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How to draft Consultancy Agreements – Part 2

In this, our next article in the series looking at drafting consultancy agreements, we focus on key terms to include in the agreement once an organisation has decided that the individual is to be engaged as a consultant.

Once an organisation has concluded that it wishes to engage the services of a consultant, it is advisable to enter into a written consultancy agreement with that individual. There are certain key terms which should be included in the agreement as discussed below.

Duties and obligations

A duties clause usually sets out the following:

  • How much time the consultant is contracted to perform services for the company;
  • Exactly what services are to the provided (with services often defined in a separate schedule);
  • That the consultant is obliged to exercise due skill and care in carrying out the services; and
  • Any other obligations, such as providing information to the company and complying with health and safety requirements.

As a word of caution, if the consultancy agreement imposes detailed and/or restrictive duties on the consultant, this may suggest a level of control which indicates that the consultant is, in fact, a worker or employee. For the same reason, the clause should not reference any employment related benefits such as holiday entitlement/pay and should clarify that the consultant will not be paid for any period during which the services are not provided, for example due to the consultant’s ill health.

Substitution

It is recommended that, if possible, the company includes a clause which would enable the consultant to provide, at their own expense, an approved and suitably qualified substitute to carry out the services in the consultant’s place. This should be on the understanding that the consultant will continue to be subject to all obligations during the substitute’s appointment as if it were the consultant carrying out the work. 

Care should be taken to avoid including anything which limits the right to provide a substitute, for example by only allowing appointing a substitute where the consultant is unavailable or where the company provides their prior consent. Such limits risk a finding that the right of substitution is a sham, which could lead to the consultant being found to be either a worker or employee rather than genuinely self-employed. The company should also be mindful that an Employment Tribunal will look beyond the wording of the clause if, in reality, the consultant does not have the ability to appoint a substitute. As such, this should only be included if genuine.

Indemnities

An indemnity provision in the agreement could protect the company from any loss sustained as a result of:

  • The consultant’s acts or omissions in the course of providing the services (except where the consultant has acted in accordance with the company’s directions);
  • Any claims arising out of the allegation or finding that the consultant is an employee or worker of the client (except where such a claim is as a result of any act or omission by the company); and
  • Any liability to tax or NICs on the consultancy fee, where the liability falls on the company rather than the consultant.

There is a small risk that including indemnity in the second point  above may suggest to HMRC, if it examines the agreement, that there is some doubt regarding the consultant’s employment status. However, this risk is outweighed by the commercial benefits of having such an indemnity.

Confidentiality

It is important to include detailed confidentiality provisions in consultancy agreements as, unlike employees, consultants are generally under no implied obligation of confidentiality. The company should ensure that the confidentiality provisions cover all types of information which it considers to be confidential and to which the consultant will have access.

However, the company should ensure that the clause does not attempt to prevent the contractor from using information which has become part of their own skills, knowledge and experience, as opposed to trade secrets for example, as this will not be enforceable if challenged.  

GDPR

On 25 May 2018, a new regime for data protection came into force, the General Data Protection Regulation (GDPR).

Under the GDPR, consultants will have rights as data subjects. The company as a data controller must provide consultants with a privacy notice, setting out what personal data the company holds in relation to them and how and why that information is being processed. It is best practice for the consultancy agreement to refer to this privacy notice, and to confirm where this notice can be found.

Additionally, depending on what services the consultant is being asked to provide and if, for example, they exercise a right to appoint a substitute, the consultant may also be either a data processor or a data controller in their own right. The consequence of being a data processor is that the consultant will be subject to additional obligations under GDPR which must be reflected in the consultancy agreement. In particular, the consultant must:

  • Enter into a written contract incorporating specific terms with the company and to process personal data only according to the company’s instructions;
  • Seek the company’s written authorisation to engage a substitute and, assuming authorisation is granted, enter into a contract with the substitute which offers the same level of protection for the personal data;
  • Put in place the same security measures to protect personal data as the company is taking itself;
  • Maintain records of their processing activities; and
  • Notify the company if they become aware of a personal data breach without undue delay.

Some of these obligations will have significant financial implications for individual consultants and, in the event that any obligations are breached, the consultant will also be directly liable for damages, fines and penalties. The consultant and the company should therefore ensure that there is adequate insurance in place to cover these eventualities.

Other provisions

Other key clauses that are commonly included in consultancy agreements include:

  • A requirement for the consultant to supply their own equipment and materials;
  • An obligation on the consultant to account for their own tax, NICs and VAT (if applicable) on the consultancy fee;
  • A requirement for the consultant to maintain appropriate insurance cover;
  • A statement excluding the consultant from having employment status; and
  • Conditions governing the ownership and creation of intellectual property.

Coming next

Next month, we will publish the third and final article in the series on drafting consultancy agreements. This will focus on common problem areas associated with such agreements, in particular the impact of IR35, including limits on the consultant’s ability to work elsewhere and restrictive covenants.

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