Employment rights for contractors

Clients are becoming increasingly concerned about possible claims for employment rights from limited company contractors and temporary workers supplied through agencies. Evidence of this may be seen in agreements issued by clients that require the agency to provide indemnities against such claims.

These indemnities are designed to cover all awards and costs incurred in the event that a contractor seeks compensation from the client for breach of alleged employment rights. The logic in this trend seems apparent but it does come at a time when those same clients want flexibility in their work force and when some clients are insisting upon margin reductions and rate cuts.

Agencies should carefully consider the risks involved in agreeing to accept liability for employment rights. These risks are unlikely to be covered by any existing professional indemnity insurance policy. As an example, unfair dismissal can occur when a fixed term contract is not renewed. The maximum compensatory award for unfair dismissal is currently set at £51,700 but a successful contractor may be entitled to additional awards. Due to the large fees commanded by contractors, at least in the IT, telecomms and engineering sectors, any award could be significant.

The danger of having such liabilities forced upon an agency is that there is little the agency can do to stop employment rights accruing, and therefore the risk of a claim accruing. It is not the agency that insists upon having direction, control or exclusive use rights over the contractors – it is the client. Similarly, contractors are, by their very nature, in business on their own account. In exchange for receiving higher rates and gross payments they accept responsibility for their own actions and the work they do. It could be said that in seeking employment rights such a contractor is not “playing by the rules”.

Certain steps can be taken to minimize the risk. For example, the right to sue for unfair dismissal does not accrue until there has been12 months of “continuous employment”. A contractor engaged on a contract of less than that period will not usually have a claim, at least for unfair dismissal. In contrast, there is little that the agency can do to protect against a breach relating to maternity rights. One option could be to refuse to supply female contractors on contracts of six months or more, but this is discriminatory and not a viable proposition.

Another solution could be to require each contractor to indemnify the agency against potential claims – this could work as a deterrent and provide a financial indemnity. However, the chances are that a contractor operating through a limited company would ensure that that company has little funds available to honour such an indemnity before embarking upon a claim.

Of similar, if not greater, concern is the requirement for agencies to indemnify against discrimination (sex, race, disability) claims by contractors. Discrimination claims are brought under various statutes and relate to infringements of the claimant’s basic human right not to be discriminated against, regardless of whether the claimant is an employee. It is hard to see any justification at all for a client to ask an agency to pay for the discriminatory, and consequently illegal, actions of the clients own staff.

Relating to all of this the question must be asked – since, in contrast to agencies, clients are able to obtain insurance against employment rights claims, why do they seek to pass the risk on to agencies? The cost of the premium could easily be spread.

There is a concurrent issue here, that of IR35. Genuine limited company contractors invariably wish their contracts to reflect the fact that they are not working under the direction and control of the client. However, many clients want nothing to do with IR35 style contracts. They have decided that they do not have the time to alter contracts or have been scared into believing that they may become fraudulently involved in tax evasion. In reality, the only instance in which a client could possibly be guilty of such an offence is if the client knowingly agrees to terms that do not reflect the true circumstances with the intention of assisting the contractor to avoid tax. The client will always be aware of the true circumstances and that by agreeing terms it will be bound by those terms – the risk is therefore very small. A blanket refusal by clients to consider any contract that for example, refers to a project and to the fact that the contractor will work under its own control does nothing to help and the client may find itself unable to engage the expert contractor required. Furthermore, a refusal by clients to amend their own contract terms in order to reflect the true nature of the engagement runs contrary to the stated intention of hiring a “contractor”. This can only result in argument in the event of dispute and may give rise to employment claims by contractors.

With a shortage of contract work available, and clients wishing to cut their costs, agencies may feel that they have little alternative but to take on board employment right liabilities in order to maintain business. This may be a mistake. As the requirements become standard practice there will be little opportunity to turn back the clock.

So perhaps the time has come to tackle this issue head on. Do clients want to hire contractors, in the strict sense of the word, or do they want fixed term employees? If the former, then clients might agree to treat the contractors as contractors and not as employees, and to only seek indemnities if they do not insist upon control and exclusive rights. If the latter, they should assume the consequent costs and responsibilities like any other employer. Whichever route is chosen, the contracts between the parties should be carefully drafted to reflect exactly what the parties intend and their respective functions, instead of using one type of contract for all engagements. There should be acceptance of flexibility, which can be provided for in a single agreement, and no duplicity on the part of clients whose real intention is to treat contractors as employees.

As more and more liabilities are forced upon agencies, there will be an inevitable cost. Coupled with other current trends there must be a risk that the entire structure of contracting, so carefully and successfully grown in this country, could decline with potential losers all round. Clients should accept they cannot have their cake and eat it and agencies should assess their liabilities and future exposure carefully.

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