An employment contract is known as a ‘contract of service’. A consultancy contract or any other services contract is known as a ‘contract for services’. It is a commercial agreement, and each party is free to try to impose whatever commercial terms they want. However, usually a balancing exercise is needed to include provisions which are strong enough to look after the client’s interests but not strong enough to result in the consultant being treated as an employee or worker. See here for our Guide on how to work out whether a consultant is self-employed or an employee.
Consultancy agreements usually contain clauses covering the following:
1. Duration of contract
- This might be linked to a specific project or deliverables, or it might be for a fixed term, or terminable on notice by either party.
- The shorter any notice period that the client can give to terminate, the less likely that it will be looked at as an employment relationship.
- It is not advisable to include either:
- A pay in lieu of notice (PILON) clause (giving the client the option to terminate the engagement with immediate effect by making a payment in lieu of notice).
- A garden leave clause (giving the client, for example, the right to exclude the consultant from the premises during the notice period, while still paying him during this period).
- These provisions are inconsistent with the nature of a self-employed relationship where pay is normally only received in exchange for services provided. For this reason, the client is likely to require a relatively short notice period.
2. Services to be provided
These can be set out in general terms, or can be quite specific and detailed, in which case they may be set out in a separate schedule at the back of the agreement.
3. Duties of the consultant
If the consultancy agreement imposes detailed and restrictive duties on the consultant, which resemble those which are either imposed or implied on an employee, this may lead to a finding that the consultant is in fact an employee.
- Level of skill and care
- As with any services agreement, a consultant will have an implied duty to work with due skill and care. But the agreement may go into more detail, referring to particular standards.
- Time to be spent
- Unless the contract and payment terms are based around certain deliverables, a contract will normally specify the minimum number of days or hours a month the consultant is required to provide his services.
- The agreement should not include any reference to holiday or annual leave provision as this would be an indicator of worker or employee status.
- Reporting requirements
- Complying with client’s health and safety, anti-corruption, social media and other policies
4. Fees and payment terms
This may either be based on specified deliverables (for example, target-based commission), or more usually on a time spent basis. All a matter for commercial negotiation. The more the consultant is seen as taking a commercial risk the better for the employment tests.
5. Supply of equipment
A consultant is likely to be obliged in the agreement to supply his own equipment and materials. The less the consultant is seen to be integrated into the client’s business processes the better for the employment tests.
A substitution clause will give the consultant the right to send a substitute to provide the services in his place. This can be very useful in establishing self-employed status, particularly if the right is exercised in practice. However, it may not always be viable commercially, as the client will often only want the expertise of the individual consultant chosen.
Whatever the agreement says, it is the reality of the situation that will be looked at in determining whether the substitution clause is effective in resulting in the consultant being treated as an independent consultant rather than an employee.
Note that if the consultant is also a data processor they will only be able to appoint a substitute with the client’s “prior specific or general written authorisation”. This restriction on the ability of the consultant to appoint a substitute independently may possibly have implications for the consultant’s employment status. See here for our Guide on consultants and data processing.
7. Tax and NICs
The agreement will provide that the consultant must account for their own tax and NICs (and VAT, if applicable) on the consultancy fee.
The agreement may include indemnities by the consultant for any loss sustained by the client as a result of the consultant’s acts or omissions in the course of providing the services. A consultant might want to try to water down any indemnities, so that any liability is only on a normal contract basis rather than the more onerous indemnity basis. A consultant may also want to include a clause placing caps on any potential liability, perhaps linked to any fees received, or to available insurance cover.
The agreement should provide that the consultant will maintain appropriate insurance. This may include:
- Commercial general liability insurance (CGLI). This is a general policy covering personal injury, damage to property and product liability. It is relatively expensive and may not be suitable for an individual consultant.
- Public liability insurance. This is a more limited alternative to CGLI and covers loss or damage suffered by the public (that is, customers, clients, suppliers).
- Employers’ liability insurance. This covers injury to employees and is compulsory for employers, so is only required if the service company employs the individual consultant(s).
- Professional indemnity insurance. This covers claims for loss or damage caused by the consultant’s negligence or mistakes. The regulatory bodies of many professions (including accountants, solicitors, financial advisers and insurers) require their members to take out professional indemnity insurance.
- Cyber insurance. If the consultant is a data processor, this can insure against the costs associated with a data breach and other liabilities relating to processing personal data. It may not, however, insure against fines potentially imposed on the consultant.
The insurance clause may also require the consultant to notify its insurer of the client’s interest in these policies, and (if the policies allow) to have the client’s interest noted on the policy. It should in any case require the consultant to produce evidence of ongoing cover on request, so that the client can be confident that the consultant’s activities on its behalf are covered.
Unlike employees, consultants are generally under no implied obligation of confidentiality. Therefore, it is important to include express confidentiality provisions in the consultancy agreement.
A clause that tries to prevent contractors from using information which has become part of their own skills, knowledge and experience will not be enforceable, just as it would not be enforceable against an employee.
11. Other activities
It is not advisable to place an absolute restriction on the consultant undertaking any other work during the term of the engagement. The fact that the consultant has other clients will be a useful indicator of self-employment. On the other hand, it may not be commercially acceptable to the client to allow the consultant to work for its competitors or to undertake other work that could adversely affect their abilities to properly perform the services.
A middle ground is to require the consultant to obtain the prior written consent of the client before undertaking any activity which may be in any way competitive with the business of the client. The client’s consent should not be unreasonably withheld.
12. Restrictive covenants
The client may wish to protect its commercial interests by imposing restrictive covenants on the consultant, to apply for a limited period after the consultancy arrangement has terminated. A consultant may build up close relationships with the client’s customers, suppliers and employees. They may also acquire valuable confidential information which they could use to their advantage in subsequent appointments with other clients.
In determining whether to enforce a post-termination restrictive covenant against a consultant, a court would apply the same general principles as apply in the employment context: is there a legitimate business interest which it is appropriate to protect? And is the protection sought no more than is reasonable, having regard to the interests of the parties and the public interest?
It is quite rare to impose strict non-competition covenants on consultants (partly because it might be indicative of employment status, and partly because it can be harder to establish that it is reasonable to restrict the activities of a self-employed consultant, who provides their services to the world in general). Other types of restrictive covenants (such as not soliciting staff, customers or suppliers when working with competitors in the future) are more common.
13. Intellectual property
In the employment context, the ownership of any intellectual property (IP) created by an employee in the course of his employment generally vests in the employer. The same does not apply to the relationship between a company and a consultant; the consultant will generally be the owner of any IP that they create during the assignment.
The significance of the rules on IP ownership will depend on the sort of tasks that the consultant will be engaged to undertake, and how significant any IP that they create will be for the client. From the client’s perspective it is advisable for the agreement to contain clear provisions governing the ownership and creation of IP. These could include:
- A requirement for the consultant to disclose all IP which they create during the consultancy.
- Provisions for ownership of that IP to be assigned to the client.
- If applicable, the grant of a licence for the consultant to use that IP to the extent required to perform his duties under the consultancy agreement.
- An indemnity from the consultant against the risk that any IP created by them constitutes an infringement of any IP rights of any third party.
14. Data protection
This could cover the privacy notice which the client needs to give the consultant under GDPR.
It could also cover the consultant’s obligations if they are going to be a data processor.
See also comments above if the consultant wants the right to appoint a substitute.
15. Employment status
The agreement may include a statement confirming that the consultant is an independent contractor and definitely not an employee. This can be useful by way of making clear the parties’ intentions on the face of the agreement. But it won’t necessarily stop the courts deciding that the contractor is an employee or worker.
The agreement may include indemnities by the consultant for any loss sustained by the client as a result of:
- Any claim arising out of the allegation or finding that the consultant is an employee of the client.
- Any liability to tax or NICs on the consultancy fee. This applies where the liability falls on the client rather than the consultant or the service company.
Consultancy agreements for personal service companies (‘PSCs’) – side letters
If a PSC is used, the provisions in its consultancy agreement will not bind the individual consultant. So if the client wants the individual consultant to be bound by them it should ensure that the consultant either joins in as a party to the agreement or enters into the obligations separately, for example using a side letter. Examples include:
- Restrictive covenants
- Appropriate indemnities
- A drawback of doing this is that there is a risk of the individual being found to be an employee of the client if its contents point to an employment relationship. Also, a side letter will form part of the overall contractual agreement, and will be disclosable to HMRC (if it chooses to investigate the arrangements) in the same way as the consultancy agreement.
A side letter can also be useful for the individual to:
- Confirm that the PSC is in a position to provide the services of the individual (for example, by confirming that the individual is an employee of the service company)
- In some cases, to confirm the ownership of the PSC (which is often 100% owned by the individual), so that the client knows who is controlling the PSC.