Opt-in, opt-out? Legal specialist Egos comments

The regulations can be found at www.legislation.hmso.gov.uk. The regulations they replace had been in force since 1976, and were hopelessly out of date, given the extensive changes which have taken place in the commercial world since that time.

A battle was engaged by the PCG and others during the earlier consultation process, concerning the status of limited company contractors under the new regulations, and whether or not the regulations would apply to them – they wanted limited companies to have the option to operate outside the regulations. Some say the battle was won, in that the regulations actually brought into force do contain indeed provision for limited company contractors to opt out. For myself, maybe I'm missing something, but if this was a victory, then to me it seems one of the Pyrrhic kind!

The majority of the regulations came into force on 6th April 2004, although the parts which (subject to the opt out provisions) bring limited company contractors inside the regulations do not come into force until 6th July 2004; until 6th July 2004 the regulations should probably be treated as not applying to contractors operating through limited companies. Thereafter, unless there is a valid and current 'opt out', the regulations will apply to limited companies used by contractors in the same way as they do to individuals working through agencies.

How to opt out

In the case of a contractor operating through a limited company who wishes to opt out, both the individual and the company must notify the agency to that effect in writing, and before either the introduction or the supply of services to the client.

Such a notice can be withdrawn at a later point by the individual, although the withdrawal will not take effect until the contract ends.

An agency may not make opting out a condition of providing work-finding services.

Thus opting out is a matter for the free choice of limited company contractors, and the choice (if exercised) must be made before introduction to the client.

The effects of opting out

In terms of the real world issues that cross my desk, I see three areas where opting out could make a practical difference; these are not the only effects of opting out, but they are the ones I see as having some commercial significance:

1 No signed timesheet: Regulation 12 imposes a restriction, the effect of which is to prevent an agency being able to use as an excuse for non-payment the fact that the client has not signed a time sheet. A contractor will still have to prove (by some means or other) that he has done the work before he is entitled to payment, but an agency can no longer use the fact that the contractor does not have (for whatever reason) a timesheet signed by the client as an excuse for non-payment. Contractual terms which conflict with this principle will no longer be valid.

(As an aside: that's not to say that they were valid before – I've had to deal with this problem on several occasions over the years, and on pretty well every occasion I have succeeded in getting round it by successfully arguing an implied term that the client would not refuse to sign the timesheet without proper cause – but now, the solution is clear cut, and where the regulations apply, there will be less of an upwards struggle).

Thus on this point, I see it as clearly being in the Contractor's commercial interests to be within the scope of the regulations, and not to opt out. This, to my mind, is a significant commercial issue.

2 Restriction on going direct: Regulation 10 limits the ability of an agency to validly restrict by contractual terms a contractor and a client making direct arrangements for future services which exclude the agency. Agencies typically impose restrictions which (if valid – and they are not always valid) would operate so as to prevent such direct dealings for periods of up to 12 months (sometimes even longer). Common law principles (clarity and certainty, and restraint of trade) govern the enforceability of such terms. Now, such terms will also have to satisfy the provisions of the new regulations in order to be enforceable, and where the regulations apply, the maximum effective period during which a restriction can prevent direct dealings will be the longer of 14 weeks after the first working day, and 8 weeks after the last working day.

On this point too, I see it as clearly being in the Contractor's interests to be within the scope of the regulations, and not to opt out. This too is a significant commercial issue.

3 IR35: There was much discussion in the course of the battle over whether or not the inclusion of limited company contractors within the regulations would be an IR35 negative; if it is an IR35 negative, then in my view it will be a very minor one, but I myself believe that operating within or without the regulations will be an IR35 neutral point. Indeed, I would say the taking of a decision to avail oneself of the commercial protection of the regulations and not opt out could be argued to be an IR35 positive, since it is exercising sound management principles to take a commercial decision in the best interests of the business, for reasons other than tax.

Thus my own feeling is that any potential IR35 effects of opting out should be disregarded.

Conclusion

Overall, I find it difficult to see that there is any sound commercial reason why a contractor providing services through an agency would wish to opt out of the new regulations.

Roger Sinclair, Egos Ltd
7th June 2004

further reading:
New Rules for Agency Contractors - April 2008
.