What needs to be in a subcontractor agreement?

by | Nov 27, 2022

If you’ve been working with your subbies for a while now, it makes sense to get a proper agreement in place. It protects you, it protects your subbies, and it helps demonstrate to HMRC that your subbies are genuinely self-employed.

But what needs to be in a subcontractor agreement?

Is an off-the-shelf template going to offer the protection you need? Can you put one together yourself? Should you just pay subbies via a payroll company and let them worry about it?

Before you do any of those things, it’s important you understand what needs to be in a subcontractor agreement so you can make sure you’re properly covered.

What needs to be in a subcontractor agreement?

At HardHats, we’ve tried to make understanding subcontractor contracts as straightforward as possible.

Here are the key things that need to be in a subcontractor agreement:

  1. Commercial aspects
  2. Business factors
  3. The three tests

Commercial Aspects

This is about how you work with your subbies – scope of work, payment terms, and who is responsible for what. Who covers materials, travel allowance and other miscellaneous costs, for example?

Do your subbies have to wear branded PPE so they are identifiable on-site? Will they use your tools and vehicles? Are they paid an hourly or daily rate?

Having the commercial aspects detailed means there is no ambiguity – everybody is clear on the expectations and terms.

Business factors

To be classed as genuinely self-employed, subcontractors must prove they are a business in their own right. This can be tough if you are their only client, and there are no obvious signs they are a separate business – such as having their own company website or office.

But this is where your contracts can help support their case. Because the key goal for any business is to make a profit. And if a business can make a profit, it can also make a loss.

If your subcontractor makes a mistake and is required to rectify it at their own cost, there is a risk of loss. And if there is a risk of loss, this indicates they are a business in their own right.  

So make sure you include a “Resolution of Disputes” clause in your contract. Make it clear that subcontractors will have to make good any defective work at their own cost or on their own time.

Not only does this demonstrate they are genuinely self-employed, but it also protects you from shoddy workmanship.

The three tests

The most important part of your agreement is ensuring it reflects your true working relationship with your subbies.

If HMRC or a court of law ever questioned the employment status of your subbies, they wouldn’t simply take the contract at face value. They would make sure it matched up with reality.

The second thing to note is the distinction between a contract of services and a contract for services. A contract of services is an employment contract. A contract for services is what you need in place with your subbies.  

UK case law generally agrees that a contract of service exists if these three conditions are fulfilled:

(i)       The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master.

(ii)       He agrees, expressly or impliedly, that in the performance of that service, he will be subject to the other’s control in a sufficient degree to make that other master.

(iii)      The other provisions of the contract are consistent with its being a contract of service.

And this is where the three tests come from. They are:

Personal service – is the subcontractor expected to carry out the work personally?

Control – do you tell them when to work, what to do, and how to do it?

Mutuality of Obligation (MOO) – do you have an obligation to keep offering your subcontractors work, and do they have an obligation to accept it?

If you fall foul of all three tests, then regardless of what your contract says, the agreement will be deemed a contract of services, not for services.

So your contract should cover these three tests (and be true to life).

Personal service can be covered by the right to substitution clause. This gives your subbies the right to send a substitute in their place (as long as the substitute has the relevant skills and qualifications). And if they can send a substitute, that means you aren’t expecting them to carry out the service personally.

When it comes to control, it is usually accepted that there will always need to be some element of control. You might have set working times for subbies for health and safety reasons or because you have to meet the terms of your contract with the client.

But if you are micro-managing your subbies and telling them how to carry out each specific task, your relationship could be deemed to be one of “master and servant” (employer and employee). Make sure your contracts are clear about which elements you have control over and the reasons why.

The final test is mutuality of obligation. Is there a sense of obligation between you and your subcontractor? Could they turn down work with you to work for someone else? Can you let them go without notice if you have no work for them?

If they are genuinely self-employed, either of you could end your commitment to each other tomorrow. Is this clear in your agreement?

Creating robust subcontractor agreements

So now you know what needs to be in a subcontractor agreement, what are your options for creating one?

As we said earlier, you could use contract templates, you could create your contracts yourself (our free book teaches you how), or you could use a payroll company.

But there is another way. And we think it’s a better way.

You could let us take care of it for you.

Not only will we create a bespoke, watertight contract (complete with an insurance-backed guarantee), but we’ll also get all your subbies to sign them.

All you need to do is tell us how you work with your subbies, and then we’ll create the contracts.

Once it’s ready, let us know the names of all your subbies and provide an email address or mobile number for each. Our fancy software will send them an email or text with a link to the contract, and they can sign electronically. Easy for you. Easy for them. Contact us to get started.

You might not even need our help!

But if you use labour-only subcontractors long-term and want to continue doing so, let’s have a chat. If you are at risk, we’ll take that risk off your hands.

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