Our drafting masterclass series continues with a look at consultancy agreements. In this article we focus on those factors which need to be considered and addressed before embarking on the drafting of such agreements.
Identifying correct status
The first area of consideration is whether a consultancy agreement is, in fact, appropriate. This will depend on whether the intention is for the individual to be a genuine consultant or whether the relationship will be more akin to one of employment, in which case an employment contract should be used.
There is no concrete single test for determining the employment status in any particular arrangement. The tribunal will simply look at the substance of the relationship, rather than the written terms or any labels that the parties have given to the relationship.
Therefore, when deciding whether a consultancy agreement is appropriate, it is worth considering the following questions:
- Will the work only be carried out by one person?
- Does the organisation want to retain control over how that individual does the work?
- Will the organisation will be providing and maintaining the tools, equipment or other resources used?
- Will the individual be paid a fixed wage or salary regardless of the work produced or their own performance?
- Will the individual receives holiday or sick pay?
- Will organisation be required to provide a certain amount of work and will the individual be required to accept any work offered to them?
- Will the individual will be integrated into the business?
If the answer to the above questions is yes, then the relationship will be an employment one and a consultancy agreement will not be appropriate.
If the answer to the above questions is no, then a consultancy agreement can be used. However, it is important to ensure that the written terms of the agreement accurately reflect the practical arrangement that is in place between the parties.
Continuity of service
In a situation where an employee is ending their employment with an organisation but the organisation wants to retain their expertise, perhaps to help with a particular ongoing project, a consultancy agreement may be offered. In such a situation, it is important to consider the potential risk of their employment being deemed to continue, so protecting their employment rights notwithstanding the written consultancy agreement.
If a company is in a situation where they are considering re-engaging an individual on a consultancy basis who has previously been an employee, they will need to ensure that the individual’s continuity of employment does not continue. Continuity may be broken where there has been a certain amount of time between the employment ending and the consultancy commencing, that period being a complete week ending with a Saturday. However, where the agreement is negotiated and signed prior to that break, such a break still may not be sufficient to stop continuity of employment.
Risky drafting points
(1) Requiring personal service
Requiring the services to be performed by the individual only risks the individual being found to have either worker or employee status rather than being genuinely self-employed. It is therefore important, when drafting a consultancy agreement, to include a right of substitution within the agreement, which demonstrates that there is no requirement for personal service from the consultant. The fact that the individual may choose personally to supply the services is irrelevant; the issue is whether he is contractually obliged to do so.
It is important that any right to provide a substitute is unrestricted. However, in cases where the individual has accepted an obligation to perform those services but is unable to do so, and where he himself does not bear the costs of providing a substitute, a limited or occasional power of delegation is usually still seen as consistent with a consultancy arrangement.
It is important when drafting to refrain from any suggestion that personal service is required in the terminology used. For example, in the case of Pimlico Plumbers Ltd and Mullins v Smith the tribunal focused on the contractual terms which were clearly directed to performance by the individual personally: for example, they referred to “your skills”, to a warranty that “you will be competent to perform the work”, and to a requirement of a certain standard of conduct and appearance.
It is important when drafting consultancy agreements to limit the amount of control the organisation retains over the individual. If it is a genuine consultancy arrangement, the individual should be free to choose where and when they work and how they carry out the work.
Any contractual requirement to meet company standards or adhere to a company brand can undermine the genuineness of the arrangement.
Another factor that it important to consider when drafting these agreements is whether the consultant is permitted to provide their services to other companies at the same time. It is usually prudent to permit a consultant to provide services to multiple companies as this points to their status being that of a self-employed worker, rather than an employee, albeit any such work can be restricted in terms of not competing with the company.
Ultimately, one of the most important points to bear in mind when drafting the consultancy agreement, is whether the written terms will mirror what will actually happen in practice. In the event of a dispute over the individual’s status, a tribunal will focus not only on the written terms of the agreement but also on what day to day patterns and behaviours are being demonstrated by both the consultant and the company, in determining whether the arrangement was genuinely that of a consultancy.