We bang on about subcontractor contracts a lot, but with good reason. If HMRC ever questions the employment status of your subbies, your contract might well be the thing that saves you from some hefty fines.
And it’s not just HMRC you need to worry about. If one of your subbies suddenly decides they should have been employed after all, your contract will be your new best friend.
But not all contracts are good contracts. Most off-the-shelf templates aren’t fit for purpose, and payroll company contracts are designed to protect them, not you.
So how exactly do you create a robust and unchallengeable contract that does what it’s supposed to?
The number one mistake contractors make with subcontractor agreements
Before we get into what your contract needs to cover, we thought we’d let you know the most important element and the thing most contractors get wrong.
Your contract must match up with reality.
There is no point sticking terms in your contract if they don’t reflect the true relationship you have with your subbies. HMRC and the courts won’t simply take your contract at face value – they will be looking at how you actually work with subcontractors.
And if the reality doesn’t match what’s written, you won’t have a leg to stand on.
So if you’re considering hashing together a contract that says all the right things but is based on complete bullshit, don’t bother. You might as well take your chances and carry on as you are.
But if your subbies are genuinely self-employed and you want to continue working with them long-term, here’s what your contract should cover.
The HardHats three-factor formula
Your contract should include what we like to call the three-factor formula:
- The Commercial Aspects
- Business Factors
- The Three Tests
Commercial Aspects
This is all about how you work with your subbies.
Do you provide vans for them? Do they wear uniforms or PPE with your branding on it? Do you cover the cost of their training?
If you do, HMRC might question why your subbies don’t cover their own expenses or promote their own business.
The good news is it’s absolutely fine for you to work this way if there is a commercial, financial or health and safety reason behind it (and you document that reason).
For example, your subbies need to be identifiable on site for health and safety purposes, so you issue them with branded hi-vis vests. No problem – as long as you document this in your contract.
Business factors
To prove genuine self-employment, your subbies must demonstrate they are a business in their own right.
But how do they do that if they don’t have their own company website, don’t have an office, and you’re their only client?
Well, the key goal for any business is to make a profit. But if a business can make a profit, it can also make a loss.
What happens if your subbies make a mistake on site – are they required to rectify it at their own cost? If so, there is a risk of loss which shows they are a business in their own right.
So make it clear in your contract that subcontractors will have to make good any defective work at their own cost or on their own time.
The three tests
While commercial aspects and business factors can be used to strengthen HMRC’s case against you, these three tests are based on law and look at specific areas of your relationship.
- Personal service
- Control
- Mutuality of Obligation (MOO)
Personal service looks at whether you expect the subcontractor to carry out the work personally or whether they can send a substitute in their place.
For example, let’s say you’ve got a long-term project on the go. One of your subcontractors (a bricklayer) calls you to say he’s not going to be available for the next two days, but he’ll be sending his mate (also a qualified bricklayer) in his place.
His mate has the same skills and is more than capable of completing the work, so do you accept this substitution or not?
If not, it suggests that you expect your subcontractor to carry out the work personally, and you would fall foul of the personal service test.
But if you allow the substitution and pay your original subcontractor (who then pays his substitute), you are demonstrating a relationship of genuine self-employment.
The control test is used to ascertain whether the relationship is one of “master and servant” – do you tell subbies what to do, when and how?
Of course, there will always be some level of control. Someone has to give direction or construction projects would end up in a right mess.
But there’s a difference between giving your subbies direction and standing over them telling them how to carry out each task.
And as long as your contracts explain why your subbies must be on-site at specific times – usually for health and safety reasons – you’ve covered that area too.
Mutuality of obligation (MOO) is about expectations – do you have an obligation to keep offering your subcontractors work, and do they have an obligation to accept it?
Do your subcontractors have the right to take holidays or days off whenever they choose? If you had a downturn in work, do you have the right just to let them go? Could they turn down work with you to work for someone else? Or is there a sense of obligation between you and your subcontractor?
If they are genuinely self-employed, then, in theory, either of you could end your commitment to each other tomorrow without issue. And your contract would definitely not contain phrases like “normal working hours consist of a five-day week in which you should complete a minimum of 40 hours.”
Putting your contract together
Putting together a robust and unchallengeable contract isn’t a ten-minute job. And as we said earlier, it must reflect the true working relationship you have with your subbies, which means bespoke is best.
You can create your own contracts based on the above and the additional information we provide in our book (get your free copy here).
Or you could save yourself a whole load of time and hassle and let us do it for you.
Not only will we create a bespoke, watertight contract, but we also guarantee it. So if HMRC ever does make an enquiry into the employment status of your subbies, we handle it on your behalf. And in the unlikely event they reclassify your subbies, we’ll cover any associated costs.
All you have to do for this complete peace of mind is be completely honest with us about how you work with subbies, get all of your subbies to sign a copy of the contract, and pay your invoices on time. If that sounds like a good deal to you, book a call to get started.