Freelancers/ contractors/ consultants can bring specialist skills to projects and provide a useful resource to supplement your workforce, boost skills and help drive growth. Just make sure you understand any legal risks around employment and tax status as there are plenty of pitfalls. And have good agreements in place with them.
Why does status matter?
It doesn’t matter what you call someone or what their agreement says, because an employment tribunal and/ or HMRC may decide that a consultant is actually an employee or worker. If so:
- the person will be entitled to certain legal rights and protections (such as paid holidays, sick pay, parental leave, minimum wage, unfair dismissal), which would not apply if they were genuinely self-employed, and
- income tax and national insurance contributions would need to be deducted at source from all payments, failure to do so results in liability for past payments and HMRC penalties.
Things to remember:
Do your own assessment of the relationship.
Even if their agreement says the individual is ‘self-employed’, this is not definitive. An employment or tax tribunal will consider what happens in reality, regardless of the contents of the contract.
Don’t become too reliant.
If a consultant becomes highly integrated into your operations, taking on significant responsibilities (such as managing direct reports) and making decisions on behalf of the business, this increases the risk of them being deemed to be an employee or worker.
Don’t treat them like an employee, e.g. controling how they work.
Remember that your relationship with them is that of an external service provider, they should not be overly ‘managed’. For example, how and when they carry out their work should be up to them, so it’s important to have defined deliverables, milestones or KPIs, and then let the consultant work to them in their own manner.
Don’t forget about IR35 and off-payroll rules.
These now apply if you are engaging a consultant through their personal service company (PSC). There is an exemption for small businesses, but the rules are complicated so take advice to make sure you fully understand your obligations.
Intellectual property.
If they are creating valuable IP for you, make sure their agreement includes an IP assignment. Otherwise it’s likely you won’t own it. This is different for employees.
How to reduce these risks:
- Do a proper assessment of the relationship – the HMRC CEST tool is a decent start.
- Make sure the contract is clear that there is no obligation to provide a minimum amount of work to the consultant, or one that obliges the consultant to accept that work.
- Don’t pay your contractor unless they actually work – otherwise this risks looks like a salary paid to an employee – and require invoices to be submitted.
- Do include a ‘right of substitution’ in the contract. This is a contractual right for the consultant to provide someone else to do their work.
- Don’t insist on your consultant working exclusively for you; there should be no contractual restrictions on working for others. However, you can insist on confidentiality and ask them to notify you if they start working for a competitor.
- Ensure your agreement protects your trade secrets and confidential information, and, if the consultant is creating any intellectual property for you, make sure you have an IP assignment clause.
- Allow your consultant as much autonomy as possible, with as little control over their work as practicable. They should be judged on results not when and how they do the work.
- Limit the consultant’s integration into the business and ensure they do not have the same benefits (such as health insurance, gym membership, etc.) as employees. Although giving them a laptop and setting them up on your email system, etc. is probably ok.
Can we help?
We can review your existing staff, contractor, etc agreements or provide them. And we can advise you if you are concerned about the employment / tax status of your workforce. Contact Nick Pritchett: nickpritchett@legaledge.co.uk to discuss.
