There are many myths surrounding the long-term use of subcontractors in the construction industry. Government guidance on what constitutes genuine self-employment is vague. And many payroll companies spread misinformation on purpose to scare construction firms into using their services.
While there isn’t one single thing that determines employment status, there are three key “tests” HMRC and the courts use when they are trying to decide whether your subbies should be classed as employees.
These tests are:
- Personal service
- Control
- 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 mutuality of obligation (MOO)?
Mutuality of obligation refers to the obligation between two parties.
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 significance of mutuality of obligation is that it determines whether there is a contract in existence at all. If there are no basic requisite mutual obligations, there is no contract. Once the basic requirements for mutuality of obligation have been identified, it’s possible to determine whether the contract is a contract of employment or a contract for services (self-employment).
What is an acceptable level of mutuality of obligation?
Let’s say ABC company engages Bob the subcontractor to build a wall. Bob agrees to build the wall to the required specifications, and in return, ABC agrees to pay Bob. The payment amount could be based on an hourly rate or 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. This is an acceptable level of MOO. Once the wall is built, and Bob is paid, the two parties go their separate ways. There is no ongoing obligation.
When can mutuality of obligation be misinterpreted?
In the scenario above, the terms of the agreement are clear, and both parties understand their obligations. But what happens if ABC wants to contract Bob long-term? What if they both want to enter into an ongoing relationship?
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 becomes Bob’s only client. He turns up each week and logs his hours so he can get paid.
But what are the ongoing expectations?
Does ABC feel obligated to keep giving Bob work? Does Bob feel as though they have an ongoing duty to keep finding him work?
Does Bob feel obligated to accept work? Is ABC expecting him to say yes to every project?
Is there an assumed mutuality of obligation?
This is where MOO can get murky.
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.”
Implied mutuality of obligation
If there are no clear terms around the termination of the agreement, either party could argue there was an implied mutuality of 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 contract, it’s harder to determine what level of MOO exists.
As a result, either Bob or HMRC could argue that the relationship between Bob and ABC was one of employee and employer and not one of self-employed subcontractor and contractor.
And if a court agrees, ABC would be liable for paying any unpaid income tax and national insurance contributions. They would also be liable for any unpaid employee entitlements Bob should have received under UK law.
They could take the case to an employment appeal tribunal to appeal the employee status, but this can be a lengthy process.
How to pass the mutuality of obligation “test”
Mutuality of obligation is becoming an increasingly important point in contract law as it forms one of the three employment status tests used by HMRC and the courts.
You are less likely to fall foul of the MOO employment status test if you have a robust contract in place. If no contract exists between a contractor and subcontractor then the relationship is open to interpretation.
What should be in your contract?
Your contract should clearly outline the terms of your working relationship with subcontractors. Is it clear it is not one of continuous employment?
A formal contract 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? Could they make a case that they were actually an employee?
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.
How important is mutuality of obligation in determining employment status?
By itself, the mutuality of obligation test is not enough to determine whether a worker is genuinely self-employed or a disguised employee.
If HMRC decides to open an enquiry, it will look for other appropriate indications that the relationship is one of employer and employment.
The best way to prevent an enquiry is to have a bespoke contractor-to-subcontractor agreement documenting your true working relationship with subbies.
Working with HardHats
Our goal is simple – to help as many construction firms as possible work with 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. Then we get all your subbies to sign them electronically, so you don’t have to lift a finger.
Plus, all our contracts are covered by our insurance-backed employment status guarantee, 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.