The gig economy is nothing new. Dating back to 1915, musicians began referring to their evening performances as a “gig”. More recently, this term became commonly used to refer to working as a freelancer or contractor, as the economy shifted away from employment.
The benefits and flexibilities afforded to employees for transitioning all kinds of roles and jobs into “gigs” have brought with it some unique challenges, particularly for companies.
One of those challenges is in understanding Independent Contractor Agreements, which are legal documents that help outline the terms and conditions of an individual-company relationship.
This helps establish that an individual is not an employee, among other agreements, to prevent disputes over tax, employee benefits, and certain workers rights. Here are the main components of such an agreement.
Main components of the agreement
When creating an independent contractor agreement in the UK, there are many different elements to consider.
Scope of Work
This element is to define the scope and boundaries of the deliverables and responsibilities that are expected of the individual. This outlines an expectation - something that can be referred to upon dispute or termination of the agreement. For example, contracting a farmer who will become responsible for managing certain crops but not others.
This defines the timing of when work will be complete. For example, certain deliverables as a marketing contractor that must be completed by the end of the month.
There are two parts to the payment element. Firstly, how much will the contractor be paid, and secondly, how will they be paid. Perhaps they will be paid at the end of the job, or staggered into milestones. Also, the potential penalties or discounts due to falling short on the pre-agreed scope of work (late or poor quality deliverables).
The termination clause includes the provisions for terminating the agreement. For example, a notice period length or if you need to pay a termination fee. However, this is an area where regulation and compliance is important, such as referring to the Public Contracts Regulations 2015.
This is where it is stated that a contractor is not an employee, thereby negating certain tax, legal, and rights afforded to employed workers.
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The Termination Process of an Independent Contractor in the UK
While it is often easier to hire and fire contractors than it is employees, this doesn’t mean there are no legal considerations. Increasingly, contractors are becoming legally protected.
Three pieces of legislation to consider
The Employment Rights Act 1996 is the foundational legislation that sets the tone for unfair dismissal, along with what defines a worker from a contractor. Whilst it’s primarily for employees, there are important rights that are outlined, such as the written right to notice of termination, unfair dismissal, and a written statement of employment particulars. These help establish fair practices throughout the company, but it can also be used as a reference for misclassifying a worker as a contractor.
The Public Contracts Regulations 2015 is another important piece of legislation that mostly relates to public sector contracts. These outline how public contracts are awarded (transparent, fair, encouraging competition) and terminated.
The Trade Union and Labour Relations (Consolidation) Act 1992: This act is the primary framework for establishing the rights and obligations of trade unions and employers. It is geared mostly towards collective action, but it also provides insight into the termination of contracts. This is important in noticing what rights individuals have towards collective bargaining.
Terminating an Independent Contractor
If the agreement between you and the contractor includes a termination fee clause, then you as an employer must pay this fee when prematurely ending a contract (before the agreed scope of the work is complete).
The scope of work is often a factor in how big this fee is, along with the duration of the contract. For example, the contractor will likely want a larger financial cushion for taking on a large project, because the opportunity cost (of turning down other contracts) is higher.
Most agreements should have a notice period for termination, which lets both parties finish up tasks, financial obligations, and wind down the work. This is a very important legal aspect that contractors must adhere to, as per the agreement.
A hugely important aspect, which can be the most elusive and subjective part, are the conditions for termination. The agreement should outline certain conditions that warrant termination, such as behavioral issues, being late, and subpar work. Of course, subpar work and behavioral issues aren’t always clear-cut, which is where both the agreement and legislation needs to be taken into consideration.
Potential challenges and how to address them.
In order to explore the challenges of independent contractor termination in the UK, let’s take a look at some real-life examples of company misjudgements.
In 2021, Uber lost a Supreme Court case in the UK for misclassifying its drivers as being independent contractors, as opposed to workers. Whilst Uber tried to claim it was a platform that merely connected passengers to drivers (like a marketplace such as eBay or AirBnB), the drivers were found to be workers under UK law. The main reason for this was because Uber exerted a lot of control over the drivers (Uber sets the fares, the route, the rating system etc.).
In damages, Uber had to pay out over £1 billion for the misclassification.
King v The Sash Windows Workshop Ltd
Mr King was a window cleaner who was classified as a self-employed contractor by the windows company. Again, because of the large amount of control exerted over Mr King (i.e. dictating his work schedule), the court ruled that he is to be granted employee rights, like paid annual leave. The misclassification awarded Mr King £27,000 in compensation, showing that smaller firms aren’t immune to legal fallouts of noncompliance and misclassification.
Best practices for terminating the agreement in accordance with UK laws.
Below are some best practices to ensure you stay on the right side of the law as a company using contractors.
Maintain clear communication
Being open and transparent with the contractor at all times - not just initially. Preventing a termination is usually preferred as it’s cheaper, simpler, and faster when the contract is a success. So, ongoing honest conversation may help with compromises or alternative solutions before deciding on termination.
Keep a record of all communications taken during the termination process. This can provide you with evidence if any legal issues arise, such as steps you have taken (or a lack of steps the other party has taken) to resolve issues.
Refer to the agreement
Continuously revisit the agreement after it’s made, not just at the start. This helps you gauge what was stipulated along with being your guide during the termination procedure. For example, always stick to your agreed notice period.
UK employment and contractor law can be tricky and complex. And, clearly, legislation is enforced as per the examples above. So, it’s wise to seek professional legal help if you’re uncertain about whether you have breached any laws, rights, or the agreement.
Upon termination, reflect on why the contract wasn’t a success so that improvements can be made next time. Take up your contractor’s point of view (perhaps ask them too) about what you could do better.
Terminating an independent contractor in the UK is a complex process that requires careful legal consideration. Following the best practices and fleshing out the agreement thoughtfully are crucial to avoiding legal pitfalls.
Prevention is the best cure, meaning that a well-drafted independent contractor agreement is at the crux of making the termination process as smooth as possible.