Opt in, opt out? What the agency regs are all about (part 2)
Q: Are, then, the Regulations worthless, as opt outs often are? Or at the least, do you believe the regulations need to be tightened?
A: The Regulations are not worthless and are a useful tool when protecting contractor rights to pay or their choice to work direct. Despite this, the difficulties in the interpretation of the Regulations make any dispute based on the Regulations a bit of a gamble.
The wording could be more precise and the absence of substantial case law in the agency area makes this worse. The Regulations are slowly becoming better known and, as they do, the courts should provide more clarity going forward as to what the terms actually mean.
Q: Due to their imprecise wording, or other factors, is it conceivable that the regulations may still not apply to a contractor even if the contractor opted in?
A: Yes, even if you do not opt out, the Regulations may not apply. This very much depends on whether there is ‘control’. Merely directing a contractor to complete a project is likely to be insufficient for there to be control. But the position may be different where a contractor is working together with in-house specialists on internal systems which may require more detailed direction.
Q: In short, does opting in or out have any implications in the event of an IR35 investigation by HM Revenue & Customs?
A: In theory, no it should not. It has been suggested that opting out shows you are not under control which helps IR35. In truth if you are not controlled, the Regulations do not apply anyway so opting out may actually imply there is control in the first place! Most opt out notices, however, say that the Regulations do not apply AND if they did the contractor opts out generally just in case. This does show the intention of the parties which can help with an IR35 investigation but it is far from definitive.
Some commentators have also implied that contractors expressed a determination to keep the right to opt out of the Regulations because, if they were covered by the Regulations, the implication was that they were controlled by the client, which contractors felt would be undesirable if they were assessed under IR35. However I believe that contractors really pushed to retain the opt out to maintain flexibility and maximise their options. Without the opt out provisions, there is no choice.
Q: How should contractors respond to an agent who says the contractor’s decision to opt out, or in, could have a positive, or negative, bearing on an IR35 investigation?
A: Take separate advice. Advice on IR35 should come from the contractor's accountant, lawyer or an employment status expert. Advice from any party who has a potential vested interest in the contractor opting out should always be approached with caution.
Giving notice on the fact that the Regulations do not apply because the contractor is not "controlled" and even if so, they opt out, may assist with IR35. An opt-out on its own merely indicates the Regulations do apply (as the contractor is controlled by the end user) but the contractor does not want them to, which arguably gives little help on IR35.
Q: Are agencies legally entitled to offer differential rates of pay to contractors depending on whether they opt out, or opt in?
A: Regulation 32(13) states that the agency should not make the provision of their services conditional on entering into an opt-out. Whilst this does not specifically state that they cannot offer different rates of pay, if the contractor is offered a contract at certain rates solely if they opt out, this is arguably a condition to that contract. However this could potentially give grounds for a claim for damages for the difference in pay under Regulation 30. Whether or not the contractor can prove that this was a condition is a different matter as any agency is unlikely to state this in writing.
Agencies are also prohibited to offer temporary/contract assignments bundled with services on condition that the contractor must use or pay for those services.
Q: What is the main problem you see contractors struggling with when it comes to the Regulations, and what tends to be the fix?
A: The main issue is that the Regulations are generally unreadable and the guidance available is contradictory. The best example of this is of course whether or not to opt out. Some contractor groups say opt in for protection, others say opt out because of IR35. Most of the agencies’ bodies say opt out for simplicity. The fix is to approach each situation or contract in isolation and take a view. A lot of the time it is best NOT to opt out, be potentially protected and argue the control point separately with the Revenue if IR35 becomes an issue.
Answers, as told to CUK, by David Buckle, head of the employment practice at Cubism Law.