IR35: Four contractual areas that undid Dave Clark; which you must beware too

Even the busiest of contractors will not have missed that recent court cases have highlighted the importance of all the contractual documents in establishing employment status, writes CEST Explained author Rebecca Seeley Harris, founder of IR35 advisory ReLegal Consulting.   

In the IR35 case of Little Piece of Paradise Ltd (LPPL), the contract was one-sided, with side agreements that were verbal. In contrast, in the PGMOL case, everything was written down and there were no verbal agreements. 

So, how does this impact on employment status and establishing a hypothetical contract?

Taking LPPL as the focus in this article exclusively for ContractorUK, let’s remind ourselves that the contract in that case was a ‘Service Agreement.’ It was renewed multiple times over a six-year period. It had at least been specifically drafted for the television presenting services of LPPL’s Dave Clark but, it also included clauses that would conflict with Clark’s intended status as self-employed, notably in four key areas. 

1. Exclusivity

A classic example of such conflicting clauses was to make the services exclusive to Sky, so Clark could not work with any other competing services, thus exerting significant control over him by Sky. 

This is, thankfully, unlikely to be seen in most limited company contractor’s contracts but, I have seen it on occasion -- mainly in the finance sector, so it is definitely worth checking.

Sky also had ‘first call’ on the services of the LPPL’s personnel.

2. Image Rights

Sky also had Dave Clark’s Image Rights exclusively, including rights to exploit his voice, name, image, nickname and, the judgment records, any “other representation”.

But if you are truly self-employed, your Intellectual Property Rights (IPR) should be yours, because your business depends upon those rights. 

If you don’t have copyright over your work and you give that IPR away to the client, technically you can’t use that material again, which is very limiting for your business.

HMRC have picked up on this and in the upgrade to its CEST tool in November 2019, questions were added requesting information on the ownership of any intellectual property that had been created.

3. Intellectual Property

I do very often see intellectual property clauses in contracts that automatically assign the rights to the client. The layman wouldn’t take any notice of this but, in reality, you are giving the rights to your work away. The solution is to provide the client a licence for the work, unless the client is paying a premium to obtain ownership of the rights. 

The three relevant questions in CEST are:

1. Are there ownership rights relating to this contract?
2. Does the contract state that the rights to this work belong to your organisation/the hirer [client]?
3. Does the contract give your organisation/the hirer [your client] the option to buy the rights for a separate fee?

4. Exclusive Record

Significantly, in LPPL, the court found that:

“The parties did not intend the contracts to be the exclusive record of the terms of their agreement, with ‘exclusive’ being the operative word here. While each contract served as the framework agreement for the relevant period between the parties, there were terms governing the parties’ contractual relationship that were not expressly stated in the contracts, because there existed tacit understanding between the parties as to the practical aspects of the outworking of the contractual terms.”

So, even though there was a contract in place, there were also tacit understandings or side agreements in place. The court then gathered the terms of the agreement partly from the documents and partly from the parties’ conduct. The court will always have leeway to put aside the contract if it does not represent the true working practices.

So what is the main takeaway for contractors?

As a lawyer, I would always recommend having a properly drafted contract and not one that has contrived practices, such as a substitution that will never happen. 

Unfortunately, one of the main problems with the off-payroll working rules (IR35) is that there are very often two contracts, one between the client and the agency, and one between the agency and the contractor. 

Most often, these two contracts do not mirror each other and in any case, the contractor cannot see the client agreement. So it is worth contractors asking for a template agreement, which is not covered by data protection legislation. Also, what I see in practice are contracts that have been cut and pasted or ‘lifted’ from another source. Remember and factor-in to your next interaction with your clients -- the contract is an extremely important memorial of the agreement. The age-old problem is this; many people in business will pay no attention to the contract until they need to rely on it and by then, it is too late.