A standard contract should consist of certain elements and clauses. It is important to understand these, as an incorrect or incomplete contract can have implications on your IR35 employment status. Our Contract Clauses Guidance introduces the main clauses and provides suggested wordings.
Where an independent contractor is obliged to provide a personal service, this is similar to the obligation imposed on employees. There has been case law that indicates that where there is no obligation to provide such a personal service, there cannot be a relationship of employee/employer. This is why the right of substitution is fundamentally important to an independent contractor.
The courts have stated that where the right of substitution contained in the contract for services is so heavily fettered by the client or agency (in terms of them having an unduly wide right to veto any substitute that the right of substitution effectively becomes unworkable), it will weaken the right of substitution and may render it a sham.
It is essential that any right of substitution or assignment contained in the contract can be exercised in practice.
It is also essential to ensure that any clause enabling a substitute to be provided should not be too heavily fettered, i.e. the clause provides the contractor with the discretion, rather than giving the recruitment agency/client the right to unreasonably refuse to accept the substitute.
Suggested clause wording
The [Contractor] is not obliged to provide the services of a named individual in respect of the [Services] and may provide a substitute to perform the services. The [Contractor] acknowledges that the [End Client] has the right to refuse the substitute if in the reasonable view of the [End Client], the substitute(s) have insufficient qualifications and expertise to carry out the work. It is also agreed that the [Contractor] will remain liable for all acts and/or omissions of any substitute(s) provided.
Independent contractors should be engaged to provide services or functions that the client’s employees are unable to carry out. When engaging independent contractors, clients expect to pay a premium price for the independent contractor's experience and expertise. It is therefore expected that independent contractors should be able to carry out the assignment without any training from the client, except for an induction into the client’s premises and bespoke equipment and any health and safety briefings required.
In the contract, it is essential that there is a clause that recognises that the member is a specialist in the provision of services and does not require any control over how the services are provided (when and where can be acceptable provided that this is not excessive). Where such a clause is omitted from the contract, one should be inserted to demonstrate intention, otherwise it is open to interpretation and may weaken the ability to fall outside of the IR35 legislation.
Where the contract does not contain any wording to reflect the right that the contractor has a right to provide the services without any control, or the wording in the contract places too much control over the contractor's right to perform the services the wording in the contract relating to direction, supervision and control should be removed and replaced with the following wording:
Suggested Clause wording
Neither the [Employment Business] nor the [Client] shall seek to or exercise any supervision, direction and/or control over the [Contractor] or its [Staff] in the manner or execution of the [Services].
If the end client is obliged to provide the member with work to carry out on an ongoing basis and the member has an obligation to accept and carry that work out, this can show the existence of ‘mutuality of obligation’ between the member and the end client.
Not being engaged to work on one specific project, for a specific duration and/or undertaking different roles while on an assignment, can also show a mutuality of obligation.
Traditionally, when an Independent contractor finishes the assignment for which he has been engaged by the client the relationship with the client will terminate. Any further assignments will be covered by a new contract with new rates/pricing being negotiated.
If a mutuality of obligation does exist between an end client and the worker, this could indicate that the worker may not be a self-employed contractor and that the relationship between the parties is that of an employer/employee.
However, where your contract does not support this position, you may wish to consider adding the following wording should amend the contract:
Suggested Clause wording
It is not intended for there to be any mutuality of obligations between the [Employment Business] or the [Client] and the [Contractor] either during the [Assignment] or upon termination of the same. The [Employment Business] is under no obligation to offer future contracts to the [Contractor] and if it does make any such offer, the [Contractor] is not obliged to accept it.
Where the Contract Confirmation Note (CCN) or Assignment Schedule attached to the contract for services indicates either of the following, they may affect a contractor’s ability to fall outside of the IR35 legislation:
i) Fixed daily hours of work
This may indicate a mutuality of obligation as the member is required to be present for fixed hours each day/week and the client is obliged to provide work for the entire period. If this were an estimated figure, it would go some way to suggesting this is inserted to enable the member and agency to agree the costs for the assignment.
Suggested Clause wording
All references to set hours of work are estimates for the purpose of costing the [Services] to be provided by the [Contractor] and it is intended that the Contractor will have absolute discretion to determine how and when the [Services] will be performed provided always that the [Contractor] shall keep the [Client] informed as to when the [Contractor’s Staff] will be present at the [Client’s] site.
ii) Bonus payments
Where the bonus is a “retention bonus”, this may indicate a mutuality of obligation as the purpose is to retain the member and the client will have to provide work to the member.
Where the bonus is a “completion bonus” or “milestone payment” payable upon specified events happening (e.g. the completion of the project or a stage of the project) this is unlikely to affect a member’s IR35 status.
Suggested Clause wording
The [Contractor] shall be entitled to receive a lump sum payment upon completion of the [Services] to the satisfaction of the [Client] of £ +VAT. All payments will be made to the [Contractor] upon receipt of a valid VAT invoice in the agreed form.
