IR35 Contract Clauses Guidance
When engaging with your flexible workforce it is important to put in place a contract which clearly establishes whether a contractor is ‘inside IR35’ or ‘outside IR35’. If you reach a decision that a contractor falls outside of IR35 you need to ensure that the contract reflects this position.
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 the contractor’s employment status. Our Contract Clauses Guidance identifies the main clauses and provides suggested wordings.
SUBSTITUTION
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 end hirer 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/ end hirer 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 [Client] has the right to refuse the substitute if in the reasonable view of the [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.
DIRECTION, SUPERVISION AND CONTROL
Independent contractors should be engaged to provide services or functions that the end hirer’s employees are unable to carry out. When engaging independent contractors, end hirers 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 end hirer, except for an induction into the end hirer’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 contractor 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].
MUTUALITY OF OBLIGATION
If the end hirer is obliged to provide the contractor with work to carry out on an ongoing basis and the contractor has an obligation to accept and carry that work out, this can show the existence of ‘mutuality of obligation’.
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 a contractor finishes the assignment for which he has been engaged by the end hirer the relationship with the end hirer 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 hirer and contractor, 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.
CONTRACT CONFIRMATION NOTE/WORKING PRACTICES
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 contractor is required to be present for fixed hours each day/week and the end hirer 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 contractor 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 contractor and the end hirer will have to provide work to the contractor.
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 contractors 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.
iii) Multiple Projects/Assignments
Where an Independent Contractor is engaged to work on different projects or assignments, it is essential that there is a contract in place dealing with each project/assignment. The contract should specify the start and end date for each project/assignment and the fees to be charged in respect of each. This will help to demonstrate that there is no obligation to accept work outside the scope of the project/body of work and also that the engagement is for a defined period.
The contract should specify the details of each project/body of work or there should be a separate contract in place for each.