Depending on how you choose to structure your business and hire your staff, you may find it helpful to have a consultancy agreement in place. Below we outline where a consultancy agreement might be beneficial and what terms you may want to include in a consultancy agreement.
Who is a consultancy agreement for?
If you do not employ your staff member as an employee, but as a self-employed contractor acting on their own account, who deals with their own self-assessment tax returns, your relationship should be documented in a consultancy agreement. It may be that your agreement is between your business and the contractor as an individual, or between your business and the contractor’s Personal Service Company (PSC) (where the contractor is generally the sole director and employee and will carry out the work and payment will be made to the PSC).
If you are unsure as to the employment status of your staff member you should consider the reality of the relationship between that staff member and your business seek legal advice from one of our employment solicitors.
Ideally you should determine a person’s employment status before the individual starts work. If the relationship changes, a new agreement should be put in place as soon as possible to reflect the change.
Why is a consultancy agreement needed?
You may choose to hire a consultant if you have a requirement for a specialist skill for a finite amount of time, or if you just have a lot of work to complete and need some excess capacity.
If you do choose to hire a self-employed contractor, in the same way as an employment contract sets out the terms of employment and makes clear to the employee and employer what the terms are, it is advisable to put in writing the agreed terms between your business and a self-employed contractor in a consultancy agreement. There are a number of reasons for this, but some of the main ones are:
- The basis of the relationship is set out, it should be made clear that the relationship is that of self-employed contractor and your business as an independent client of that contractor;
- A written consultancy agreement provides clarity for your business and the contractor on the terms you have agreed such as the scope of the work to be provided and the payment that will be received. Having the terms in one place and set out clearly at the beginning of the relationship should help to reduce disagreements on what was agreed at a later stage;
- If there are disagreements at a later stage, having a written contract gives protection both to your business to sue for breach of contract if work has not been performed as expected or to the contractor if payment has not been made as agreed, amongst other things and
- You may require additional protection from the contractor’s perspective or from your business’ perspective, such as confidential information and IP, this can be agreed and set out clearly in the written agreement before work starts.
In summary, a consultancy agreement gives protection to both parties, minimising the likelihood of litigation.
What provisions should be included in a consultancy agreement?
There are some clauses which are contained in every consultancy agreement, and others which may be more specific to your business. Below are some of the more general terms you might expect to be contained in a consultancy agreement:
- A provision stating that the relationship is one of business and self-employed contractor and not employer and employee.
- If it is anticipated that the work will only be for a set duration or task, this should be set out clearly in the contract.
- How payment will be calculated, when payment will be made and under what circumstances pay may be reduced or delayed should all be as clear as possible.
- It is usual to insert a substitution clause into a consultancy agreement, which allows the consultant to appoint another qualified person to perform the services to your business, on their behalf. This type of clause again helps to demonstrate that the individual is self-employed, if the right to substitution is genuine and not restricted.
- More detail about the work, how it will be carried out and communications. What the scope of the work will be and any particular standards required or qualifications that need to be proven, as well as the roles and responsibilities of both parties and how deadlines will be communicated should be detailed.
- Restrictive covenants restricting the consultant from contacting and dealing with your customers, suppliers and key employees and restricting the use of your business’ confidential information and ensuring data protection, can be added to a consultancy agreement. These restrictions must be reasonable and protect a legitimate business interest. You may want to seek advice before inserting restrictive covenants into a consultancy agreement, as this imposes control over an individual, which may indicate an employer / employee relationship.
- How IP will be dealt with in a consultancy agreement, as unlike in an employment relationship, a consultant (or their PSC if they are working through that) will usually retain ownership of IP they create during their engagement. Again, as with restrictive covenants, caution should be exercised, as changing this means there is a risk that having all IP rights vest in your business may indicate employment status.
- How and in what circumstances termination will be permitted should be set out in the consultancy agreement, as well as what materials or information will need to be returned to your business at the end of the contract.
What pitfalls do I need to be aware of with consultancy agreements?
Caution should be exercised if you have not sought legal advice on a consultancy agreement for your specific circumstances, although standard templates are available, if it does not fully protect your business once you have hired one or more consultants, this may be a false economy and should be avoided at all costs.
If you choose to use a general template and this does not adequately protect your trade secrets or other IP, or if a contractor discovers something which your business could really use but retains the IP and extorts your business thereafter for the use of this, amongst other things, these issues could be financially very costly to your business. In short, having a poorly drafted consultancy agreement is almost as good as not having one at all, and in some cases, could be more damaging to your business. If you would like advice on drafting the first consultancy agreement your business will use or would like to change or update the terms on which you hire contractors, our employment law solicitor who can offer a no obligation quote.
It is critical that your consultancy agreement protects confidential information from being shared. It may be that a consultancy agreement alone is not enough. If you feel that the information a contractor will encounter is particularly commercially sensitive, it is advisable to seek legal advice on whether asking the contractor to sign a separate Non-Disclosure Agreement (NDA) in addition, would be beneficial for your business.
If you are a medium or large employer and engage a consultant via a PSC, since April 2021 there have been additional obligations placed on businesses hiring in this way, by IR35. Such employers must prepare a “Status Determination Statement” for each consultant, which must include 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 employing business, or client) will be responsible for deducting income tax and employee NICs through PAYE.
How can Harper James Solicitors help?
There are a number of ways that we can help ensure that your business is well protected if you choose to hire a self-employed contractor. Here are some of the ways we can help:
- Drafting and updating consultancy agreements - whether you are hiring a contractor for the first time, wish to change some of the terms for a new contractor or wish to update your agreement, our employment lawyers can discuss your business’ specific circumstances and draft a consultancy agreement to specifically meet the needs of your business.
- IR35 advice – as you have seen above, if your business engages a consultant through a PSC then our employment solicitors can advise on whether IR35 applies and what your business will need to do in order to comply, if the relationship falls within IR35.
- Drafting consultancy agreements for overseas consultants – since the pandemic there has been a move towards remote working and your business may wish to hire a contractor who is based overseas. Our employment solicitors can support in providing advice and guidance for your business in these circumstances.
If your business is looking to hire a self-employed consultant it is advisable to have the agreement drawn up and signed prior to the consultant starting work for your business. You will see from the above that there are many things to consider when compiling a consultancy agreement. Once you have thought about how you would ideally like for the relationship to work and if this is unchartered waters for your business, seeking early legal advice on how to best draft the agreement to protect your business is also highly recommended.