If you are taking on or working as a consultant, a comprehensive agreement is essential. Without a clearly drafted contract, there is a risk of misunderstandings or disputes over issues such as the scope of work, payment, and ownership of intellectual property. We explore the details and explain what makes an effective agreement.
Summary
This article contains the following points:
- What is a consultancy agreement?
- Why use a consultancy agreement?
- Key clauses in a consultancy agreement
- Consultancy agreements vs employment contracts
- UK legal context
- Advantages and disadvantages of consultancy agreements
- Types of consultancy agreements
- FAQ
What is a Consultancy Agreement?
Consultancy agreements allow businesses to use the services of self-employed individuals who offer the expertise needed for a project or development.
Taking on a consultant gives you the ability to secure the specialist help you need without having to take on a full-time employee. This can be beneficial for several reasons. You only need to pay the consultant for the period of time you need them, you can fill in any missing skills gaps, and you will not need to deal with the employment process or the higher level of risk involved in having an employee.
However, if you take on a consultant, you need to ensure that you fully understand issues relating to employment status and tax liabilities. The authorities can penalise organisations that incorrectly deal with employees as if they were consultants.
You must also ensure that you have a robust consultancy agreement in place, setting out the extent of your relationship, protecting your interests and establishing what is required of the consultant. A well-drafted contract will reduce the risk of misunderstandings and can also include clauses stipulating how any disputes will be dealt with.
Why use a Consultancy Agreement?
A consultancy agreement will define the relationship between the consultant and the business, providing both parties with legal protection and setting out how certain issues will be dealt with.
It demonstrates professionalism and, should a disagreement arise in the future, the contract should assist in resolving matters.
Key Clauses in a Consultancy Agreement
Your consultancy agreement should be tailored to the unique needs of the job. Key clauses contained in consultancy agreements include:
- Scope of services
- Substitution
- Duration of the contract
- How the contract can be terminated
- Payment terms
- Confidentiality
- Ownership of IP
- Restrictive covenants
- Liability and indemnity
- Dispute resolution
- Tax responsibilities
Scope of Services
A consultancy agreement should clearly outline what services the consultant will provide and the time they will spend working for the business. You can impose some restrictions on the consultant, but it is important that they are not controlled to such an extent that they could be considered to be an employee.
This is one of the main reasons why it is important to have a consultancy agreement drafted by a commercial contract law expert. If a contractor is able to show that they were employed, this could expose you to a range of liabilities and claims.
Substitution Clause
A substitution clause is commonly included in a consultancy agreement, allowing the consultant to provide a replacement to carry out the work on their behalf. The consultant would still be liable for the quality of work.
Allowing the consultant to make substitutions can support the claim that the consultant is not an employee, provided that the clause does not impose restrictions. For example, if the consultant is only allowed to make a substitution if they are ill or the substitution must be approved by the business, then the clause may be considered a sham.
Duration of the Contract
The agreement should specify how long it will last. It could continue until the project is completed, for a fixed term, or last until one party serves notice of termination.
How the Contract Can be Terminated
Termination clauses will set out the circumstances in which a contract can be ended early. This could be because one party wants the relationship to end, or alternatively, because there has been a breach of the agreement. Other potential grounds for termination can also be included, such as insolvency. The clauses should set out how notice of termination should be given, what the notice period is, and any post-termination conditions, such as paying any outstanding fees. Otherwise, the contract will end when the job is completed, a specific goal is reached or after a set period of time.
Payment Terms
Clear payment terms should be included, setting out how much will be paid, when, whether there is a schedule of payments, how money will be transferred, and what penalties will be levied for late payment. Payment options include a fee for the whole project, a retainer, or an hourly rate. Where an hourly rate will be paid, details of how time will be recorded and notified should be included.
Confidentiality
It is important for the organisation taking on the consultant to protect the confidentiality of the business and its clients or customers. Confidentiality clauses will define what information is confidential and prohibit the consultant from divulging information or using it outside of the scope of the consultancy.
Ownership of IP
If intellectual property is created by the consultant during the consultancy, the consultant remains the owner of this unless there are clauses in the agreement transferring ownership. The business will generally want to ensure IP is assigned or licensed to it, and the contract can set out any terms and conditions for this.
Bespoke restrictive covenants can be drafted dealing with issues such as GDPR compliance and soliciting clients, although again, it is essential not to go so far as to suggest an employer/employee relationship. To be capable of enforcement, a clause must also only go as far as is reasonably necessary to protect a business’s interests.
Liability and Indemnity
Should the consultant breach the terms of the agreement or be negligent in carrying out their obligations, the contract should specify how the losses will be dealt with. It may cap the liability at a certain figure, and some types of loss may be excluded, such as consequential damages.
Dispute Resolution
The agreement should set out how a disagreement will be handled. It is usual to require the parties to attempt alternative methods of dispute resolution before resorting to litigation, for example, mediation, early neutral evaluation or arbitration.
Tax Responsibilities
The business owner will want to ensure that the contractor assumes liability for all tax payments and National Insurance Contributions, and the agreement should stipulate this for the avoidance of doubt.
Consultancy Agreements vs Employment Contracts
It is important to distinguish between a consultancy agreement and an employment contract. Where the basis of engagement is legally definable as employment, the employee will be entitled to a number of rights, such as protection from unfair dismissal, and the employer will be required to pay tax, as well as other payments such as holiday pay, pensions, redundancy pay, and statutory sick pay.
When taking on a consultant, you are strongly advised to have the agreement drafted by a solicitor to ensure that you do not take on liabilities that you did not intend.
UK Legal Context
IR35/Off-Payroll Rules
IR35, or the off-payroll working rules, aim to ensure that a contractor pays similar tax and National Insurance to an employee and that the contractor is not in so-called disguised employment.
The rules are designed to decide whether a contractor working through a third party, such as a personal services company or a managed service company, and supplying services to an organisation, would be an employee but for the existence of the intermediary.
If the contractor had been an employee but for the existence of the intermediary, then the organisation providing the job to the contractor is liable to decide whether IR35 applies and, if it does, must pay tax and National Insurance to HMRC.
HMRC Guidance on Employment Status Tests
HMRC offers a Check Employment Status for Tax tool, which allows contractors and others to find out if someone is classed as employed or self-employed for tax purposes. This is not always completely reliable, so it is recommended to take legal advice to ensure the correct outcome.
Companies Act Duties: If Consultant is Also a Director
Where the consultant is also a director of the company, the agreement should set out the consultancy duties separately from the duties that exist because the individual is a director. The agreement cannot waive directors’ duties and should comply with all relevant legislation, including the Companies Act.
Advantages and Disadvantages of Consultancy Agreements
Advantages of a Consultancy Agreement for Businesses
Taking on a consultant is a flexible way for businesses to bring in the expertise they need for the period of time it is required. There is no need to have the individual for longer than necessary, meaning lower costs and no requirement to pay tax, holiday and other statutory payments and no employer’s liabilities.
It also allows a business to engage an expert who might otherwise be too expensive. Their expertise can be shared, assisting employees and management, and giving the organisation opportunities for growth that might otherwise be out of reach.
Advantages of a Consultancy Agreement for Consultants
Working as a consultant is far more flexible than having employee status, allowing the consultant to decide how long they want to work on a project and what hours they are prepared to give.
Financially, it can be beneficial to be classed as a contractor for tax purposes rather than an employee.
As a specialist who is able to move between organisations, a contractor can command better remuneration from businesses that are prepared to pay for a shorter time period but a higher level of expertise.
A drawback is not having the protection that an employee has regarding issues such as sick pay, redundancy, and unfair dismissal.
Examples of the use of contractors include hiring an IT expert to implement an IT project at a business, or a charity hiring a consultant for a fundraising strategy. Once the job has been completed and the consultant is no longer needed, there is no requirement for the organisation to pay any more money, follow any employment rules, or deal with redundancy.
Types of Consultancy Agreements
A consultant can choose the type of agreement to suit the project. This could be:
- Short-term project agreements, limited to a single job, with a clear end
- Retainer-based agreements, where the consultant agrees to a set number of hours or a set goal
- A sector-specific agreement, tailored to the specific industry, such as financial services, IT or construction
Contact Our Company and Commercial Solicitors
If you are thinking of taking on a consultant, our team can work with you to draft a robust agreement setting out the right terms and conditions. We can also advise on agreements if you are a consultant.
For information on our services, see our commercial law solicitors page.
To find out about changing an employee’s status to that of a contractor, see our article on employees v consultants.
To speak to one of our expert company and commercial solicitors, ring us on 0330 173 3980, email us at info@witansolicitors.co.uk or fill in our contact form, and we will talk through your situation with you and discuss how we can help. We have offices in Birmingham, Northampton, London and Wellingborough.
FAQ
What is a consultancy agreement in the UK?
A consultancy agreement is a legal contract between an organisation and an individual who provides specialist services for a period of time. Unlike employment, the agreement will often include an end date once a certain goal has been met or time has elapsed.
What should a consultancy agreement include?
The contract should be drafted to suit the specific role and will include a range of provisions governing issues such as pay, the service to be provided, timelines, how the contract will be ended, confidentiality, dispute resolution, and termination.
What is the difference between consultancy and employment?
Consultancy is project-based or time-based, with an identifiable end. The consultant is responsible for paying tax and National Insurance Contributions and is not entitled to any employment rights or statutory pay.
Are consultancy agreements legally binding?
Consultancy agreements are legally binding contracts. For this reason, it is essential to take legal advice before signing one and ensure that it has been drafted by a solicitor and tailored to the job in question.
What is IR35?
IR35 is intermediary legislation setting out the tax rules that relate to whether or not an individual is an employee. Those deemed to be within IR35 are taxed as employees, which can result in higher tax payments.
Key indicators of whether an individual is employed are:
- Whether a contractor can substitute someone else to carry out the work, if they can do this freely, this will tend to show that they are a contractor
- Mutuality of obligations, where the business is obligated to provide work and the worker is obligated to carry it out, tends to show an employer/employee relationship
- Level of control, the more control the individual has over when, where and how they work, the more this will support them being a contractor
If someone is deemed to be inside IR35, they are an employee, and PAYE will have to be paid on their behalf.
Does IR35 apply to consultancy agreements?
The organisation taking on a consultant is responsible for determining the IR35 status of the contractor. To be considered a contractor and therefore outside of IR35, the following should apply:
- The contractor controls how the work is completed and can carry out the work in their own way
- The contractor can be substituted for someone else with similar qualifications
- There is no obligation to carry out further work once the job has ended, and the agreement sets out a clear end date or an event which will result in the termination of the contract
- The contract should be capable of termination immediately or in less than a month. Longer notice periods are generally considered to be related to employment
What are the benefits of using a consultant?
Some of the main benefits of using a consultant include:
- Securing the expertise you need
- Only paying for a consultant for the time you actually need them for
- The flexibility of being able to take on different consultants to meet your needs at any one time, without the need to deal with employment issues
- Consultants tend to be focused on the job they are hired to do and will find the solutions you need without being distracted by other issues within your organisation
- A consultant can take over a particular project and see it through from start to finish
- Bringing outside skills and a fresh perspective to your business can help you move forward and give your team more expertise, resulting in increased productivity
What is the legal definition of a consultant?
In looking at whether someone is a consultant, HM Revenue & Customs will consider the following:
- Does the individual bid or submit quotes to secure work?
- Are they free from direct supervision when working
- Do they submit invoices for their work?
- Are they responsible for paying their own tax and National Insurance Contributions?
- The fact that the employer does not pay them holiday pay or sick pay
- There is a consultancy agreement or contract for services in place that uses terms such as self-employed, consultant and independent contractor
Where the answer to the above questions is yes, then HMRC may be inclined to conclude that the individual is a contractor. In addition, HMRC will look at the way in which the contractor carries out their role.
What is the difference between a consultancy agreement and an employment contract?
Employment contracts impose a higher degree of control on the individual, setting out details such as where they will work, what their daily obligations are and holiday and pay entitlements.
Consultancy contracts must be carefully drafted to avoid any suggestion that the individual is an employee. If mistakes are made, as a business, you would incur tax liabilities, and the individual would have the same employment rights and entitlements as your other employees.
Can a consultant work for a competitor’s business?
Whether a consultant can work for a competitor depends on the terms of the contract they have signed with you. This is a difficult area, as you may want to restrict this, but at the same time, you need to avoid creating an employment-type situation.
We can advise you of the best course of action to protect your interests while also maintaining the freelance nature of your relationship with the contractor.
Can a consultant outsource work?
A consultancy contract should usually allow the consultant to outsource work. A substitution clause allowing the consultant to choose someone else to carry out work on their behalf will tend to show that the individual is not an employee.
The wording should ideally give the consultant a high degree of freedom in managing substitutions to avoid any allegation that the clause is a sham, included for the purposes of avoiding employment obligations.
What is the extent of consultant liability?
The contract will set out the extent to which a consultant will be liable for losses arising from its acts or omissions. It is usual to indemnify the business from claims, damages, losses, expenses, liabilities and costs relating to performance or failures on the part of the contractor.
How do you protect confidential information in a consultancy agreement?
It is customary to include robust confidentiality agreements in consulting agreements. While an employee is under some implied duty of confidentiality, this is not the case with contractors.
Contractors are entitled to use any skills they have acquired during the engagement, but matters such as sensitive company information, customer and client details, and trade secrets can be protected.
Who owns intellectual property created by a consultant?
A clause can be included in the consultancy agreement setting out how intellectual property (IP), such as software, created by the consultant during their engagement, will be dealt with. Without a clause addressing this, the contractor would usually be the owner.
Vesting all IPs in the business may tend to support the idea that the consultant is an employee; however, it is important not to go too far in controlling intellectual products.
How do you end a consultancy agreement?
The consultancy agreement will include a process for both parties to terminate it. You must ensure that you adhere to this to avoid any claims against you.
