Starting out as a contractor and owner of a limited company, it is well worthwhile spending some time in building a good understanding of contract law.
That’s not to say you need to be an expert in it; you just need to have a good basic understanding of what constitutes a favourable contract and when you need to employ the services of a contract law expert. So before you get caught up in the heady excitement of securing your first contract, adjust your mindset from employee to contractor and service provider.
The terms you really need to know
Contracts are the keystone of contracting. They set out what you are offering the end-client (via the agency) and ensure that you are paid what you agree for the work you agree to. There are a few terms that are important to have a good working knowledge of to ensure you get the best possible deal. Some ensure you don’t fall within IR35 (you can read more about IR35 here), others are standard elements of a contract.
Contract of service vs. Contract for service
This is the difference between being an employee (contract of service) or a service provider (contract for service). Your contract with an umbrella company is a contract of service where you are paid to work for the client on an ongoing basis for what is essentially a salary. The umbrella company then has a contract for service with the recruitment agency.
For contractors operating using their own limited company as a service provider you have a contract for service between your limited company and the recruitment agency, you provide specific services as defined in the contract for a fee.
Mutuality of obligation (MOO)
Employees and employers have mutuality of obligation – the employee has to turn up to the office, and work within the parameters of their job description, for specified hours. The employer in return provides an agreed salary, work for them to do, holiday and other employee benefits.
In contrast, as a contractor, the client pays the agreed fee for a specific project or deliverable, so if the project is delivered early or is cancelled, the client is under no obligation to find the contractor something else to do. The flip side is that the contractor doesn’t have to sit in the office 9-5, provide services outside of the contracted terms and can substitute another contractor should there be a substitution clause in the contract they sign.
The contract you sign shouldn’t detail what could be seen as control over the contractor by the client; this could include reporting to specific managers, having work checked, detailing how and when work is done. The contract should focus on what needs to be delivered, as how it is delivered is ultimately under the contractor’s control. This ensures you are not seen as an employee and remain outside IR35.
Restrictive covenants are sections within a contract that protect agencies from contractors sourcing ongoing work from the initial contract with a client direct. Agencies invest a lot in cultivating their clients and sourcing contractors for them; the majority of contractors see this as a fair reflection in the cut they take from the contract fee charged to the client.
The majority of restrictive covenants restrict contracting direct with a client (and sometimes subsidiaries) for a specific time after the initial contract ends. It is worth noting that restrictive covenants are a two way street – should the agency try to drive down your rate for subsequent contracts or alter the terms of your agreement it can effectively render the restrictions void but don’t take this as an absolute as the covenants are enforceable and you should always take legal advice before challenging them.
The schedules within your contract should outline what the client expects you to do. It usually includes:
- Specific services you are to provide as part of the project or deliverable.
- Time limits – a timings schedule often outlines key milestones for deliverables and time-critical points that need to be met to satisfy delivery.
- Your rate and payment schedule – ensure that this is tied to deliverables within the project rather than a regular payment to ensure it cannot be construed as a salary.
- Technical warrants, protection and equipment – warrants outline technical skills you (or substitutes) possess that are critical to the effective delivery of the project; protection includes the insurance and liabilities you are expected to cover; equipment includes any hardware, software and specialist equipment you are expected to provide when you provide your services to the client.
Understanding the basics of contract law is the best way to ensure that the contracts you accept are fair and reflect the project you work on. For more information on standard clauses that may be in your contract, visit the IPSE website. The Association of Independent Professionals and the Self Employed (IPSE, formerly the Professional Contractors Group – PCG) provides advice for contractors and is a member of HMRC’s working group on IR35 application.
How to accept and sign a contract
“A verbal contract isn’t worth the paper it’s written on” holds true, but verbal contracts are enforceable. One of the golden rules of being a successful contractor is to give due consideration to any contract offered. The most successful contractors know their way around a contract and have new contracts reviewed by a professional where appropriate; this enables them to negotiate any terms or clauses that are unfavourable. There are some crucial milestones in agreeing and signing the contract that’s right for you.
The interview is the chance for the client to see if you are a good fit for the project and for you to ensure that the project is right for you. Even if it is the dream contract, never jump in and accept a contract at the interview. You can certainly express an interest and offer assurances but without the full terms and conditions you should in effect be saying “That sounds like the perfect fit, when can I expect the contract to review and agree?”. Typically, this will be an agency contract which is standard.
Information to come out of the interview with:
- How does the client feel about your rate?
- Do they have any reservations about hiring you? (You need to combat these reservations before leaving the interview).
- When they are looking to offer the position (so you can chase the agent).
Consideration and negotiation
The agency will usually call first to discuss your rate and it’s important to ensure you are comfortable with the agreed rate. The next step is to review the contract itself – the terms and conditions of your service agreement to the client. You need to ensure that all of the terms and conditions are commensurate with what you are going to provide to the client and what you expect in return.
This is your opportunity to negotiate if any of the terms within the contract are unfavourable. Negotiation skills are crucial to ensuring the contract meets your needs as a contractor. If you don’t agree with certain terms you’ll need to have them removed or amended. If you don’t understand any of the terms or why they are in the contract, you need to understand why they have been included – this is where review by an expert, not an accountant, is invaluable; don’t expect an agency to work in your best interests – they ultimately work for the client so it’s your job to ensure that the contract you enter into satisfies your needs.
When reviewing and negotiating the contract, ensure you provide feedback in good time but do not let the agency pressurise you into signing the contract without reviewing it fully.
Signing – if you operate via a limited company
The contract needs to be signed by both parties – you as the contracted company and the client/agency on their behalf. Note that you are signing the contract as a company not as an employee. The contract should be in the name of your limited company as it provides additional protection and is more likely to be a Contract for Service.
You need to ensure that you retain original signed copies of each and every contract. In addition, retain any correspondence related to the terms of service. This provides a solid audit trail should HMRC require information to support any contract’s status in relation to IR35.
Signing – if you operate through an umbrella
Your umbrella company signs the contract with the recruitment agency. It is important that you are involved in reviewing the contract before the umbrella company signs it on your behalf. The recruitment agency is entering into an agreement with the umbrella, which employs you and ultimately pays you.
Making contracts work for you
As a contractor it’s your job to ensure that the contracts you enter into fit with the services you expect to the client, under the desired terms.
Understanding the basics of contract law enables you to:
- critically review the contract on offer and negotiate elements that don’t fit with your business model or requirements as a service provider;
- work outside of IR35 for the majority if not all of your contracts;
- enlist the professional services of a contract law expert to review contracts when required;
- know what to do should problems arise when the terms of the contract are broken.
If you are looking to make the leap into contracting, consider a relatively short contract for your first foray. That way, the first set of terms you work to are for a short duration and any learning points can be applied to longer-term assignments in the future.
Start up with confidence. Download your free book
"I really wish I had access to this book when I first started - I highly recommend this for any early business owner"
Start your company with confidence by reading our best-selling book "Preparing to Set Up Your Limited Company" which is now available for free. Simply enter your details below and we’ll email you your copy, instantly.