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Contractor termination disputes increase as the recession bottoms out

Disputes between contractors, clients, agencies and umbrella companies are growing in number and becoming increasingly intense, as each player in the contract food-chain tries to hold on to cash as the recession bottoms out.

According to a report in Contracting Matters, disputes between umbrella-contractors and their clients and agencies have risen four-fold on last year’s figures. And Rob Crossland, managing director of professional business services provider Parasol, says the effects are wide ranging. He says: “In these difficult conditions, it is far more prevalent that an end-client would terminate a contract early, and this of course can have a huge knock-on effect.”

There are different courses of action suggested, depending on whether the contractor involved works through their own limited company or as an employee of an umbrella company.

Umbrella company support

Terminations involving umbrella company contractors can be complex, because the supply chain is multifaceted. The contractor is an employee of the umbrella company, which has a contract with an agency, which in turn has a contract with the end-user client.

So, Crossland says that, when in dispute with a client over termination fees and notice periods, contractors should talk to their umbrella company. Parasol has a dedicated out-reach Human Resources (HR) department to deal with these issues.

If a contractor faces early termination, they need to act quickly, but also in the right way. “If the relationships between the parties are not clear, or not understood, then there is a tendency for contractors to raise a challenge against anyone that will listen; but they should pause for breath and ensure they’re dealing with the right party,” warns Crosland.

To forestall rash contractor action, Crossland urges umbrella company contractors in any dispute over termination or timesheets to treat the HR function at their umbrella company as the first port of call, before entering into any discussions with their client or agency.

“It can be very disheartening if an early termination happens. Many of the agency contracts with an umbrella company have no notice periods stated, so it can be a no win situation,” he says.

“Make sure you keep your brolly in the loop and work with them for resolution. Remember that, as an employee of an umbrella, you do have rights. Equally, if you are deemed to be responsible for breaking a contract, then don’t be surprised if your employer starts to question your motives.”

If the relationships between the parties are not clear, or not understood, then there is a tendency for contractors to raise a challenge against anyone that will listen; but they should pause for breath and ensure they're dealing with the right party

Rob Crossland, Parasol

Limited company contractors – to sue or not to sue?

Limited company contractors don’t have the luxury of an HR department on tap, and their dispute with the agency or client is far more likely to be contract law-based than employment law related.

For genuine limited company contractors who rely on business-to-business contracts for protection, the ability to take action in the face of early termination will depend on the exact wording of the contract. Often, whether the termination is unfair will be a judgement call, and premature legal action could shut down any future stream of contracts.

A blatant contract breach by a client or agency, for example giving no notice where the contract says 30 days notice is required, could leave the contractor with some room for negotiation. In such cases, a month’s fees could be worth the legal expense and hassle to chase, but another option is to negotiate and perhaps suggest to the client that they split the difference.

Employment rights for some contractors?

There is an interesting development for some contractors who have worked long-term for the same client, have been working within IR35, and find themselves facing early termination. Following the recent Tilson v Alstom ruling, it appears that some of these contractors could be entitled to employment rights, which might include a claim for unfair dismissal.

But whatever your situation, understanding your contract is crucial. Crossland says: “Times remain challenging and the inevitable early terminations can and do happen to some contractors. It need not be the end of the world and there are some good businesses out there that can help you through it.

He also recommends thinking about the medium and long term before taking action: “It’s a tough one when it feels one sided, but remember that agencies and clients that you feel have done you wrong today might also be the ones to supply tomorrow’s project after the dust has settled.”

Published: 10 July 2009

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