You’ll hear us talking about the importance of contracts a lot. And that’s because they really are the best way to protect your construction business from an HMRC enquiry into the employment status of your subbies.
Not only that, but they ensure there’s no ambiguity between you and your subbies, reducing your financial risk if things go wrong.
But how detailed does a contract need to be? Do you need a bespoke agreement, or can you make do with an off-the-shelf template?
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Do you need a contract for your subbies?
A contract is a formal agreement made between two parties such as a contractor and their end client, an employer and employee, or a main contractor and a service provider or independent contractor.
Contracts do not have to be written – verbal agreements are binding too. However, if there is a dispute it can be difficult to prove the terms of a verbal agreement if one party claims something different to the other party. This is why we recommend using written agreements.
Benefits of having a written agreement
Contractor-to-subcontractor contracts can be used to protect contractors and their subbies by detailing the terms of the working relationship. These could include details of the services to be provided, payment terms, project scope, responsibilities of each party, delivery times, termination clause, provision of equipment, intellectual property rights, quality control and so on.
Having a written contract ensures both parties understand the expectations and their obligations. Should there be any disputes, the contractor or subcontractor can refer to the contract to help settle the dispute. If the dispute is serious, the contract can be used in court as evidence of a breach.
Having a contractor-to-subcontractor contract can also help prevent misunderstandings about employment status. Should HMRC ever question the employment status of a subcontractor, the contract provides evidence that the relationship is considered by both parties to be one of contractor and self-employed individual rather than of employer and employee.
The provision of a contract is not enough on its own to prove self-employment, but it can help strengthen your case.
Who is responsible for setting up these contracts?
Either party can set up the contract, but where a main contractor works with multiple subbies, it makes sense for them to take the lead. This will ensure more consistency as each independent contractor will work to the same terms.
If you hire a freelance worker through a recruitment agency, the agency will usually provide a contract. Essentially, the agency sits between you and your subbies in the contractual chain.
You do not need a lawyer to create the contracts for you. You can draft the document yourself or use templates. However, if the terms of your agreement are complex, you might prefer to seek professional advice.
Is a written contract legally binding?
If both parties have agreed to the terms and signed the agreement then it is legally binding. If either party breaches the terms of the agreement or fails to fulfil their contractual obligations, the other party could make a legal claim.
However, when it comes to contractor-to-subcontractor agreements, HMRC and the courts don’t just take your contract at face value and rule in your favour. They’ll look at the reality – how do you actually work with your subbies? If the reality does not match up to the contract, then your contract will not stand up in court.
For example, a tribunal in 2022 saw a construction firm ordered to pay almost £30k to a subcontractor because the court decided the contract they had in place was a complete sham. It didn’t match up with their actual working practices, and the judge saw right through it.
Should you be using free online contract templates?
If you use independent contractors on an ongoing basis, getting a formal agreement in place can help protect you both.
Documenting your working practices makes the obligations of each party clear. If one party decides not to fulfil their obligations, the other party can hold them accountable.
Some contractors use online contract templates. These can be useful for basic business arrangements but do not carry as much weight as bespoke contracts. As with anything, they have their pros and cons.
Pros and cons of using a free contract template
The biggest advantage of using a free contract template is that it’s free. No costs. All you need to do is fill in the blanks with details of your company and the individual or company you are contracting. Both parties sign it and you now have a written agreement in place.
However, as tempting as free contract templates might be, you can’t always rely on them for protection.
The biggest flaw with free templates is that they are designed to be generic. The whole point of them is that anyone can use them, which means they don’t get into the specifics of how your business works.
Yes, you can add an extra clause or amend wording here and there, but unless you understand contract law, you could leave your company open to risk.
Free contracts might save you a few quid in the short term, but they could end up costing you a fortune in the long term.
Creating your own written contract
If you don’t want to risk a free contract template, you can create your own contract.
To help ensure you cover the key elements, we’ve broken them down into what we refer to as our three-factor formula:
- Commercial Aspects: detail the day-to-day relationship and working practices you have with the subcontractors. For example, do subbies wear clothing branded with your company name or use your equipment?
- Business Factors: demonstrate your subcontractors are genuinely self-employed – that they are a business in their own right. For example, do they have to rectify defective work at their own expense?
- The ‘Tests’: cover the things the courts will look at to determine employment status – control and supervision, mutuality of obligation, and personal service.
As well as the three factors, there are some more general points you’ll need to cover in your agreement, such as the effective date and payment terms.
If you’d like to understand more about creating your own contractor-to-subcontractor agreements, grab a free copy of our book. It covers the three-factor formula in detail and talks you through the process of creating watertight contracts.
Want to find out what should be in a contract? Check out our blog.
Get bespoke written contracts with HardHats
If you don’t fancy writing your own contracts, let us create a bespoke contractor-to-subcontractor agreement for you.
We’ll even get your subbies to sign them electronically using our fancy software. And you can use our software as a subcontractor management tool at no extra cost. Securely store digital copies of any documents relating to your subbies, including training and insurance certificates, invoices, expense claims and payment details.
Find out more about how HardHats can protect you here, or contact us to get started.