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Contractor Doctor’s recent legal challenges facing contractors

Ranging from sharp business practice through poor processes to downright bullying, contractors have faced a myriad of challenges during 2013. We answered them all and have published over 56 contracting guides so far this year.

To help the wider contracting community learn from other contractors’ less than positive experiences, we have drawn together those questions relating to legal topics during 2013 to date. They broadly fall into five main themes:

  • Contract restrictions – restrictive covenants
  • Contractual disputes
  • Clients thinking that contractors are employees
  • IR35
  • Employment law.

Contract restrictions – restrictive covenants

Restrictive covenants, which are typically found in contractor agency contracts, play an important role in protecting the investment an agency has made in developing client relationships and forging profitable and lasting client-contractor relationships.

However, there is no legal requirement for a restrictive covenant to be included in an agency-contractor contract. Neither business efficacy, where you have to imply a term to make a contract work, nor the ‘officious bystander test’, suggest any kind of restriction should be included in standard contracts.

Where there is a restriction, it can be abused by the agency accusing the contractor of breaching the restriction and making threats, even if there are no grounds for the agency to take action.

Under these circumstances, the agency itself may be in breach of contract for threatening the contractor with, for example, non-payment of outstanding fees. The covenant could also be challenged on the grounds of restraint of trade.

And these are assuming that the contractor expressly opted out of the conduct regulations. If these apply, the covenant cannot be applied and the agency is legally obliged to pay the contractor for hours worked.

Contractual disputes

The first question Contractor Doctor’s legal experts usually ask when contractors have issues is, ‘What does the contract say?’. And that’s what budding contractors must ask if they’re keen to take-up a short-term opportunity by working on a contract during a period of gardening leave.

Gardening leave contracts usually prevent the worker in question from working – that’s the whole point of them. But if the contract was with a client where there would be no conflict of interest, then the worker’s employer who put them on expensive gardening leave might be prepared to do a deal, if asked first. But if not asked, and the contract says that no work is allowed, then the worker could be in trouble.

The first question Contractor Doctor's legal experts usually ask when contractors have issues is, 'What does the contract say?'

Sloppy processes within the client’s HR or procurement function, or at the agency, are another common source of contract dispute. The minute an agency tells a contractor that the start date they agreed and signed up to isn’t actually the start date, the agency is in breach of contract. The contractor at that point was free to disregard any threats from the agency about breach of contract on the contractor’s part.

Contractors are employees, aren’t they?

Client’s often don’t understand that contractors are not just extra employees with a funny badge and paid in an odd way, and are therefore not subject to the same requirements as employees might be, such as attending extras like weekend teambuilding events.

Clients can even get aggressive about becoming ‘part of the team’, and bully contractors to participate, even if there is no contractual obligation on the contractor’s part to attend. Unfortunately, it is that distinction between a client’s employees and the employees of service providers – such as contractor limited companies – which means often the only recourse for the contractor is to get out fast.

The client may be liable for its employees’ bullying behaviour, but in practice the contractor is unlikely to gain much from pursuing that, and would be better off extracting themselves with the money owed and finding another contract.

IR35 – substitution

While many contractors have a theoretical unfettered right of substitution in their contract, for some it remains untested, and they would be nervous about sending in a full-time substitute. Hiring a subcontractor to perform an element of the overall contract is a much more realistic proposition.

If the subcontractor is performing ‘meaningful’ tasks on the contract, on a par with what the contractor is doing, then it implies that the contractor’s personal service is not required. Personal service is perhaps the closest thing to an IR35 ‘silver bullet’. If the contractor’s personal service is not required then IR35 cannot possibly apply.

Employment law and contracts

Although employment law does not apply to limited company contractors, it does apply to umbrella company contractors. That’s because legitimate umbrella companies should fully employ their contractors, and have an employment contract in place, and give them all the rights that go with employment.

So, when an umbrella company contractor’s contract ends, what happens next depends on that contract of employment between the contractor and their employer, the umbrella company.

If the contractor is on a Swedish Derogation contract, then they should continue to be paid between assignments. The contractor may also have non-rolled-up holiday pay that has accrued, which the umbrella company must pay if the contractor requests it.

Finally, to benefit from claiming expenses the umbrella company contractor must be on an overarching employment contract. That means they will be offered a minimum amount of work at national minimum wage, which HMRC says should be 336 hours over a twelve month period.

When their contract stops, and if there is no other contract immediately following on, the contractor should confirm with their umbrella company that they are not due any pay as a result of their overarching employment contract.

If you have a question about contracting that hasn’t already been covered by Contractor Calculator, then ask the Contractor Doctor.

Published: 12 September 2013

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