Consultancy Agreement - Simple


Sep 14, 2022

A consultancy agreement is a legal contract between a company and either a self-employed individual consultant or an individual providing their consultancy services through their own limited company. The agreement sets out the terms on which the consultant will be engaged. The contract is often also known as a consulting services agreement, a freelance agreement (or freelancer agreement), a business consulting agreement, an independent contractor agreement or a consulting agreement.

When should you use a Consultancy Agreement?

A consultancy agreement is used to engage an independent contractor (or freelancer), which could either be a self-employed individual or an individual providing their consultancy services through their own limited company. Consultants are generally engaged to provide their expertise for a specific project or period. For example, a software implementation consultant who is brought in to implement new software by installing any required hardware/software as well as conduct training sessions with staff etc. The flexibility afforded by a freelance agreement is optimal especially where the requirement for a specific skill set or expertise is limited. 

The intention of this agreement is that the employment status of the individual will be that of self-employed consultant/independent contractor, rather than employee. However, regardless of what the agreement says, employment status is determined by how an individual operates in practice. In particular, the key factors are (a) mutuality of obligation (i.e. whether the company is required to provide work and whether the individual is required to carry it out), (b) personal service (i.e. whether the individual is required to provide their services personally or whether they could provide a substitute in their place) and (c) degree of control (i.e. how much control the company has over the individual consultant/contractor. This employment status is important for both the consultant and the company as it has a substantial impact on both parties. A self-employed consultant does not enjoy employment related rights (such as the right to claim unfair dismissal on termination, national minimum wage, paid annual leave and sick leave, employer’s contribution to pension etc) in relation to the engaging company, but on the other hand the consultant may benefit from a more favourable tax regime, and will likely have more flexibility in the way they work,  with the ability to work with multiple companies at the same time.

Why is a Consultancy Agreement important and why should you use a Consultancy Agreement?

Consultants are valuable assets for companies as the arrangement allows a company to benefit from a particular skill set, experience or expertise that it does not have within its existing workforce, without having to use resources such as time and/or money to recruit or train personnel. 

A business consulting agreement would also encourage an outside perspective which is often valuable as the breadth of experience may bring in solutions which you have not previously considered. Consultants are regularly engaged to smoothen the transition period of a company as they provide extra support during an expansion, relocation, restructuring, implementation of systems and/or processes, merger or acquisition etc. A consultant would be able to hit the ground running from day one, thereby adding value immediately and increasing productivity without any training time gaps.  

As the company would not need to pay for the consultant’s PAYE, National Insurance nor any pension contributions, this is often seen as a most cost effective method of filling in a skill gap without the long term commitment.

What are the common pitfalls of a Consultancy Agreement?

From the company’s perspective it is critical that the contract used properly reflects the employment status of the individual in person - i.e. a company should only use this agreement where the employment status of the individual is definitely not that of employee. If a company treats an individual as a self-employed contractor when the reality is that they are actually an employee, the company could become liable for unpaid tax and NICs (plus interest and penalties) and the likelihood of a dispute on termination (leading to a potential employment tribunal claim) is greater.

Intellectual property (IP) created by an employee as part of an employment would generally belong to the employer/company. However, the same rule does not apply to the company-consultant relationship. Any IP created as part of the engagement would, if not specifically dealt with, generally be owned by the creator (e.g. the consultant). It is therefore strongly advisable, especially if it is anticipated that the consultant will be creating any IP (for example any development of any software, creation of any marketing or training material etc), that clear terms be included in the consultancy agreement to make sure that the ownership of all IP created will assigned to the company, and that the consultant will disclose all and any IP created as part of the services provided. These protective measures, as well as further protective terms, are included in the agreement available on our platform. 

If the consultancy service is offered through a company (as opposed to the individual entering into the consulting agreement personally), it is strongly recommended that direct undertakings in relation to certain key matters (e.g confidentiality, ownership of intellectual property etc) be obtained from the individual carrying out the consultancy service. The consultancy agreement on our platform addresses these points in detail. 

Whilst it may be tempting to include post-termination restrictive covenants in the consultancy agreement (limiting what the consultant can do after the agreement terminates), a court would be more likely to find that the individual is an employee rather than a self-employed independent contractor. If it is determined (by an Employment Tribunal or by HMRC) that the employment status of the individual is that of employee, the company would be liable for unpaid tax, National Insurance and pension contributions, and the risk of litigation may be greater. A balanced yet thorough approach is therefore key in creating a suitable consultancy agreement. 

Please note: Pocketlaw is not a substitute for an attorney or law firm. So, should you have any legal questions on the content of this page, please get in touch with a qualified legal professional.

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