Contractors and Contracts: the importance of a written agreement to prevent ‘disguised employment’

Solicitor, Jake McManus explains the importance of having a written agreement when choosing to engage with a self-employed contractor or consultant.

The emergence of the ‘gig economy’ over the last decade has drawn attention to employment status and its complexities like never before, fuelled by high-profile cases that have attracted widespread media attention, such as the Uber v Aslam case, where Uber’s drivers were found by the Supreme Court to be ‘workers’, not self-employed. The ramifications of this court ruling were huge as suddenly those drivers were entitled to numerous employment rights such as the national minimum wage and holiday pay, no doubt leaving Uber with a significant bill to pay. What is more, it was reported at the time by the BBC that Uber’s share price took a hit as investors were concerned with how the court’s decision may impact its business model going forward, demonstrating how the consequences of getting employment status wrong go further than the court proceedings alone.

The business case for engaging self-employed contractors or consultants

Whilst the Uber case displayed the risks involved when engaging individuals on a self-employed basis, rather than by using a contract of employment, it should not stop employers from utilising self-employed contractors or consultants as there are many benefits from doing so.

There is a level of flexibility on offer for employers that a traditional employment relationship is unable to provide, for example choosing as and when to engage an individual for their services based on business needs, as opposed to there being a contractual obligation to provide work. When the business need no longer exists, for example during quiet periods, a difficult economic climate or on conclusion of a project, then the business can choose to no longer engage the individual and save costs. There is no need to pay tax such as an employer’s national insurance contributions and the business will not be obliged to provide additional benefits or statutory entitlements that employees receive such as redundancy pay, instead paying only for the service provided. Perhaps most importantly, it is much easier and quicker to terminate the relationship with a self-employed contractor or consultant than dismissing an employee.

The importance of a written agreement

When engaging a self-employed contractor or consultant it is hugely important for a business to be clear on the terms of that engagement to ensure that the relationship does not unintentionally become akin to an employment relationship. There is no better way of doing this than having a written agreement in place. The agreement can be used to clearly define the relationship and determine the responsibilities owed by each party. Importantly, it allows the employer to control the terms of services to be provided by the individual whilst engaged by the company.

Given the risk of a self-employed contractor or consultant being regarded as an employee, a written agreement can be used to prevent misunderstandings between the parties or confusion as to their duties within the contractual relationship. The agreement should therefore unequivocally state that the relationship will be that of an independent contractor and nothing should render the individual as an employee or worker, nor should the individual hold themselves out as such. The employer would then be able to refer to that specific clause if the individual’s employment status is ever challenged.

A well-drafted agreement can be used to contractually oblige the individual to indemnify the business for any costs, expenses or penalties should their employment status be challenged. For example, this could be used to protect the business from the costs associated with any claims brought by the individual in an Employment Tribunal, or any demand by HMRC for unpaid income tax or National Insurance.

A recent decision by the Employment Appeal Tribunal (EAT) demonstrates the protection that a written agreement can provide to a business. In Plastic Omnium Automotive Ltd v Horton, the company engaged the contractor, Mr Horton, via a written agreement to provide his services to the company. The company asked Mr Horton to become an employee, however he declined their request on the basis that he found his current engagement as a self-employed contractor to be more beneficial. The company challenged Mr Horton’s employment status via the Employment Tribunal, which found Mr Horton to be a ‘worker’. The company appealed and the EAT in turn held that Mr Horton was genuinely self-employed, not a worker, as his written contract with the company reflected the true agreement between the parties and was also consistent with the practical reality of the parties’ relationship. Given the agreement unequivocally stipulated that its “terms shall not be construed as a contract between any individual supplied or any representative of the contractor”, and it was reflective of the actual working arrangement, Mr Horton was held to be self-employed.

This case demonstrates how having a written agreement in place, which clearly sets out the position of each party and defines the relationship, can be used to protect a business (albeit in this instance, the individual) should the contractor’s employment status be questioned.

What could go wrong?

As seen above, any uncertainty in respect of an individual’s employment status can expose a business (or the individual themselves) to legal challenge. In that event, a claim could be brought in the Employment Tribunal when the relationship is terminated, such as a claim for unfair dismissal, or claims whilst the individual is still working for the business to assert their statutory rights as an employee for entitlement to holiday, notice or statutory redundancy pay.

Perhaps what is more consequential for a business is the risk that HMRC will consider that insufficient tax and/or National Insurance Contributions have been paid if an individual’s engagement is regarded as being disguised employment. This could result in the business being liable for unpaid tax, interest and penalties associated with the individual’s incorrect tax status. To make matters worse, HMRC operates on a risk basis which means that if they assess a company as not having complied with tax rules, they are likely to inspect all of the company’s tax affairs until they are satisfied that there are no concerns, looking back as much as six years earlier.

The caveat…

As the Plastic Omnium Automotive Ltd case demonstrates, it is important that an employer engages a self-employed contractor or consultant via a written agreement. However, whilst an agreement may appear on the surface as being a contract for services, for example it is named as being a consultancy agreement, an Employment Tribunal will scrutinise what happens in practice to determine an individual’s actual employment status. Often key to this test is the level of control the business has over the individual. If the business has much control over the individual, then it is more likely that there is an employment relationship as opposed to engaging someone on a genuine self-employed basis. It is therefore crucial that the written agreement reflects the reality of the working relationship where an individual is engaged on a self-employed basis.

We strongly recommend that you consider having a written agreement in place should you choose to engage a self-employed contractor or consultant. If you would like us to provide you with an agreement that is bespoke to your business, or you would like any advice in respect of the above, please contact Jake McManus, a solicitor in the Employment team on 0161 912 6151.