Leaving company and subcontracting - employment contract
Discussion
Hi all,
Need to be a bit vague here but in essence, what are the rules on employment contracts and protecting existing clients ('restrictive covenants' I think they're called)? For example, if an employer were to change said contract such that an individual would then work as an independent contractor for them, would said employer be able to include an employment contract clause such that the individual wouldn't be able to work with previous clients/customers within a specified time (i.e. 12 months)?
I presume that the company would be well within their rights to do this and, equally, the contractor would be well within his/her rights to not sign such a contract but the issue is that this could possible stop said contractor from earning a living (in the absence of new clients).
Some background that muddies the water a little:
-The employer didn't offer the type of work delivered by the contractor before he/her joined the organisation (it's unclear whether the company wants to continue to do this - although, given the positioning above, it seems likely)
-The contractor bought across a few clients with him/her to the company
-The contractor has made available IP that the company has then benefited from (i.e. charged fees for its use). The contractor would intend to continue using these resources (as they were developed before joining the company).
Apologies for vagueness of the above. Genuinely asking for a friend!
Need to be a bit vague here but in essence, what are the rules on employment contracts and protecting existing clients ('restrictive covenants' I think they're called)? For example, if an employer were to change said contract such that an individual would then work as an independent contractor for them, would said employer be able to include an employment contract clause such that the individual wouldn't be able to work with previous clients/customers within a specified time (i.e. 12 months)?
I presume that the company would be well within their rights to do this and, equally, the contractor would be well within his/her rights to not sign such a contract but the issue is that this could possible stop said contractor from earning a living (in the absence of new clients).
Some background that muddies the water a little:
-The employer didn't offer the type of work delivered by the contractor before he/her joined the organisation (it's unclear whether the company wants to continue to do this - although, given the positioning above, it seems likely)
-The contractor bought across a few clients with him/her to the company
-The contractor has made available IP that the company has then benefited from (i.e. charged fees for its use). The contractor would intend to continue using these resources (as they were developed before joining the company).
Apologies for vagueness of the above. Genuinely asking for a friend!
Edited by LittleBigPlanet on Wednesday 28th February 12:32
The scenario you describe has several pointers to your friend not being an independent contractor but in fact a disguised employee. For a start HMRC will take a very dim view of him being an employee one day & a contractor the next. The essence of being 'self employed' is that he is in business on his own account & as such he should be free to take on other work for other clients. If he can only work for his current company then he isn't 'self employed'. If your friend's arrangement is deemed to be inside IR35 (ie a disguised employee) then he will be taxed as an employee but may not receive any employee benefits.
Obviously no true contractor would/should sign a contract with a restrictive covenant but as you say this may mean he doesn't get to work for them.
I suspect the other stuff about bringing clients & IP doesn't have much relevance but I may well be wrong.
Obviously no true contractor would/should sign a contract with a restrictive covenant but as you say this may mean he doesn't get to work for them.
I suspect the other stuff about bringing clients & IP doesn't have much relevance but I may well be wrong.
Mr Pointy said:
The scenario you describe has several pointers to your friend not being an independent contractor but in fact a disguised employee. For a start HMRC will take a very dim view of him being an employee one day & a contractor the next. The essence of being 'self employed' is that he is in business on his own account & as such he should be free to take on other work for other clients. If he can only work for his current company then he isn't 'self employed'. If your friend's arrangement is deemed to be inside IR35 (ie a disguised employee) then he will be taxed as an employee but may not receive any employee benefits.
Obviously no true contractor would/should sign a contract with a restrictive covenant but as you say this may mean he doesn't get to work for them.
I suspect the other stuff about bringing clients & IP doesn't have much relevance but I may well be wrong.
Thanks very much for your comment, very helpful (and that above of Eric too). Obviously no true contractor would/should sign a contract with a restrictive covenant but as you say this may mean he doesn't get to work for them.
I suspect the other stuff about bringing clients & IP doesn't have much relevance but I may well be wrong.
The reality is that my friend joined said company a little while ago and it hasn't worked out for one reason or another. He/she probably could also be described as being a bit commercially unsavvy for want of a better phrase. Just don't want him/her to get shafted!
Edited by LittleBigPlanet on Wednesday 28th February 17:59
A non-compete, non-solicitation or transfer restriction clause is fairly common in most contracts. Depending on how it is worded (the are usually very broad) and the nature of how you leave is likely to have a major impact on the outcome.
For example, I was made redundant from a company and immediately went and worked for their biggest client, doing the same thing. I don't think they had much cause for complain having had just made me redundant.
On the other hand, if a client or competitor poached your friend with a better offer, it is more likely to leave his employer aggrieved and they could trigger the clause.
For example, I was made redundant from a company and immediately went and worked for their biggest client, doing the same thing. I don't think they had much cause for complain having had just made me redundant.
On the other hand, if a client or competitor poached your friend with a better offer, it is more likely to leave his employer aggrieved and they could trigger the clause.
CzechItOut said:
A non-compete, non-solicitation or transfer restriction clause is fairly common in most contracts. Depending on how it is worded (the are usually very broad) and the nature of how you leave is likely to have a major impact on the outcome.
For example, I was made redundant from a company and immediately went and worked for their biggest client, doing the same thing. I don't think they had much cause for complain having had just made me redundant.
On the other hand, if a client or competitor poached your friend with a better offer, it is more likely to leave his employer aggrieved and they could trigger the clause.
Did you actually read the original post? He's not being faced with a restrictive covenant as an employee, but as an independent contractor/self employed service provider.For example, I was made redundant from a company and immediately went and worked for their biggest client, doing the same thing. I don't think they had much cause for complain having had just made me redundant.
On the other hand, if a client or competitor poached your friend with a better offer, it is more likely to leave his employer aggrieved and they could trigger the clause.
CzechItOut said:
A non-compete, non-solicitation or transfer restriction clause is fairly common in most contracts. Depending on how it is worded (the are usually very broad) and the nature of how you leave is likely to have a major impact on the outcome.
For example, I was made redundant from a company and immediately went and worked for their biggest client, doing the same thing. I don't think they had much cause for complain having had just made me redundant.
On the other hand, if a client or competitor poached your friend with a better offer, it is more likely to leave his employer aggrieved and they could trigger the clause.
You sound like another Yipper. Apparently a long term member, but only recently started posting lots of largely irrelevant rubbish.For example, I was made redundant from a company and immediately went and worked for their biggest client, doing the same thing. I don't think they had much cause for complain having had just made me redundant.
On the other hand, if a client or competitor poached your friend with a better offer, it is more likely to leave his employer aggrieved and they could trigger the clause.
OP, many issues in what you suggest.
If you are employed you can't have your contract changed to make you self employed, it isn't that simple and employment is a matter of fact and not a choice. That is not to say that the relationship between an individual and employer can't change and that as such it becomes a B2B relationship but it's quite a leap and the facts have to demonstrate this and if they don't then IR35 is not your friend.
Anti compete clauses and so on differ depending on whether we are talking about an employment or a commercial b2b agreement... more details needed really.
If you are employed you can't have your contract changed to make you self employed, it isn't that simple and employment is a matter of fact and not a choice. That is not to say that the relationship between an individual and employer can't change and that as such it becomes a B2B relationship but it's quite a leap and the facts have to demonstrate this and if they don't then IR35 is not your friend.
Anti compete clauses and so on differ depending on whether we are talking about an employment or a commercial b2b agreement... more details needed really.
UpTheIron said:
OP, many issues in what you suggest.
If you are employed you can't have your contract changed to make you self employed, it isn't that simple and employment is a matter of fact and not a choice. That is not to say that the relationship between an individual and employer can't change and that as such it becomes a B2B relationship but it's quite a leap and the facts have to demonstrate this and if they don't then IR35 is not your friend.
Anti compete clauses and so on differ depending on whether we are talking about an employment or a commercial b2b agreement... more details needed really.
My friend had his/her employment ended (effectively fired), he/she has had a few weeks off and has then been invited back on a contractor basis (with a new contract). Said new contract has this restrictive covenant clause in it, the original did not. If you are employed you can't have your contract changed to make you self employed, it isn't that simple and employment is a matter of fact and not a choice. That is not to say that the relationship between an individual and employer can't change and that as such it becomes a B2B relationship but it's quite a leap and the facts have to demonstrate this and if they don't then IR35 is not your friend.
Anti compete clauses and so on differ depending on whether we are talking about an employment or a commercial b2b agreement... more details needed really.
This covenant restricts his/her working with a long list of existing clients (over 100!). There is also wording to suggest that this client list will be amended over time (I'm guessing that this means 'extended' given the current approach taken by the company).
All in all a rubbish situation and I'm currently advising him/her walk away and lose ~3 months salary and start up afresh (at present, there is no contract as employment has been terminated and there was no such restrictive covenant in his/her previous contract).
Mr Pointy said:
Did you actually read the original post? He's not being faced with a restrictive covenant as an employee, but as an independent contractor/self employed service provider.
I am an independent contractor and I have a Transfer Restriction clause in my contract. I was merely using my previous experience as an example of how an employer may or may not look to actively restrict who you can work for moving forwards.CzechItOut said:
I am an independent contractor and I have a Transfer Restriction clause in my contract. I was merely using my previous experience as an example of how an employer may or may not look to actively restrict who you can work for moving forwards.
Have you taken advice on the implications of that clause? Are you contracting as a limited company, sole trader or some other mechanism?LittleBigPlanet said:
Eric Mc said:
You seem to be implying that the "client" is getting rid of an employee and then re-hiring the same individual pretty much straight away as a non-employee?
Is that the correct interpretation of what you were saying?
Precisely.Is that the correct interpretation of what you were saying?
HMRC might not be convinced that the employment has actually ended - and if the "employee" has been advised by his former employer to operate through a limited company, the former employee will be massively exposed to IR35.
Eric Mc said:
LittleBigPlanet said:
Eric Mc said:
You seem to be implying that the "client" is getting rid of an employee and then re-hiring the same individual pretty much straight away as a non-employee?
Is that the correct interpretation of what you were saying?
Precisely.Is that the correct interpretation of what you were saying?
HMRC might not be convinced that the employment has actually ended - and if the "employee" has been advised by his former employer to operate through a limited company, the former employee will be massively exposed to IR35.
For him/her to sign up to a new contract with a restrictive covenant in it, such that is restricts his/her ability to work with over 100 clients for the next <12 months, he's be barking mad to sign it. I sense that things will get a bit sour now though but this may be the battle, rather than the war.
It doesn't matter why the company is doing this. Firing an employee and re-hiring the day after seemingly in a self-employed/limited company category is a massive indication that IR35 will be applied or the claim that self-employed status exists is really false.
The latter is compounded if the former employer tries to exercise maximum control over how the supposedly independent contractor/self-employed individual runs what is supposed to be his own business.
The latter is compounded if the former employer tries to exercise maximum control over how the supposedly independent contractor/self-employed individual runs what is supposed to be his own business.
Eric Mc said:
It doesn't matter why the company is doing this. Firing an employee and re-hiring the day after seemingly in a self-employed/limited company category is a massive indication that IR35 will be applied or the claim that self-employed status exists is really false.
The latter is compounded if the former employer tries to exercise maximum control over how the supposedly independent contractor/self-employed individual runs what is supposed to be his own business.
I didn't say that he/she had been re-hired the day after, he/she has had a week or two off. Not sure if that matters or not. I presume that the premise if the same.The latter is compounded if the former employer tries to exercise maximum control over how the supposedly independent contractor/self-employed individual runs what is supposed to be his own business.
Thanks for your help.
LittleBigPlanet said:
I didn't say that he/she had been re-hired the day after, he/she has had a week or two off. Not sure if that matters or not. I presume that the premise if the same.
Thanks for your help.
The time gap is still very short. HMRC would not be convinced that this is a true business relationship. In order for a genuine sole trader or limited company business relationship to exist, the sole trader/limited company must be able to demonstrate that the relationship is a genuine business/trading relationship.Thanks for your help.
Rehiring the same individual within a few weeks of getting rid of them as an employee is not a good sign that somehow the relationship has magically transformed itself into something different to what it was before. This is reinforced when the former employer starts off by setting out a set of instructions as to how this so called totally unconnected and separate business actually runs its business.
HMRC looks at "control" and "independence" as significant factors in deciding whether a business really is a business. The other factor (and often the most important one) is "substitution" i.e. the ability of the self-employed individual/contractor to send someone else instead of themselves if they feel like it.
The recent case involving the BBC presenter hinged to a large extent on "control" and "substitution".
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