With the roles of contractor and consultant becoming increasingly popular in many industries, Aberdeen employment lawyer Louise Spark shares her top tips on how businesses and individuals can get the most out of the working relationship.
Louise, of Lili Hunter Consulting Ltd, says: “Companies frequently tell us they use individual contractors (“consultants”) because they see them as a less risky alternative to having employees or other workers given the significant levels of employment legislation in existence.
“Often when you begin asking questions, however, it becomes clear that the relationship is actually one of employment, not independent consultancy. It is vital that both parties entering into the relationship understand the difference.
“Even if both parties label the relationship as one of independent consultancy, if the ‘consultant’ receives many of the same rights as employees, is subject to the company’s discipline and grievance and other employee policies, is provided with all his or her equipment, told how to carry out work, when and where to carry it out, has a line manager etc. then the reality is that he or she is likely to be an employee.”
And Louise says that, from an employment perspective, this can have huge repercussions because it automatically gives the individual “consultant” employment rights – minimum statutory notice periods, paid holidays, working time limits, access to a stakeholder pension, etc generally all need to be provided to employees.
The individuals will also have the same rights as other employees to raise claims in an employment tribunal, unfair dismissal being the obvious one if the relationship is terminated, although this will in most instances only apply once the individual has been engaged by the company for 51 weeks.
Louise continues: “A company cannot contract out of employment claims in a contract of employment or ‘consultancy’. Therefore it is extremely important that both the contract and the relationship with the individual reflect one of independent consultancy, otherwise the contracting company – or their client where the ‘consultant’ is engaged specifically for a client project – could get severely bitten down the line.
“The relationship is equally as important for the individual. There are often clauses within consultancy agreements which provide that if any PAYE liabilities become due by the contracting company on payments made to the consultant then the consultant will be responsible for these. The tax position may depend on the arrangement under which the individual provides his or her service – e.g. whether he or she is engaged as an individual or through a limited company – we would always urge the consultant to seek accountancy and tax advice in this regard before entering into the relationship.”
So how do you determine whether an individual is an employee or a consultant? Louise says that this will be determined by a legal test which can be summarised in three elements as follows:
1. Personal Service
An employee is required to turn up for work in person. He or she cannot send a substitute to perform his or her job. Agreements with consultants should provide for substitution if possible so that if the worker in question cannot attend, a different individual may be sent to take their place.
2. Mutuality of Obligation
Both parties must be under some form of obligation to each other for an employment relationship to exist. An employer has a duty to provide work and pay to an employee and the employee has a corresponding obligation to carry out the work in exchange for payment. No such duties generally exist between a company and a consultant.
Ultimate control over an employee’s performance rests with the employer. The employee is subject to the orders and directions of the employer, whilst a consultant has more power to control the services himself.
“If any of these elements is missing – it cannot be a contract of employment but if all factors are present it may be a contract of employment,” adds Louise. “A tribunal would look then look at the surrounding circumstances in order to decide if there is an employment relationship.
“The nature of the contract in place between the parties will be considered but it is not decisive. Even if the contract states that the individual is a consultant, the courts or tribunals will look at how the parties behaved towards each other and look behind the terms of the contract – if they think the contract is a ‘sham’ they will disregard it.
“Both the contract and what happens in reality are therefore important. The contracting parties must be clear at the outset of the relationship that they are entering into, and make sure that the boundaries do not become blurred – otherwise there could be financial repercussions for both sides.”
Lili Hunter Consulting and Lili Hunter Legal are located at 499 Union Street, Aberdeen, AB11 6DB. For further information on employment law, training and mediation visit www.lilihunter.com Alternatively, call (01224) 228100.