Using contractors? You need an agreement. Here’s why
As with most business relationships, when using contractors to fulfil a business need it is always preferable for the details of the relationship to be worked through fully and agreed in writing. This article highlights some of the specific factors which need to be considered when entering into an agreement with a contractor.
What is a contractor? In this article the term contractor is used to apply to a self-employed contractor, so someone who is not an employee of the business. A number of different terms may be used to refer to such self-employed contractors. In addition to contractor there is consultant, sub contractor, associate, partner and sometimes advisor, counsellor, coach, instructor and so on, although many of these terms can overlap with titles which may also be applied to employees so the title itself is not conclusive.
Reasons for using contractors There are various reasons why a business might decide to use a contractor rather than engaging an employee with similar skills and expertise. These include situations such as:
- Wanting to respond to a new opportunity, offer a new service or cover a business requirement for a skill without committing immediately to it by expanding staff and infrastructure within the business
- Maintaining flexibility to respond to fluctuations in client demand without the addition of staff whose skills might not be fully occupied
- Insufficient skill or expertise within the business to offer or supervise the area in question
- A strategic decision to run without full time employees and instead draft in contractors as and when the workload dictates (common in the construction, IT and training industries)
Contractor's status
A key issue for many businesses which decide to use a contractor will be that the contractor will be self-employed, and will be treated as such particularly for tax and national insurance purposes. Provided the contractor is truly self-employed the business will not have the responsibilities and obligations as employer which would apply if the contractor were to be an employee of the business.
It is not always easy to determine whether a contractor really is self-employed. There is a range of factors which are taken into consideration in determining self-employed status. Some will almost invariably indicate employment, whilst others will tend towards indicating self-employment. In between is a whole spectrum of possibilities which can leave the business relationship with a contractor uncertain. Different tests may be applied by the courts, employment tribunals and tax authorities. What is certain is that the label attached by the parties to the business relationship is not conclusive: it is the way the relationship works in practice that will determine the contractor’s status.
Some contractors operate via their own company. This can be of assistance in indicating self employment, but in itself is not conclusive. If a business is working with a contractor in this way, so that it is in fact contracting with the contractor’s company, there are other safeguards which it may wish to consider putting in place to deal with aspects of the relationship.
If the business is using a contractor to seek orders it will also need to consider whether the contractor is in fact an agent of the business in which case other rules may apply, but those rules are outside the scope of this article.
Parties
In the agreement with the contractor, it is important to identify the correct person from a legal point of view. Many contractors will use a business or trading name, but the contract should be with the individual unless they work via a company in which case, as indicated above, the business may wish to consider putting other protections in place as well.
Length of the engagement
The business will need to agree with the contractor whether the contractor’s services are only required for a set period of time or for a specific piece of work and, if so, specify that in the agreement. If the business’s requirement for the contractor’s services is indefinite, the question of how the arrangement can be brought to an end by either party will need to be considered including such matters as appropriate notice periods.
Services
It will need to be absolutely clear what the contractor will be doing for the business, so that there will be no gap between expectations and delivery. What the business might expect to be included within a particular remit might be quite different to what the contractor would expect to provide. To avoid any such misunderstandings – which could be costly in terms of time, fees and reputation for the business – suitable levels of detail about the services to be delivered should be agreed.
The type of details to be covered will include where, when and, to any necessary extent, how the agreed services are to be performed. It will nevertheless be important to bear in mind the self-employed status of the contractor in relation to any directions given.
If the services to be provided by the contractor are in relation to a project, set out any milestones or targets to be achieved in terms of performance requirements and dates.
The contractor will be responsible for ensuring that the agreed services are provided. This will normally include providing a substitute to perform the agreed services if the individual who was to do so is no longer able, for whatever reason, to do so. If the business expects to have any input into the identity of any such substitutes that should be agreed and in such a way as not to impinge on the self-employed nature of the contractor.
Fees and expenses
Set out whether the payment to the contractor will be a fixed sum for the agreed services or whether the whole or any part of it will be variable depending on such matters as the precise type or amount of services required or time spent. If the fee will vary, agree any appropriate measures such as time or amount of services and how performance of these will be demonstrated such as keeping of timesheets, specific requests from the business, certified attendance by a client etc.
Agree with the contractor whether there will be any expenses payable in addition to the fee and, if so, will there be any limits on amounts or types of expenditure, prior approvals needed or evidence required such as receipts.
Payments
It should be clearly agreed whether the whole fee is payable on completion or whether there will be monthly or other interim payments such as parts of the fee payable on achievement of agreed milestones or targets. The payment procedure should indicate how and when invoices should be delivered by the contractor and timeframe for payment to be made by the business, such as 30 days from receipt of invoice. Arrangements for payment or reimbursement of any expenses should similarly be agreed.
Other activities
Provided it does not prevent or otherwise detract from what is agreed, the contractor, as an independent contractor, can normally spend any time not dedicated to performing agreed services for the business in such way as he or she wishes. If the business would expect to have any limitation on that freedom it must be agreed with the contractor in writing. This might apply in the case of activities for a competitor of the business either during or after the engagement where the business may seek to protect its interests. Any such proposed restriction must be carefully structured if it is to be enforceable and not impact on the self-employed status of the contractor.
Confidential information
Depending on the nature of the services, it is quite likely that the contractor will have access to confidential information of the business or even of clients. This should be protected by suitable confidentiality provisions and these should also apply to any substitutes.
Intellectual property
If the nature of the services performed by the contractor is expected to, or might, result in the creation of any intellectual property such as designs, software, reports and so on, the ownership of that intellectual property should be carefully considered. If the business requires ownership of any such intellectual property, either for itself or to pass on to any third party such as a client, then it must be properly documented in writing.
Insurance and liability
A contractor will not normally be covered by the business’s insurance, so the business should check that the scope and level of insurance cover held by the contractor is appropriate for the services being undertaken by the contractor to deal with any loss or damage caused to the business as a result of the actions or failings of the contractor in the delivery of the services.
The apportionment and responsibility for discharging any such liability should also be agreed. Where the contractor deals direct with any clients or other third parties on behalf of the business it will be particularly important to deal with these issues, because in the event the client or other third party suffers loss or damage it will seek compensation from the business.
For further advice or assistance in identifying the issues which need to be dealt with in relation to engaging a contractor and in drawing up an appropriate agreement for that or any other trading contract for your business, please contact our specialist solicitor Sue Mann by phone on 0121 246 4437 or by email at sue.mann@business-lawfirm.co.uk.
Article added: 29 March 2012 © Cousins Business Law
This article is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.
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