Contractors: IR35 is not the only risk factor

Dubious Algorithms

Understandably, with the impending Off Payroll Legislation only weeks away, there is some panic within the contracting community regarding the need for an IR35 assessment of contracts and working practices.

The reforms have put both contractors and their clients on high alert as contractors will no longer be responsible for assessing their own status since this risk will be shifting to the ‘fee payer’ in April. As a result, many contractors have decided to have their contract reviewed by an ‘IR35 expert’ to advise whether the contract is ‘inside’ or ‘outside’. Unbelievably, some contractors are even relying on automated algorithms to make that determination. Presumably this is because a computerised assessment is quick and cheap. This, however, is very short-sighted on the part of contractors and opportunistic on the part of the algorithm suppliers who can ‘conveyor belt’ IR35 reviews. These suppliers often promote an insurance product at the same time.

Assessing the other risk factors

What is conspicuously missing from these IR35 reviews is a thorough analysis of the non-IR35 risks in the contract.  Although an IR35 review is obviously important, particularly in the context of the new legislation, it is also absolutely crucial that contractors review all the terms contained within the contract. Commercial contracts usually include other significant areas such as indemnities, restrictions and liability clauses which could be just as financially risky as IR35, if not more onerous.

Notwithstanding this, it seems that the majority of contractors do not have their contracts reviewed by a qualified commercial contracts lawyer who can advise on the implications of obligations and liabilities which, if enforced, could bankrupt a contractor.

Some examples of onerous terms commonly found in contracts include the following:

Payment Terms

It’s important to make sure your contract contains clear payment terms. It should include a detailed breakdown of the fees, the payment procedure and when fees can be withheld and or delayed. In the event you fail to comply with the payment terms, there’s also the chance that your client or agency could withhold payment or use their right of ‘set-off’.

When it comes to late payments, it’s also worth bearing in mind that you can legally charge a client interest, which is 8% plus the Bank of England base rate for business to business transactions, however this is often missed in contractual drafting.

Indemnities and Liabilities

An indemnity is a contractual obligation of one party to compensate the other party for a loss. The implications of an open-ended indemnity which requires the contractor to compensate the agency and/or the client for indirect and consequential losses could be catastrophic. These are in addition to direct losses, so could be catastrophic if they exceed the amount of your insurance cover. It would be even worse if they are excluded from your cover entirely.

For example, let’s imagine you make a mistake, or you are alleged to have made a mistake, which leads to the agency and or client losing out financially – in many cases, your contract will hold you liable. In some cases, some indemnities make you responsible even if the loss was not your mistake! A huge data loss or cyber loss could cost an organisation millions of pounds. So, unless your liability was capped and the indemnities carved-out for your negligence only, then you could be left holding the ball. As a consequence, this could put you out of business, or even worse, ruin you financially.

The importance of carving out indemnities for your negligence only and capping liability to a sensible figure, cannot be overstated.

Restrictive Covenants

Restrictive covenants are often found in commercial contracts. They are included to prevent contractors from competing with the agency or client and/or to stop contractors from working directly for a client or with a client’s competitor. Such covenants are set for prescribed amount of time after the assignment has finished. In order to be enforceable these restrictions must be carefully drafted (and compliant with EAA regulations) and the duration can be no longer than necessary to protect a “legitimate business interest”. In practise, 12 month restrictions are commonplace, preventing a contractor from working directly with a client for an entire year after termination.

Termination

Your contract should also include information around termination for a number of reasons:

  • the working relationship you have with the agency or client might break down or,
  • you might receive another offer elsewhere,
  • you might want to stop working on a particular project or through an agency because of late payment

In any event, you need to know whether there is a clause allowing you to ‘terminate for convenience’ or whether you can only ‘terminate for cause’. It is therefore vital you have an idea of how to legally terminate a contract with a particular client or agency, along with the repercussions of doing so.

Be prudent

There are likely to be many other obligations in the contract that will put you in breach if you are unable to fulfil your contractual obligations, even if that is through no fault of your own. It is therefore commercially prudent and absolutely essential that you have your contract reviewed to ensure that you are comfortable with the terms. Whilst it may be tempting to just sign the T&Cs without really understanding the legal and financial implications if things go wrong, doing so would be unprofessional and a risky approach to doing business.


WTT Legal Ltd. has experienced commercial lawyers who not only have an excellent understanding of IR35 but can also advise you on contractual pitfalls and liabilities. We also have an in-depth understanding of restrictive clauses and can advise with respect to their enforceability. Contracts are often poorly drafted and ambiguous and can be challenged on many fronts – however it is far better to have your contract reviewed and amended before you sign it so you understand exactly what you are getting into!

So, whilst it is obviously sensible to have an IR35 contractual review, do not fail to consider the other terms lurking in your contract that could trip you up.

For a free legal consultation to discuss our contractual review services (including IR35 and all commercial terms), please contact us at
info@WTTlegal.co.uk.