Engaging contractors: Clearing the muddy waters

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Clear waters

Chris Bryce, director of the Professional Contractors Group (PCG), attempts to clear the confusion felt by some companies who have become hesitant about engaging contractors or freelancers for fear they might owe these types of workers employment rights.

Those companies who hire contractors and interims will know that in 2004 the Court of Appeal in the case of Dacas v Brook Street Bureau stated that an agency worker could be the employee of the end user to which he or she is supplied.

In 2006, the Court of Appeal supported its statements made in 2004 and found a Mr Muscat to be an employee of Cable and Wireless under an implied unwritten employment contract – even though Mr Muscat was operating through a limited company and supplied by a recruitment agency to Cable and Wireless. The contract he was hired on was nominally a contract for services.

This complex judgment has undoubtedly led to confusion and some hirers may still be questioning the entire concept of agency supply, which has historically protected them against employment claims.

The UK economy has thrived on a flexible workforce and contractors could be missing out on opportunities as companies are put off hiring contractors and freelancers for fear of being caught out.

Companies have either stopped taking contractors on so readily or started terminating their contracts after 48 weeks or 11 months in an attempt to avoid employment rights. PCG believes that this approach is unnecessary, counter-productive and very likely to fail.

What does engaging a contractor entail?

  • Ensure you establish a proper business-to-business relationship with your contractors.
  • Make sure that their contracts are proper contracts for services and not contracts of employment.
  • Make sure that the working practices of contractors on the ground are clearly distinguishable from the working practices of your staff.

Is it true that a contractor can sue me for employment rights if they work for me for more than 12 months?

Not really; no contractor should be suing you for employment rights, although people occasionally go freelancing without realising the implications and continue to think of their clients as 'employers'. For a contractor to sue you for unfair dismissal or any other employment right, they will have to demonstrate that they were your employee. If you have a proper business-to-business relationship with them this will be impossible.

Would it be better to terminate all my contractors at 48 weeks, just to be safe?

Absolutely not. If you do this with work still to be done, you will have all the extra expense of engaging new contractors and having them take time to get up to speed on work that your existing contractors could have finished more quickly and cheaply. It is totally unnecessary – a properly engaged contractor will never be able to claim
employment rights successfully.

What about the Muscat Case?

In this case a contractor successfully sued his client for employment rights. If you have engaged a contractor under employee-like terms like Muscat, it may well make them your employee. Nevertheless, proper business relationships are unaffected so be sure to use them.

Is it just a matter of what the contracts say then?

No, the contract must be an accurate reflection of what actually happens. It is also a good idea to use Real Arrangements Letters, which set out the practical arrangements relating to the contract and are signed by you and the contractor – these can be considered by employment tribunals.

What if I want to take one of my existing employees as a contractor?

Be careful; ensure their pattern of behaviour is not the same as before, reflecting that they are no longer your employee and that the contract is business-to-business. Be aware that it will be easier for them to leave your company and go and work elsewhere if they are engaged under a commercial contract.

What if an employee approaches me asking to "go limited"?

Again, be careful; if they want to do the same work in the same way but via a contract, they are probably just trying to save on tax – they will fall within the IR35 legislation which would negate any tax saving anyway. If you agree to this request, ensure the contract is clear and if you agree to this request but their working relationship with you remains unchanged other than the introduction of a new contract, you could end up being sued for employment rights should you dismiss them. In this scenario, a court may decide that you should have been paying employer’s National Insurance contributions and HMRC could approach you for the money.

When engaging a freelancer or contractor always:

  • Use proper business-to-business terms.
  • Ensure that their terms include the right to substitute, no "mutuality of obligation" and no direction and control – these are they key employment status tests in the common law.
  • Ensure working practices reflect the contract and use Real Arrangements Letters to set out the practical aspects of the relationships with your contractors.

When you have decided which type of worker you wish to engage – an employee or a freelancer/contractor - set up the appropriate relationship and remember the key employment status tests:

Personal service

  • Employees will be obliged to do the work personally themselves.
  • Commercial providers are not under this obligation: ensure your contractors may send substitutes if necessary.

Mutuality of Obligation

  • Employees are obliged to turn up and you are obliged to pay them.
  • Commercial providers are not obliged to turn up if there is no further work and you are not obliged to pay them or offer them any further work in this situation.

Direction and control

  • Employees may be directed in how to carry out their work.
  • Commercial providers should be left to exercise their professional judgement in how to carry out the work.

Remember that in a dispute, courts will look at contracts to infer your intention when engaging a worker: if your intention was to hire an employee by other means – as happened in Muscat – the courts will find against you.

PCG is the representative body for freelancers, contractors and consultants and is dedicated to protecting and promoting the interests of this community. For more information, please visit: www.pcg.org.uk

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