The benefits and pitfalls of engaging contractors

August 10, 2016

As many businesses worry about the effects of Brexit, the latest government statistics suggest businesses are holding off employing permanent employees, engaging contractors instead to provide additional resources.

One of the advantages of engaging contractors is that they provide a business with flexibility, without the administration that is often involved with employees, even those engaged on a short-term basis. Normally you have no PAYE or National Insurance contributions to administer – payments are made without deductions as you would pay any other supplier. Many contractors are available on short notice, no waiting around before they can start, and they don’t have the same legal protection as employees, like unfair dismissal, at the end of their contract.

Contractors are generally engaged for short-term projects or to provide particular expertise that a business doesn’t have. This allows you and your employees to focus on the company’s core products and talents. However, this may not allow your employees to learn new skills so you should balance a short-term need, with long term aims and staff development.

Contractors are usually paid more than equivalent employees, which may cause resentment amongst staff, but they may be cheaper overall than an employee. Contractors don’t get employee benefits like holiday and sick pay, and many work from home so don’t need office space and equipment. In addition, the business doesn’t have to pay employer national insurance contributions.

However, one area where you shouldn’t cut costs is the consultancy agreement with any contractor that you engage.

You have less control over a contractor than an employee, who you can tell how to do their job, when to do it and discipline them if they don’t. With contractors, you are relying on their expertise to ensure that they achieve the task that they are engaged to perform. The consultancy agreement should set out clearly what services the contractor is providing and the standard you expect of them.

There can also be tax implications if you call an individual a contractor when they are an employee. You need to make sure you’re compliant with IR35, if you’re not you may face claims from HMRC for underpaid tax, penalties and interest. The consultancy agreement should set out the nature of the relationship and include the key clauses that show that the contractor is not your employee. The agreement should also include a clause requiring the contractor to pay you back for any money that you have to pay if the contractor, is in fact, an employee.

The contract should set out who owns any intellectual property created by the contractor. Unlike an employee where most of the intellectual property that they create at work is owned automatically by their employer, this is not the case for contractors. They own the intellectual property rights in their services unless they transfer them to the business engaging them. This should be done in the consultancy agreement. It should also protect the confidential information and key business connections of the business through confidentiality provisions and restrictions both during and after the engagement, and a notice period allowing you to end the contract before the project is completed.

Louise Paull – LawBite Employment LawBrief. For further legal advice, you can contact Louise via our online legal advice portal.

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