Beating the IT contract crunch iii) pressure points
Contractor's complaint: I'm being pressured to become an employee
In this economic downturn, client companies are pursuing cost savings by offering to take high-wage contractors on as employees on the basis that they will not be able to renew existing contracts when they expire. Contractors suggest they find such offers detrimental to their status as an independent supplier, and wonder whether the offer would be perceived as signpost towards IR35, should they be unlucky enough to face a tax enquiry. Contractors wonder if they can insert a clause into the contract prohibiting such offers of permanent, direct employment, or whether this would have the reverse result of bringing them closer to an IR35 liability, in the event HMRC investigates.
There is nothing you can do to stop your employer turning you into an employee if that is what you are. This may seem like a glib answer but whether you are classed as an employee or self-employed is not a simple decision. There are a number of factors that must be taken into consideration and there are no hard and fast rules. There are however a number of cases that we can look upon for guidance and also a number of assumptions as a result of these cases and guidance generally.
You would be classed as self employed if you run your own business and control what you do and when you do it. You would have several customers as opposed to just one, You use your own tools/ equipment, you engage other people to help you as and when you want at your own cost and expense.
In contrast, you would be classed as an employed person if you work for one person/ entity, if someone directs you as to how, when and where you should work, provides you with tools/ equipment, you are paid a set salary or wage and you have deductions taken out for PAYE , tax/ NI contributions. Also with regards to your work- the benefits and risks are borne by someone else.
As you can see it is not a decision made only by signing a contract of employment, as you may find that you are still classed by the Inland Revenue as an employee if an enquiry were to arise. The taxman has altered the law for a reason.
That said, signing or renegotiating any contract should be a free choice and a big change to your contractual position made without your consent is likely to be unlawful. The very first thing, as usual is to examine your existing contract. Check that you have not signed a term which allows a conversion under certain circumstances and check what those circumstances are. If you are unsure, ask a solicitor to look it over.
What the law says
If an investigation is undertaken into your tax situation, and your status as a self-employed contractor is not approved, the extra tax burden will fall on the employer as you are already paying your tax as self-employed. Having said that do watch out for any claw back provisions in any agreement that you have with the client/ employer. If you are covered by the IR35 law, matters changed a little last year. A case in point is Dragonfly Consultancy Ltd where a £99,000 retrospective tax bill was applied. This case resulted in contractors in similar situations reviewing their terms and status. Of course this article cannot substitute tailored advice and is not meant to.
If you are forced into accepting a contractual situation in which you are unhappy, presumably because of economic influence, you may argue that in court you would be able to resort to the doctrine of duress. It is a relatively late developer in English contract law, and much better recognised when it relates to physical rather than economic duress. Consideration is at the base of the existence of the doctrine of duress, i.e. if someone points a gun at you head and you sign a contract you have not provided any consideration for your signature. This is of academic interest, but in summary consideration does not need to be adequate so if you sign up (or allow a variation) to work for a year at one pound a month, you've still provided consideration so that a fully formed contract is created. In other words, your look-out. English contract law recognises inequality of bargaining power, undue influence and unconscionability but always remember that the law does not like venturing into the field of economics. You may also refuse direct employment on the basis that the change goes to the root of your contract and therefore the client is in breach and you are no longer obliged to fulfil your side of the contract. See part one of this series for more on this argument.
IR35 applies to situations where you are paid by an intermediary who is paid by the client. You are advised to seek help on these matters as they relate to the current financial year alone. If the intermediary is your limited company and you pay yourself in dividends the Inland Revenue has brought the legislation in for you, so you need to make sure you understand it.
What to do
•You must always make sure that a contract is favourable before signing;
•Draw up your own pro-forma before you go into negotiations;
•Ensure that you insert a clause which prevents unilateral decisions on employment status;
•Be aware what circumstances would indicate you would no longer be classed as self-employed – speak to a specialist solicitor or accountant;
•If a clause does exists in your contract concerning employment status see a solicitor; and
•Be sure to get compensation (consideration) for the renegotiation and make sure you get a new contract to suit. You may be able to dissuade the other party.
•Indemnity - most contracts will contain a clause from the client stating that if the Inland Revenue were to investigate the position and view the relationship and term this as an employer/ employee relationship then the contractor would repay the tax/ NI deductions.
Contractor's complaint: I'm being pressured to follow suit, dubiously
In this economic downturn, some contractors have been instructed to lower their rates by their agent, saying the client has ordered the reduction for all contractors.
However, contractors want to know the best course of action to take if they discover that, contrary to the agent's claim's, their freelance counterparts are not working at a reduced rate, and a reduction has not, in fact, been ordered by the client. Contractors also wonder if they should inform the client of the implication that the agent is simply trying to make more commission at the expense of contractors and client.
There are two issues here, but both revolve around your agent not being honest with you. First things first, consider changing agent! Before that, seriously consider if you can have a hard conversation. In the situation posed, firstly try and discover the agent's justification for varying your rate in comparison to other contractors. The unfortunate truth may be that they are better or more experienced than you. Quality will generally win out in a recession. You may therefore need to get to the bottom of the position before you make any judgments on your agent's motives. Given the fact that you know that lowering the rates has not come from the client - put this to the agent. Also the fact that you know other contractors have not had to lower their rates should be used as your last resort.
What the law says
English contract law is almost entirely of the courts' creation. These sort of questions have been decided over the last century or so in the English law courts and I could spend an age discussing the various and varying 'doctrines' that our learned judges have developed to answer specific cases on the facts whilst ostensibly remaining within a framework. Realistically all one needs to do in a situation like this is use good common sense. A good lawyer will help you deal with the situation by giving you sound commercial and personal advice, keeping the big gun of the law in his pocket for any unpleasantness.
What to do
You really have to consider if you are able to stay calm for long enough to deal with your agent calmly and professionally. You need to find out if he/she has valid justifications for his actions and what they are. If you cannot, you may be forced to employ a professional. It may work out a financially sound move.
If you need the agent more than the agent needs you, you may need to take it on the chin and make it clear that you are worth keeping the right side of and worth putting forward for jobs. You may want to offer a compromise if you believe that you can do this with dignity, and if the agent is worth it. Make the agent believe that you can make waves amongst other contractors.
If your agent has lied to you whether you inform the client depends entirely on commercial matters which vary client to client and situation to situation.
Contractor's complaint: I'm being pressured to accept a nasty clause
In previous economic downturns, clients sought to improve their bottom line or future position of their business by inserting words and clauses, relating to termination notice and control of the worker, in their freelance staff contracts upon review or renewal. Contractors wonder if clients in this downturn are using any contractual phrases that may hurt the contractor, in terms of termination or IR35 liabilities.
We must be very wary here of providing generalised contract advice pretending to be specific, as it can be akin to advising to focus on kicking tyres when the car is an insurance write-off.
Take a contract to see a commercial solicitor and ask them to look it over for you for a fixed fee. Try and make sure it is one you feel is unduly onerous and if he is a good solicitor you ought to be able to pick up a rudimentary grasp of what to deal with and how. Even better ask the solicitor to redraft it for you into your favour. You will then have a pro-forma or template and if you cannot afford legal help next time, you at least have a base to negotiate from.
CUK was advised by Izaz Ali, a director of Lawdit , a legal firm specialising in intellectual property, internet and technology law.