August 7, 2018
Employment Law

Does your business engage consultants?

In a recent case (Sprint Electric Ltd v Buyer’s Dream Ltd and another [2018] EWHC 1924 (Ch), 30 July 2018) the High Court ruled that, despite the litigants entering into what was called a “contract for services”, the true nature of the relationship was that of employer/ employee.

Surprisingly, this was a great result for the employer – it meant that ownership in the intellectual property rights in the software that the employee had developed belonged automatically to the employer. Remember – in a true contract for services / consultancy arrangement – the consultant will own the intellectual property in the materials that he or she creates unless the contract says otherwise. Not so for employees.

But while Sprint Electric may be popping the champagne the case will serve as a worrying reminder to businesses that just because they’ve called a contract a “consultancy agreement” or a “contract for services” and included “proper” consultancy clauses in it, this doesn’t mean the court (or HMRC) will agree. Our lead contract for services lawyers are Imogen Finnegan and Marc Jones who are experts in all employment law matters.

Here is a reminder of some of the things that the courts will look at to assess whether a relationship is one of employer/employee or client/consultant:

Contract for services – Factors indicating employment status

• The company is required to provide the individual with regular work and the individual must make themselves available to do the work.

• The individual is required to provide the contract for services personally. Either there is no right to appoint a substitute or any right of appointment is subject to the company’s approval.

• The company controls what the individual does, how they do it and when they do it. However, those holding senior, professional or skilled positions may retain significant control over how they carry out their work but still be employees. The individual may also be expected to conform to standards of, for example, behaviour expected of others within the same working environment.

• The individual is not normally free to enter a contract for services with other organisations without the express permission of the company. The individual may be subject to restrictive covenants in their contract.

• The length of the engagement is not determined (with the exception of fixed-term contract for services) and does not relate to the performance of a specific task.

• The individual is paid a fixed amount on a regular payment date irrespective of performance targets or completion of a specific task (however, note that commission workers may be employees). They may receive a pension, bonus, private medical insurance, company car or other benefit and be entitled to company sick pay.

• The individual is integrated into the company. For example, they perform services which are similar to or substantially the same as those performed by an employee, their name appears on the internal telephone directory, they have a company e-mail address, they have a company business card.

• The company provides the individual with the facilities and equipment required by them to carry out their job.

• The individual is paid even if there is not sufficient work to keep them fully occupied. The individual assumes no financial risk in working for the company.

• The individual is not responsible for payment of income tax and national insurance contributions (NICs) on their earnings.

Contract for services – Factors indicating self-employed status

• The company is not obliged to offer work on a regular or frequent basis and the individual has no obligation to accept any work that is offered.

• The individual has the ability to determine when and how they work and is not under the direct supervision of the company.

• The individual is not required to carry out the contract for services personally and has an unqualified right to appoint a substitute.

• The individual is free to provide their services to whomever they choose without operating exclusively for one organisation.

• The individual is engaged for a finite period to carry out a specific task or project.

• The individual is paid on completion of a specific task or project or on a commission-only basis. They are not entitled to participate in any benefit schemes and will not normally be paid overtime.

• The individual is not sufficiently integrated within the company to have a defined role and does not perform services similar to or substantially the same as those performed by an employee.

• The individual provides their own equipment and materials in order to perform the contract for services.

• The individual risks their own capital in the business and will be personally responsible for any losses arising from their work. They may be required to correct any unsatisfactory work in their own time and at their own expense. Conversely, they may have the opportunity to profit from the success of the project.

• The individual is responsible for payment of their own income tax and NICs on their earnings and is responsible for registering for VAT if the level of their supplies exceeds the relevant registration limit.

If you need any help putting a contract for services together or if you want your consultancy / contract for services arrangements reviewed get in touch with one of our lawyers at EM Law. Neil Williamson, Marc Jones and Imogen Finnegan are specialists in this area.