Contractors, Subcontractors and Others

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Contractors, Subcontractors and Others

General Issues

Some businesses find it more convenient to contract out or subcontract work to independent contractors, rather than directly employing people for specific work in-house. There are many reasons for this; for example you may need specialist services for only a limited period of time or perhaps the work required to be undertaken is not part of your core business. Contracting out and subcontracting arrangements can be made with individual self-employed people or with other established businesses which then provide their services to you through their own workforce.

Outsourcing work to any contractor like this is not without risks and in recent years questions have been raised about whether the contractor’s personnel can, in fact, be deemed employees of your business. This raises two significant questions:

Tax obligations - Should you have deducted PAYE income tax and national insurance?

Employment obligations – Has the individual acquired employment protection and other rights that you would otherwise not have been responsible for?

The answer to the question of employment status is far from clear and each situation is likely to be heavily dependent on its own specific facts and features.

Important considerations for verifying anybody’s employment or subcontracting status include the following points:

Personal service – Are the subcontractors obliged to do the work themselves, personally or can they substitute other workers to cover for them? If they are obliged to do the work themselves, they are more likely to be employees.

Control – Who controls the detail of how the work is done? This is slightly different from detailed instructions of what needs to be done, but if detailed control over how the work is done is exercised over the worker, it suggests an employment relationship rather than self-employment.

Mutuality of obligations – For an employment relationship to exist there must be mutual obligations between the worker and the contractor. If the contractor is obliged to offer or provide work and the worker is obliged to accept it and do it, the worker is likely to be employed. If the worker can choose whether to work (without breaching the contract) and the contractor can opt not to offer any work, then self-employment is more likely suggested.

If you are self-employed or if you are a contractor trying to ensure that your subcontractors do not become employees, you should bear the following points in mind.

Contract

Borneos would advise that all contractors and subcontractors have written contracts. In the case where a business is contracting to provide services through a partnership or limited company as a subcontractor, the contract should be between the partnership/company and the main contractor to whom the services are to be provided (ie. not an individual worker and the contractor). It is good practice for subcontractors to review and renew any subcontracts regularly and this can be done with every new project or periodically at agreed intervals in time.

Pricing and billing

In demonstrating self-employment it can be helpful to be able to show that subcontractors have provided quotations for jobs and/or have submitted tenders for work. It is also important that self-employed workers and subcontractors deliver invoices to the contractor for the work they do and that they are paid by the contractor against those invoices.

Business organisation and marketing

Self-employed workers who can demonstrate they administer their work as a business will be able to produce better evidence of self-employment. For example, keeping copies of business advertisements and marketing material, business cards, letter headed paper, and business insurance etc.

Differing contractors

A self-employed worker providing services to different contractors (simultaneously or consecutively) will have a stronger argument for self-employment than someone who works consistently for one contractor.

Own equipment

It often helps to demonstrate self-employed status if subcontractors use their own tools, equipment and clothing.

The construction industry

Contracting and subcontracting occurs frequently in the construction industry. There are specific rules governing the way tax and national insurance is handled in the construction industry and these are due to change. The new changes were due to be implemented in April 2006 but due to delays the new regulations are now to be brought in from April 2007. These will entail considerable changes to the current CIS certification requirements and the payment of subcontractors’ income tax and national insurance by contractors. There is already much more information on these changes available and if you need further details or assistance in preparing for these changes, do get in touch with one of our commercial lawyers.

Summary

The above is, of course, a summary of very detailed issues concerning tax, employment and subcontracting. You should ask us for detailed advice on your specific circumstances. We will be pleased to advise you on the latest legal position as it relates to your business and assist you with drafting relevant contracts and other business documents to minimise the risks involved when contracting or subcontracting work.

If you would like to discuss how we might help you, please: