Longer IT contracts 'a risky business'

The reality of longer terms contracts following Cable and Wireless v Muscat is that the hirer will be more at risk of a claim for employment rights than for short term engagements. At least that will be the perception with hirers and agencies which are familiar with Muscat and Dacas.

In turn a person set up as a contractor but actually working in the same way as an employee will not only, no doubt, be obliged to pay tax under IR35, but also may have the benefit of those employee rights against the hirer. The longer such a person works in the same way as an employee; the more likely it is that rights will accrue. After one year a key right comes into play – the right to claim unfair dismissal on termination – scary stuff for hirers who have "no liability for employment" penned in their balance sheets.

It is hardly surprising therefore that some hirers do not wish to expose themselves to potential claims and are now insisting on short-term contracts for contractors as well as PAYE agency workers. After all, let us not forget that Mr Muscat was operating through a limited company as a contractor supplied by an agency (I accept that otherwise the facts were somewhat unusual in that case).

However genuine contractors should not be worried about this case law since it will not impact upon them at all. Indeed there is an opportunity to sell their specialist IT services to agencies on the basis that, as a genuine contractor, there is no employment risk. This in turn could lead agencies to use Muscat as a selling tool for genuine contractors.

The problem for many contractors, of course, is that they may well be asked to work in the same way as an employee. Where a hirer insists on direction supervision and control rights the contractor historically has had little choice but to accede if the contractor wants the work.

However Muscat offers at least the negotiation point that if the hirer and the agency will agree to structure the work as a project (assuming that it can be) and treat the contractor not as an employee, no rights will accrue. This has the double benefit of providing crucial evidence to stave off HM Revenue & Customs' demands under IR35 and thus, the assurance that money earned and 'in the bag' can be spent.

I would even say that a genuine contractor set up on a project after deploying the Muscat argument, and working in line with that, who would have no employment rights against the hirer, may therefore be able to command a hirer charge rate, and may have lower overhead by avoiding unnecessary retrospective tax and penalties insurance.

The other side of the coin is that those contractors that are simply operating through a limited company to avoid tax and who are not genuinely working as self-employed will, surely accrue employment rights over a period of time. They pose a substantial risk to hirers and agencies alike (at least that could be the perception as mentioned above) and therefore can expect their contracts to be kept as short as possible. At the same time such contractors run a high risk of liability under IR35.

Article written and provided by Adrian Marlowe, Managing Director of Lawspeed Limited, the recruitment law specialist.