When HMRC and the courts are determining employment status, there are three key “tests” they use:
- Personal service
- Mutuality of Obligation (MOO)
The first of these tests – personal service – determines whether you expect the subcontractor to carry out the work personally. We cover this in detail here: What is the right to substitution clause (and do you need it)?
The second test looks at control, direction and supervision, which we cover in-depth here: Supervision, direction, and control – what construction firms need to know.
The third test is Mutuality of Obligation (MOO), which we’ll cover in this article.
What is MOO?
Mutuality of obligation (MOO) refers to the obligation between two parties. Whether you have a contract for services or a contract of services, an element of MOO will be present.
According to the UK government website:
“The basic requirements as to the mutual obligations necessary to determine whether there is a contract in existence at all are:
- that the engager must be obliged to pay a wage or other remuneration, and
- that the worker must be obliged to provide his or her own work or skill.
These basic requirements could be present in either a contract of service or a contract for services and, on their own, will not determine the nature of a contract.”
The last line of that quote is particularly important, but we’ll come back to that shortly.
First, let’s put MOO into context.
An acceptable level of obligation
Let’s say ABC contractor engages Bob the subbie to build a wall. Bob agrees to build the wall to the required specifications, and in return, ABC agrees to pay Bob £X.
That payment could be an hourly rate until the project is completed, or it could be a fixed fee. The terms aren’t relevant – what’s important is that Bob is obligated to build the wall, and ABC is obligated to pay for it.
And this is an acceptable level of MOO. It is clear to all parties that Bob’s relationship with ABC is not one of employer and employee. Once the wall is built, and Bob is paid, the two parties go their separate ways. There is no ongoing obligation.
When MOO gets murky
In the scenario above, the terms of the agreement are clear, and both parties understand their obligations. The relationship is one of contractor and subcontractor – two companies doing business. It’s certainly nothing that would cause HMRC to question Bob’s employment status.
But what happens if ABC wants to contract Bob long-term?
Creating a new contract for each project is not always practical, especially if Bob is needed on multiple sites. But ABC doesn’t want to employ Bob.
So they arrange an hourly fee with Bob and then send him details of where he’ll be needed each week.
ABC give Bob plenty of work, so they become his only client. He turns up each week and logs his hours so he can get paid.
This is all well and good while ABC needs Bob and Bob needs ABC, but what if the circumstances suddenly change?
What happens if Bob gets offered a better opportunity starting tomorrow?
What happens if Bob turns up at site one Monday morning, but ABC doesn’t have any work for Bob?
What are the ongoing expectations?
Does ABC feel obligated to keep giving Bob work? Does Bob feel as though they are obligated to keep finding him work?
Does Bob feel obligated to accept the work? Is ABC expecting him to say yes to every project?
According to HMRC:
Where work is regularly offered and accepted over a period of time a continuous contract of employment may be created. The parties may claim that between each offer and acceptance of work there is no obligation to offer or accept further work. But such an obligation can be implied in certain circumstances.
And this is where MOO gets murky.
If there are no clear terms around the termination of the agreement, either party could argue there was an implied obligation.
ABC might think Bob should give notice if he wants to end the agreement. Bob might think ABC should give notice if they want to end the agreement. But if there is no formal agreement, it’s harder to determine what level of MOO exists.
How to pass the MOO “test”
It will save a lot of headaches if you have a robust contract that clarifies exactly what the obligations are between you and your subbies.
Do your subbies have to provide notice, or can they simply decide not to turn up one day?
Are you obligated to give them notice, or can you just let them go when the work dries up?
This will help strengthen your position if HMRC ever makes enquiries, but it also ensures your subbies know where they stand.
You might have a fantastic relationship now, but what if a project suddenly falls through, and you have no work for them? How would they react?
It’s not unusual for disgruntled subbies to try and claim unfair dismissal if they feel they’re owed. And that’s a can of worms you definitely don’t want to open up – especially if you don’t have a written contract.
That said, the important thing to remember about MOO is that it’s not enough on its own to determine employment status.
HMRC will look at other factors to determine whether your subcontractors are genuinely self-employed.
And that’s where the other two tests – personal service and control – come in.
The best way to ensure you pass all three tests is to have a bespoke contractor-to-subcontractor agreement documenting your true working relationship with subbies.
And that’s where we can help.
Working with HardHats
Our goal is simple – to help as many construction firms as possible work with their subbies long-term without using a payroll company or upsetting HMRC.
To do that, we create bespoke, watertight contracts outlining exactly how you work with your subbies and why you work that way.
And once we’ve done that, we get all your subbies to sign them electronically, so you don’t have to lift a finger.
Plus, all our contracts are insurance-backed, meaning we’ll handle any HMRC enquiries on your behalf.
So if you want to work with subbies long-term without handing your payroll over to a third party and without risking an enquiry from HMRC, book a call to get started.