Why agencies insist on control clauses that can pull contractors into IR35

Barrister; John Antell, examines the dangers to clients and contractors of the standard agency contract

In the past many contractors signed contracts with agencies without being too concerned whether or not the detailed clauses reflected the way in which they provided their services to the end client. With the introduction of IR35 from 6th April 2000, it is important that contractors which provide services as independent contractors (rather than simply supplying workers to work under the control of clients as if they were employees) ensure that the contracts they sign accurately reflect the way they work. Otherwise they may find themselves caught by IR35.

Contractors negotiating changes to their agency's standard contract often face an uphill struggle. Sometimes this is due to the agency being unwilling to spend time looking at clauses and gambling on the contractor giving in and signing the standard contract. Often the agency will say that the client will not agree to changes and sometimes this is so. However many contractors will find themselves in the situation where they and the client are in agreement, but the agency will not change the contract to reflect the realities of the situation. Why is this and why, in particular, do agencies try to insist on there being a clause in the contract which says that the contractor's worker will work under the control of the client?

The answer lies in the particular way that agencies structure their contracts. Instead of simply charging a finders fee to the client, agencies generally insist on having a contract with the client under which the agent undertakes to provide the services to the client at a certain fee rate, and another contract with the contractor under which the contractor agrees to provide the service to the client on behalf of the agent for the fee rate minus 20% (e.g.). Contractually this is a standard contractor/sub-contractor arrangement under which if anything goes wrong, the agency is directly liable to pay compensation to the client. The agency must then try to recover its loss from the contractor. Agencies like to reduce their potential liability and one way of doing this is to put a clause into the contract with the client saying that the contractor's worker will be under the client's control, obey any reasonable instruction, and that the client must supervise the worker. If anything goes wrong it is more difficult for the client to sue because the contract says that the client has control of the worker. Thus although the client may agree that the services being provided by the worker are consultancy services where the worker is providing his judgement and expertise rather than being a servant obeying his master's orders, often the agency will still try to insist on a control clause.

It is not surprising then that many contractors are looking with renewed interest at the possibility of direct contracts between contractor and client. In doing so they are not necessarily seeking to dispense with the services of the agencies who may still be needed to put those who provide a particular service and those who need it, together. They are seeking a reasonable arrangement with agencies which allows contractor and client to negotiate a direct contract which reflects the realities of the situation and which is not coloured by the desire of agencies to dress up the relationship as something akin to employment in order to reduce their own potential liabilities.

Some agencies are sympathetic to the concerns of contractors and clients and are willing to consider new ways of working. Other agencies, however, are renewing their efforts to persuade clients to keep them in the chain of contracts. It is reported that some agencies have been telling clients that if a client contracts direct with the contractor then the contractor's worker can claim employment rights from the client whereas (it is said) if there is an agency in the middle the client is not at risk in this way. Employment law is complex. There are many UK Statutes and European directives, each conferring different employment-related rights on different, but often overlapping, groups of people. The right to a redundancy payment, for example, applies only to employees in the strict sense who have a contract with their employer, but working time rights extend to agency workers and the end client is treated as their employer even though there is no direct contract between agency "worker" and client. Thus there is no real possibility of clients being liable to make redundancy payments to the employees of the client's contractors, but there is the possibility of the client having other liabilities such as those relating to working time or disability if the "worker" is under the control of the client. A recent decision of the Court of Appeal in the case of MHC Consulting Services Ltd v Tansell has confirmed that the client can be liable, in this case under the Disability Discrimination Act, for those rights which extend to "workers" if the workers are under the client's control. Interestingly the decision explicitly confirmed that the involvement of an agency in the chain of contracts makes absolutely no difference to the end client's liability.

It could be argued that no decent client would ever discriminate so why should they worry if a contract comes under the Disability Discrimination Act. The problem from the client's point of view is that it is relatively easy to make an allegation of discrimination and potentially very expensive for the client to defend even if the allegation does not have a sound basis. In the ordinary courts the loser pays the winner's legal costs but in Employment Tribunals each side bears its own costs. The mere fact that a claim has been made will cost a company a considerable amount of money even if the claim is not justified. Because of this some companies even have a policy of settling claims that they consider to be without justification simply because it is cheaper to settle than to pay the legal costs of defending the claim. Clients may be prepared to accept that from time to time they will have the expense of defending unmeritorious claims from actual employees but most will balk at the possibility of having to defend an employment-type claim from someone holding himself out as an independent contractor providing a service.

The message to clients is clear. If you want the services of an independent contractor make sure that the contract clearly states the service which you require, but do not let agencies persuade you to put in a clause making the contractor's worker subject to your supervision and control when that is not the reality of the way the work is to be done. Not only will a control clause be likely to make the contractor liable to IR35 but it will also expose you to employment law claims which are expensive to defend whether the claim is justified or not.

John Antell is a barrister who provides legal advice to PCG members. He regrets that, under Bar Council regulations, he cannot, as an employed barrister, advise non-members.