Only attractive contractors go direct

Contractors should face the fact that sitting behind an agent is a jolly nice, comfortable position. The agency takes the risk of non-payment by the end client, it invoices the client, it smoothes cash-flow worries by chasing tardy payers, it even pays the contractor based on a time sheet. And all for only 10 to 20 per cent.

You might think the 10 or 20 per cent will by yours if you go direct, but it ain't necessarily so. In this wonderful, capitalist society of ours, the client will understand there is no longer a middle man and will quite likely demand a cut of the pie. After all, they now have to deal with your small limited company, set it up as a supplier, go through all accounting procedures and deal with your invoicing enquiries directly.

This might be no different for small companies that employ single contractors for short term jobs, but on large projects with tens or hundreds of contractors, companies prefer dealing with collective invoices from preferred-supplier agents with advantageous payment terms. If companies go direct with one contractor, then why not them all, and then they would be in a right administrative mess for a six month development with half a dozen sub-projects.

As an example, and to illustrate how as a small independent supplier you might find yourself in competition with agencies, Dave Waterman, developer and architect working in a two-director limited company, found doing the job well was not enough to keep his direct contract. "We delivered exactly what we said we would, when we would. Unfortunately they [the end client] have now given all external resourcing to an agency and refuse to bring small companies in direct."

The client made a corporate decision to source workers through an agency; end of story. It seems illogical and somewhat arbitrary that their first consideration was not to the work Waterman could do for them but to the arrangement of the contracts.

But the paper trail can be crucial in defining the legal basis of the relationship, and many clients have no desire to risk embroilment in tribunal claims for unfair dismissal, or sick pay or maternity leave or other statutory rights awarded to employees, because they didn't do their legal homework.

When HP Ltd. v O'Murphy was settled in 2002 at the Employment Appeals Tribunal, it was found that O'Murhpy had no claim for unfair dismissal since the chain of contracts between his personal services firm, Circle Technology Ltd., and HP Ltd. did not amount to employment status.

That computer specialist O'Murphy was operating via an agency made a significant difference in the case. Robyn McIlroy, senior associate employment lawyer at law firm Pinsent Masons, said, "If there had been a direct agreement between the parties on such matters as confidentiality or data protection (which is not uncommon) then there might have been more scope for arguing that this created an employment relationship."

While only heard in the Employment Appeal Tribunal and not amounting to precedent, the case is useful from an and end client's perspective since it limits liability for employment problems and provides a reason to seek contractors via agencies.

These practical and legal reasons for companies to prefer agency workers means the contractor must be able to offer a better deal if attempting to go direct. Far from being a licence to print money, rates may need to be reduced, and contracts carefully drafted to be attractive.

Even then, companies will take a view on employment status since the written contracts are only part of the relationship and the facts of the working arrangements will also be taken into account should contractors, like O'Murphy, decide they are unhappy with circumstances and involve a tribunal.

Going direct may not incur as much advantage as fabled, and then you still have to chase your money. When Waterman first began to work direct he learnt some hard lessons in writing off bad debts. "Ask your accountant about debt collection firms," he says.

William Knight