Subcontractors can be a fantastic resource for businesses, especially when your business is just starting out, consistent cash flow is uncertain but you need an extra pair of hands or a different skill set.
But without a great written agreement in place, this mutually beneficial arrangement can quickly turn sour – and it’s your business that takes the risk.
Find out why you should always have a comprehensive written agreement in place when engaging a subcontractor.
What do i mean by subcontractor?
Subcontracting goes by many different names, depending on the industry and way they will be used. They could be called freelance, associates, contractors or subcontractors (also known as subbies in some trades). The name doesn’t matter, what is key is that the person is self-employed and is performing services for your business, without hitting PAYE.
Defining your subcontractor’s status
Just because you’ve brought someone on as a subcontractor doesn’t mean they can’t be classed as an employee in the eyes of the law.
If you bring in a subcontractor for a few days’ work, and it’s clear they work this way for others, no one’s going to dispute their employment status. But if you work with a subcontractor in such a way that at first glance, they might as well be a full-time employee, then their employment status could be up for debate, and that is often a costly debate.
A plumber has been working with a company on a self employed basis for 5 years; there is no agreement in place.
The plumber is technically a subcontractor, but the Plumbing company has total control over his working conditions. The job’s are priced by the company and he is sent to a location at the time they specify, the customers belong to the company and he drives a company van and uses company tools. The Plumbing company keeps him busy, so he is working 5 days a week.
After 5 years, the Plumbing Company says they’re letting him go, but as he is self-employed, they don’t give him notice. He takes them to a tribunal, where it’s ruled that based on the conditions of his employment, he might as well have been an employee. The Tribunal grants him employee status. Once given that employment status, the plumber is able to retroactively claim 5 years’ worth of employee rights, such as National Minimum wage, holiday entitlement and Sick pay, plus be able to seek compensation for unfair dismissal.
If the Plumbing Company had an agreement in place for their subcontractors (perhaps with the assistance of a qualified HR Consultant), they may have been able to avoid this issue altogether.
When is a subcontractor classed as an employee?
There is an in-depth 13-point legal test that defines whether a subcontractor is actually an employee. Among other factors, the test considers:
- Who controls how a subcontractor works
- Who controls when they are required to work
- Who provides the tools they’re required to use
- What level of management they have
If in doubt, remember the rule of duck: if it looks like a duck and quacks like a duck, you can’t call it a swan for your payroll purposes.
So how do you avoid issues with your subcontractor’s employment status being brought into question? You define the relationship in advance with a clear agreement – this ensures both you and the subcontractor know exactly what to expect from the arrangement, and that you both intend it to work the same way.
If there’s no agreement in place, you’re leaving it for the courts to decide and opening yourself up to significant risk.
Defining the responsibilities and liabilities of a subcontractor
Another reason you’ll want to get a comprehensive agreement drawn up for your subcontractor is to define your responsibilities and liabilities.
When you employ someone full-time, you are responsible for their actions, and if something goes wrong due to their actions, you are covered by your employer’s liability insurance.
However, if you’re asking someone to do work for you as a subcontractor, they are not covered by your employer’s liability insurance. The responsibility to cover their actions, falls to them. Some subcontractors have professional insurance to cover this risk, but if they don’t, you could be in trouble if something goes wrong.
As part of your business, you provide your employees with company vehicles so they can do their jobs.
Your employee, Thalia, is in a car accident while at work. As her employer, you’re liable. To cover the costs for associated losses and damages, you have your employers’ liability insurance.
While Thalia is recuperating, you bring in Andrew the subcontractor to pick up the slack. Andrew, while driving your company vehicle, is also in a car accident on the job, but he doesn’t have the insurance to cover the damages.
The insurance company wants a pay-out and when it’s clear that Andrew can’t help them, they look elsewhere. Because Andrew was driving in the performance of your company, the insurance company may go after you to cover the costs.
Even though it’s not technically your responsibility, you may still end up being liable for the actions of your subcontractors – unless you have an agreement in place that stipulates otherwise.
Ensuring you’re not liable for your subcontractors
You can avoid liability issues by having a comprehensive agreement in place that defines who is liable if something goes wrong. Issues like the one just described can be avoided by including clauses like:
- the subcontractor must have adequate professional insurance
- the company is not responsible for any loss or damage incurred during the time as a subcontractor.
In the absence of an agreement, you’re relying on the right people to step up and take responsibility if something goes wrong. But let’s be honest, that doesn’t always happen.
With a clearly defined subcontractor agreement, you’re not just avoiding unnecessary risk – you’re potentially saving yourself from financial devastation.
Why else do you need a contract for your subcontractor?
It’s not just about employment status and liability. Having an agreement in place when you engage a subcontractor can help you avoid risk in a number of ways.
Contracts help define and protect you when it comes to confidentiality. If you employed a subcontractor who breached GDPR, you may well receive the enforcement action if you don’t have an agreement stipulating the subcontractor’s responsibilities.
It also prevents subcontractors from taking clients and undercutting prices for customers to go direct with them.
The contract also defines the terms for payment, from how much they’re going to get paid to when. It resolves disputes and misunderstandings by making everything explicit – and gives both parties the chance to review and agree on payment terms, including the subcontractors obligations to pay their own taxes.
If you’re working with a subcontractor for an indeterminate amount of time, an agreement ensures that everyone understands and agrees to the terms of termination. If you stipulate in the agreement that a subcontractor can be let go at any time, they can’t turn around and challenge your decision.
A good agreement can help you protect your intellectual property. Say your company developed video games and you brought on a subcontractor to develop a new game; if there’s no agreement, they could take your new designs or coding innovations to market. A contract helps you define ownership of work product.
Contracts help to protect the business when you’re working with a subcontractor in industries where there’s a risk to life or health, like people working at height or on dangerous sites. An agreement outlines the limit of your responsibilities if something were to happen while they’re working for you. This allows the subcontractor to make sure they have adequate cover to protect themselves.
Help with agreements for subcontractors
Getting a good agreement in place when you bring on a subcontractor isn’t just about avoiding disaster for you and your company.
A clear agreement benefits both parties. By having all your terms laid out clearly, your subcontractors have the chance to review the terms and negotiate them with you, so it’s clear what the issues are up front! Before you take on the risk.
If you’d like specialist support in drawing up a bespoke agreement that’s tailored to your business requirements, let’s have a conversation. From just £500 +VAT, you can protect your businesses from significant risk – just by doing things by the book.