How to fight the freelance contract crunch – Part 2

In this economic downturn, client companies and recruitment agencies are pursuing cost savings by, allegedly, verbally offering freelancers a certain pay rate only to downgrade that rate when the paperwork comes through. Freelancers want to know if clients/agents are legally permitted to renege on verbal pay promises, particularly if the freelancer rejected another role because it offered a lower rate that emerges as the higher rate once the agent’s or client’s downward revision is factored in. Contractors say they need to know their legal options when they make a business decision based on, or because of, their agent’s or client’s initial pay promise that ends up being broken.

FreelanceUK advisor:

As a freelancer, firstly consider:

•How sure are you of your ground?

•What is the difference between the amount you were paid, the amount you were offered and the amount you were offered on the contract you turned down?

•Is that figure substantial enough to warrant any action other than requiring future offers in writing from the agent/client?

•In the commercial world we live in, the phrase ‘because of their initial promise’ can be read more than one way.

What the law says

Verbal agreements can be incorporated into a contract at any stage and can even form the contract in its entirety. The terms of a contract need not be written and it is for this reason that many contracts have what is known as an ‘entire agreement’ clause, ostensibly to restrict the terms of the contract to those signed and exclude oral representations.

Contracts by necessity are often interpreted by the courts as desirably flexible, in order to match the demands and nature of business people and the commercial world. There may be good reasons for variation. That said, unilateral variation of the terms of a contract or offer, whether written or oral, can create a breach of contract or invalidate the contract resulting from the offer, allowing non-performance or part-performance.

The other party has an obligation to honour their offer. You must mirror their offer with mirror image acceptance, fundamental to the law of contract. You were induced to enter the contract by a misrepresentation and therefore the contract is ‘voidable,’ and you can elect to rescind or affirm the contract. Damages may not be available unless the misrepresentation was made fraudulently or negligently, but may put you back into the position you would have been in had the tort not been committed.

What to do?

You could consider claiming a breach of contract. It is likely such a claim would be more successful against an agent than if you are dealing direct with a client as you may have more of a claim where you have an ongoing relationship. With a client it might be viewed that such statements were part of negotiation, and with an agent you may have an existing and ongoing contractual relationship. You may place more reliance in an offer from your agent. Equally the opposite may be true! This is subjective.

If you still have other options you could claim the contract is not valid. You may have a claim to damages, but be aware of your general duty to mitigate your loss. In the non-litigious world this equates to a marginally better hand in negotiation as you can point to the difference between the wages – if you had anything in writing to evidence the three contrasting offers. This not being the case you may have little to work with even if the damages are large, beyond your persuasive charm!

The costs of actually pursuing a claim may be prohibitive, but dependant on the sums involved, consider engaging a solicitor to write a robust letter.


Freelancer’s bind: I agreed, but then along came a better contract

Background

Like most businesses in this economic downturn, freelance consultants need to make the most of market opportunities. Freelancers want to know where they stand, legally, if they verbally accept an offer of work but subsequently decide they want to accept a higher-rate contract elsewhere, perhaps with or without a separate agent. Freelancers are asking what might happen if they went a step further and signed the first contract, and claim they were wrong to sign because of unforeseen personal or commercial reasons, in an attempt to free themselves up to take the better-paid alternative.

FreelanceUK advisor:

What the law says

Legally and morally speaking the answer to the first question is simple. A verbal agreement can form a binding contract. Practically speaking, read the answer to one of the other question posed here regarding verbal promises made by the other party.

In addition you may wish to consider whether you have formed a valid and binding contractual relationship. This is a case-by-case matter and one that it may be worth considering with an expert, but a contract in summary is typically formed by:

•Offer;

•Acceptance;

•Consideration on both sides; and

•Intention to create legal relations

The answer to the second of these questions is, as usual, dependent on the contract itself. More particularly, check whether the contract allows for its discharge in certain, or any, circumstances. If it does, consider carefully whether your situation can be made to fit the circumstances in which you are legally permitted to discharge your obligations by agreement or performance. And consider whether there is a penalty.

If it does not, it is largely legally irrelevant whether you have decided you could earn better elsewhere, or whether your dog has had puppies unexpectedly. If the other party to the contract wants performance, and contractually they have the right to performance, it is likely that you are legally bound to perform.

Many contracts contain what is known as a ‘force majeure’ clause. This applies where for unavoidable reasons one party is unable to meet their contractual obligations. However such clauses are not often used, and are unlikely to apply to a ‘better paid alternative ’ as they more typically relate to natural disasters and the like. The law has always favoured certainty in contracts, so when you sign you must typically honour the obligations (if not unduly onerous) to which you sign up to. And it must be said, generally rightly so.

What to do?

This means your only sensible and practical option, unless you are willing to defend a breach of contract action, and maybe earn a bad reputation, is to check out your options and the bottom-line thoroughly, before you commit yourself to a contract. And make it plain that you will only consider yourself engaged once you have it in writing.

Always try and leave a well-hidden get-out clause. It always helps to have a pre-drafted standard contract available at the negotiating stage and a loose grasp of what you are trying to avoid in their standard contract.

If it is unavoidable, thoroughly examine the contract you have signed, and check amongst else whether it is divisible, and you have reached the end of a stage, and check that it does not allow for assignment. Check minimum levels of performance and how performance may be provided. Consider working two jobs if necessary, or sub-contracting.

Freelancer’s bind: I’m being pressured to become an employee

Background

In this economic downturn, client companies are pursuing cost savings by offering to take higher-wage freelancers on as employees on the basis that they will not be able to renew existing contracts when they expire. Freelancers suggest they find such offers detrimental to their status as an independent supplier, and wonder whether the offer would be perceived as signpost towards IR35, should they be unlucky enough to face a tax enquiry. Freelancers wonder if they can insert a clause into the contract prohibiting such offers of permanent, direct employment, or whether such a clause would bring them closer to an IR35 liability in the event HMRC investigates.

FreelanceUK advisor:

There is nothing you can do to stop your employer turning you into an employee if that is what you are. This may seem like a glib answer but whether you are classed as an employee or self-employed is not a simple decision. There are a number of factors that must be taken into consideration and there are no hard and fast rules. There are however a number of cases that we can look upon for guidance and also a number of assumptions as a result of these cases and guidance generally.

You would be classed as self employed if you run your own business and control what you do and when you do it. You would have several customers as opposed to just one, You use your own tools/ equipment, you engage other people to help you as and when you want at your own cost and expense.

In contrast, you would be classed as an employed person if you work for one person/ entity, if someone directs you as to how, when and where you should work, provides you with tools/ equipment, you are paid a set salary or wage and you have deductions taken out for PAYE , tax/ NI contributions. Also with regards to your work- the benefits and risks are borne by someone else.

As you can see it is not a decision made only by signing a contract of employment, as you may find that you are still classed by the Inland Revenue as an employee if an enquiry were to arise. The taxman has altered the law for a reason.

That said, signing or renegotiating any contract should be a free choice and a big change to your contractual position made without your consent is likely to be unlawful. The very first thing, as usual is to examine your existing contract. Check that you have not signed a term which allows a conversion under certain circumstances and check what those circumstances are. If you are unsure, ask a solicitor to look it over.

What the law says

If an investigation is undertaken into your tax situation, and your status as a self-employed contractor is not approved, the extra tax burden will fall on the employer as you are already paying your tax as self-employed. Having said that do watch out for any claw back provisions in any agreement that you have with the client/ employer. If you are covered by the IR35 law, matters changed a little last year. A case in point is Dragonfly Consultancy Ltd, where a £99,000 retrospective tax bill was applied. This case resulted in freelance contractors in similar situations reviewing their terms and status. Of course this article cannot substitute tailored advice and is not meant to.

If you are forced into accepting a contractual situation in which you are unhappy, presumably because of economic influence, you may argue that in court you would be able to resort to the doctrine of duress. It is a relatively late developer in English contract law, and much better recognised when it relates to physical rather than economic duress. Consideration is at the base of the existence of the doctrine of duress, i.e. if someone points a gun at you head and you sign a contract you have not provided any consideration for your signature. This is of academic interest, but in summary consideration does not need to be adequate so if you sign up (or allow a variation) to work for a year at one pound a month, you’ve still provided consideration so that a fully formed contract is created. In other words, your look-out. English contract law recognises inequality of bargaining power, undue influence and unconscionability but always remember that the law does not like venturing into the field of economics. You may also refuse direct employment on the basis that the change goes to the root of your contract and therefore the client is in breach and you are no longer obliged to fulfil your side of the contract. See part one of this series for more on this argument.

IR35 applies to situations where you are paid by an intermediary who is paid by the client. You are advised to seek help on these matters as they relate to the current financial year alone. If the intermediary is your limited company and you pay yourself in dividends the Inland Revenue has brought the legislation in for you, so you need to make sure you understand it.

What to do

•You must always make sure that a contract is favourable before signing;
•Draw up your own pro-forma before you go into negotiations;
•Ensure that you insert a clause which prevents unilateral decisions on employment status;
•Be aware what circumstances would indicate you would no longer be classed as self-employed – speak to a specialist solicitor or accountant;
•If a clause does exists in your contract concerning employment status see a solicitor; and
•Be sure to get compensation (consideration) for the renegotiation and make sure you get a new contract to suit. You may be able to dissuade the other party.
•Indemnity - most contracts will contain a clause from the client stating that if the Inland Revenue were to investigate the position and view the relationship and term this as an employer/ employee relationship then the freelancers would repay the tax/ NI deductions

FreelanceUK was advised by Izaz Ali, a director of Lawdit, a legal firm specialising in intellectual property, internet and technology law. Lawdit offer discounted agreements to Freelance Alliance members.

 

1st April 2009

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