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What is a consultancy agreement?

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Consultancy agreements are used by businesses to engage the services of an individual without forming an employment relationship.  Our Employment Law team here reviews the different types of consultancy agreements, their benefits and drawbacks, before outlining some of the clauses that may be included in a consultancy agreement.

Self-employed individual consultancy agreement

One form of consultancy agreement is between a business (the client) and a self-employed independent contractor (the consultant). The consultant enters into a contract with the client to perform services in exchange for remuneration. The consultant is in business for themselves, and will be required to account for their own income tax by self-assessment.

Personal service company consultancy agreement

Another common type of consultancy agreement is a consultancy agreement via a personal service company (PSC). Under this type of agreement, the consultant owns a service company, and is usually also its employee and sole director. The consultant does not enter into a contract with the client, instead, the client enters into a contract with the consultant’s PSC. The consultant carries out personal services to the client and upon receiving an invoice, the client pays those fees to the consultant’s PSC.

Medium and large employers who engage consultants via their PSC should be aware that the consultant may be deemed an ‘employee’ for tax purposes under IR35. As of April 2021, the client must prepare a “Status Determination Statement” for each consultant they engage with in this way. The SDS must include, among other things, whether the consultant is truly self-employed or is in fact an employee for tax purposes. If the consultant is deemed to be an employee, the “fee-payer” (which in some cases is also the client) will be responsible for deducting income tax and employee NICs through PAYE.

What are the benefits of a consultancy agreement?

Consultancy agreements can be useful if you have a limited need for certain expertise or skills that a consultant can provide. A true consultancy relationship is also free from many of the statutory obligations and liabilities that govern an employment relationship. This makes them more flexible and gives you more freedom in setting out how the relationship operates.

What are the drawbacks of a consultancy agreement?

Businesses have considerably less control over consultants than they do over employees or workers. Consultants generally will not be under implied duties of fidelity or confidentiality, so you may wish to include clauses in the consultancy agreement which protect your confidential business information. However, you should be aware that any clause which increases your control over the consultant increases the risk that they will be deemed an employee.

If you engage a consultant via a PSC, you will also need to consider the additional obligations placed on you by IR35, mentioned above.

Clauses to consider including in a consultancy agreement

1.Substitution clause

A substitution clause allows the consultant to appoint another qualified person to perform the services required on their behalf, and the inclusion of such a clause may go towards demonstrating that the individual is self-employed. However, its usefulness in establishing self-employed status may be weakened if the right to appoint a substitute is not genuine, or if it is restricted in some way, such as where the client has to consent to the appointment of the substitute.

2.Restrictive covenants

You may want to impose restrictive covenants on a consultant where they have built relationships with your customers, suppliers, and employees or where they have gained access to sensitive commercial information. As with employment contracts, restrictive covenants must protect a legitimate business interest and must be reasonable. However, employers should be very cautious as restrictive covenants impose a higher degree of control over the individual, which may indicate employment status.

3.Intellectual property clause

Unlike in an employment relationship, a consultant (or their PSC) will usually retain ownership of any intellectual property they create during their engagement. For this reason it is good to have a clause that governs the ownership of any intellectual property created during the engagement. However, just as with restrictive covenants, there is a risk that having all intellectual property rights vest in the client may indicate employment status.

4.Preventing a consultant from being considered an employee or a worker

Even where the agreement states that the consultant is an independent contractor and not an employee, an Employment Tribunal (ET) may still find that the individual is in fact an employee or a worker if that is how the relationship operates in practice. There is no term that can be inserted into an agreement which will be determinative of employment status. While the terms of the consultancy agreement will be relevant to determining status, an ET will look at the operation of the relationship as a whole, including:

  • The degree of control you have over the consultant;
  • Whether the individual provides their own tools and equipment;
  • Whether the individual receives fixed payments or if their pay is dependent on the completion of certain deliverables; and
  • Whether the individual must perform the services themselves, or whether they can appoint a substitute. If they can appoint a substitute, the ET may consider whether this is an unqualified right or whether the client must consent to the substitute.

You must therefore always be very careful when drafting a consultancy agreement and consider carefully whether a consultancy arrangement is really the best option for your business.

If you have any questions about engaging consultants or require help drafting a consultancy agreement, contact our Employment Law Team today on 023 8071 7717 or email employment@warnergoodman.co.uk.

To receive regular Employment Law updates from the team regarding recent tribunal cases and legislation updates, you can subscribe to our weekly Employment Law Newsletter by completing our subscription form or emailing us at events@warnergoodman.co.uk

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.