When should I get an Independent Contractor Agreement?

Regardless of the profession, trade or role to be carried out, it will sometimes be a more practical and attractive option to engage individuals as self-employed consultants rather than permanent employees. Freelancing arrangements are particularly common in the creative sector, such as musicians, actors and writers. Workers themselves are also increasingly attracted by the idea of being their own boss.

Why is it Important?

As well as regulating the relationship between the contractor and the client, one of the most important functions of a well-drafted contractor agreement is to minimise the risk that a true consultancy arrangement will fall inside the IR35 tax rules such that the contractor is deemed to be an employee of the end client. This has a potentially adverse impact on both parties, with various knock-on implications such as running the risk of the client paying PAYE and national insurance contributions.

What it is / what should be included?

Where the consultant is genuinely self-employed, both parties will want to include as many indicators of this as possible and avoid including provisions which are consistent with an employment relationship. The following provisions are typically included in freelance agreements:
  • Duration and responsibilities. Obliging the contractor to use his/her own facilities and equipment is common, as is a degree of flexibility over the timing and manner of completion of the work.
  • Commitment. Whilst wording compelling consultants to dedicate their full time and attention to the project are indicative of employer/worker status, clauses requiring a minimum time commitment can be helpful.
  • Payment and expenses. Remuneration on a time and materials basis and/or on the achievement of certain targets, is common. Fixed salaries, on the other hand, point towards employment status.
  • Assignment of intellectual property. IP created in the course of a consultancy arrangement typically rests with the consultant.
  • The right to appoint a substitute. This will be a useful indicator of a freelance arrangement. Will the client have a veto right over any substitute provided?
  • Status and tax liability. The consultant should indemnify the client for tax incurred in the event that they are deemed to be found an employee.
  • Termination and notice. Clauses enabling the client to pay the consultant a lump sum, rather than require them to work out their notice period, should be avoided.
  • Insurance. Indemnities in favour of the client should be backed up by insurance cover.
  • Duty of confidentiality. Unlike in an employment relationship, this is not implied so must be expressly included.
It’s worth bearing in mind that labelling a contract ‘an independent consultancy agreement’ will not enable the parties to avoid undesirable employment/tax consequences if its substance is more akin to an employment relationship. Expert advice may be needed to establish the true nature of the arrangement. Consideration will also need to be given to whether the individual is contracting personally or via an intermediary service company (i.e. a service or loan-out company which is usually controlled by the individual), as is often the case.

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