out, the reverse can be true, and some clients have been known to demand that contractors take a rate cut mid-contract, particular when market conditions change dramatically.

“Contractors are perfectly at liberty to try to renegotiate their rates at any time,” continues Sinclair. “But they should assess the strength of their negotiating position and ask themselves, ‘Can I afford to walk away from this contract?’”

Check the contract

If the contractor can terminate the contract on notice, then he or she may have some negotiating strength in their position already. “The contractor can choose to look elsewhere for a contract,” says Sinclair, “on the basis that if a new contract is found, the contractor would then be able to exercise his/her right of termination”.

“If the contractor then finds another contract, they are in a strong position,” he continues. “They are able to ask the agent for an increase and, if refused, the contractor could give notice and move on to their new contract.”

Who to target – the agent or client?

Often the contractor may not know whether it is the agency or the client who is the barrier to a rate increase. It could be the agent taking a higher cut, and there is no legal barrier to an agency charging a very high margin, or the client paying a very low rate. If the contractor can gauge the answer to this, they know who best to approach.

...there is no legal barrier to an agency charging a very high margin, or the client paying a very low rate.

“If the agent is taking a high cut and refuses to negotiate, then the contractor can threaten to go direct,” explains Sinclair. “However, there may well be contractual restrictions to the contractor doing this.”

And, according to Sinclair, many clients are risk averse and will not take the risk of contracting directly with a contractor, either because of concerns about action from the agency, or about exposure to claims for employment rights. Sometimes such concerns may be warranted, sometimes not; but some clients will just say ‘no’ if they perceive a possible risk.

Contractual barriers

“What is often overlooked by contractors is that the client may itself have restrictions placed on it by its agreement with the agency,” continues Sinclair. “These restrictions might prevent the client from contracting direct, or might force the client to pay the agency an introduction fee.”

If the contractor has opted to remain within the Conduct of Employment Regulations, then the agency cannot restrict the contractor from contracting direct once the current contract has ended. But, if the contractor has opted out, then the agency can put restrictions in the contract, such as a restrictive covenant.

‘Restraint of trade’

“An agency placing restrictions on contractors in their contracts must be careful not to fall foul of the law relating to restraint of trade,” says Sinclair. “The restrictions should go no further than is reasonably necessary to protect the agency’s legitimate commercial interests.”

As Sinclair explains, protection of legitimate commercial interest will generally apply in three contexts:

  • Protection of trade secrets
  • Protection of confidential information
  • Protection of business connections.

It is only the third context that is likely to be relevant in an agency-contractor relationship, and the agency may want to protect their business connection both with the client and with the contractor.

When do restrictions apply?

The key principle, according to Sinclair, is that: “The restriction placed on the contractor must be necessary to protect the agency from the contractor taking unfair advantage of a business connection, and must go no further than is reasonably necessary to protect the agency’s legitimate commercial interests.”

He continues: “A restrictive covenant that simply prevents a contractor dealing direct with the client and does not last longer than the duration of the contract (or in any event, a maximum of a year) may well be upheld by a court. But one preventing the contractor from contracting with the client, the client’s subsidiaries and the client’s customers and other clients of the agency for a longer period would probably not be upheld.”

The restriction placed on the contractor must be necessary to protect the agency from the contractor taking unfair advantage of a business connection, and must go no further than is reasonably necessary to protect the agency's legitimate commercial interests

Roger Sinclair, Egos

Sinclair also says that restrictive covenants often don’t mean what the agency wants them to mean, and clauses restricting a contractor’s options must be read and interpreted correctly before they can be successfully applied.

So, the upshot to the contractor’s questions is that contractors can indeed try and renegotiate their rates mid-contract. However, their chances of success will depend on the power of their negotiating position, and they should also be wary of any barriers in their contracts that might restrict their options.

Good luck with your contracting!

Contractor Doctor

Published: Monday, October 5, 2009

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