The benefits
For a business, engaging someone on a freelance or consultancy basis can provide a lower risk option when compared with recruiting employees.
As they are self-employed, the usual raft of employment laws will not apply to them – in effect offering business protection from claims in the Employment Tribunal. There will also be lower costs as there is no liability for holiday or sick pay or a requirement to pay employers’ National Insurance as this obligation rests with the individual or their service company supplying their services rather than the business.
From the consultant/freelancer’s perspective, working on a self-employed basis usually gives greater freedom, truly flexible working and the potential for higher earning opportunities. A business may not only see this as a cost effective solution to help plug gaps in skills and experience but also a way to facilitate growth in a tight recruitment market.
The challenges
Taking on freelancers or self-employed consultants does present some challenges, but with careful planning and advice before starting, risks can be reduced.
Firstly, it is important to consider whether they could be regarded as an employee or worker and are there any ‘hidden’ employment or worker rights. Whilst a written agreement may state that someone is working as a freelancer or consultant, how things operate on a day-to-day basis in practice may be different. If there is a disparity here, there is the possibility that the individual could be considered an employee or a worker from a legal or tax perspective, despite the contractual wording.
Employees have statutory rights, for example there is holiday and sick pay, maternity and parental pay and leave, redundancy entitlements, the right not to be unfairly dismissed and protection from being subjected to a detriment as a result of whistleblowing.
Developments over recent years with the ‘gig economy’ have led to significant growth in case law on the status
of employees, with a third category of ‘worker’ status being established. This worker category sits somewhere between an employee and the self-employed, giving some but not all the statutory rights that employees have.
It is therefore important that as well as having the appropriate agreement in place, the freelancer or consultant is truly working on a self-employed basis.
What do you need to look out for?
It’s very important to have a written agreement in place. When considering the terms in the agreement, businesses have to tread a fine line between wishing to maintain control, in order to protect the business, yet not being so controlling that the obligations being placed on the freelancer or consultant are more like those of an employee.
In particular, the parties should ensure the agreement is carefully drafted to cover off the following key areas:
• Intellectual Property
In an employment relationship, it will generally be the case that any intellectual property rights created during working hours whilst using work materials/premises will automatically belong to the employer. However, with a consultant or freelancer arrangement, the default position will be that they, as the creator, will own the intellectual property in the works unless the contract clearly states otherwise.
It is not uncommon that, in addition to their expertise, a consultant will bring their own pre-existing intellectual property rights to use in a business. It is important to set out clearly which rights the consultant will retain and which will transfer to the Company, including the right to be credited if that creation is to be exploited in the future.
• Non-Disclosure Agreements (NDA)/Confidentiality
Whilst a consultant or freelancer may have valuable expertise to add to a particular project, which can help lead to growth in new areas of the business, it also raises risks for the business where highly secret information which could be useful for competitors, is placed in the hands of a relatively unknown individual.
In an employment context, an employee would have fiduciary duties where they would be required to act in the interests of the employer. However, there are no such duties for the genuinely self-employed and therefore it’s necessary to include terms to protect the business, either in the consultancy contract or in a separate NDA.
• Substitution
The right of a consultant or freelancer to appoint a substitute (to carry out the role in their absence) is an important factor in establishing that an individual is genuinely self-employed. This ability to substitute will negate any obligation for the individual to carry out the work personally, and in turn this will mean they are less likely to be considered an employee or worker.
Whilst it will be in both parties’ interests to ensure that this right to substitute exists, from the business perspective they will want to ensure that any substitute that is appointed will provide the required level of service satisfactory and that the risks involved in working with them are minimal. However a truly self-employed relationship would not allow an employer to decline a substitute.
• Restrictive Covenants
Restrictive Covenants are terms that will apply to the individual for a set period of time after the contract ends, such as non-compete and non-solicitation clauses. Generally, these are not commonplace in freelance or consultancy contracts due to their very presence being a factor that could suggest an employer/employee relationship. However, in certain circumstances in may be possible to include these, but legal advice should be sought before doing so.
• Workplace Culture
From a practical perspective, when you engage a freelancer or consultant, you will usually want to have them fully integrated into the business so they feel a part of the team.
If a freelancer/consultant feels that they are included as part of the team, rather than separate from it, they are more likely to align with your brand/values and develop deeper loyalty to the aims and aspirations of the organisation.
However, this is where the danger lies because it leaves the business open to being challenged if HMRC investigates as they will use the level of integration as evidence that the person is an employee or worker. The business could then face penalties, interest charges and fines. Additionally the freelancer or consultant may challenge their status later and bring Tribunal claims as an alleged employee or worker if the relationship sours.
It’s important therefore to carefully consider if freelancers or consultants are what you need and ensure you know how to work with them to avoid tax or legal obstacles later. The starting place is making sure you have the right documentation in place and if you need help with that, please get in touch with us.
