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Should contractors include a right of substitution clause in their contracts?

Should contractors include a right of substitution clause in their contracts?

‘Right of substitution’ is one of three primary concepts, along with ‘control’ and ‘mutuality of obligation, which is used to determine a worker’s employment status. Recent controversy surrounding IR35 and the off-payroll reforms has seen these theoretical concepts scrutinised and put to the test in tax tribunals. In this article, Contracting Scout looks at the right of substitution in light of recent government recommendations to determine if a substitution clause is still relevant.

What is the theory behind right of substitution?
Right of substitution refers to the contractor’s right to send a replacement if they are unable to carry out work on a contract. The theory implies that if the contractor can be replaced with someone similarly skilled, then it can be argued that the contractor isn’t providing a ‘personal service’, and is therefore less likely to be an employee. Until recently, right of substitution has been one of the most important determinants in deciding whether a contract is ‘of service’ (employment) or ‘for services’ (employed on their own account). However, as the recent spate of IR35 tribunals demonstrates, right of substitution is a difficult status test to implement across an increasingly broad spectrum of independent workers. For example, many contractors are the sole fee earner for their limited company, which means that they would effectively need to hire a subcontractor to act as a substitute, rather than merely letting the recruitment agency find a replacement. It has been argued that this is a notional scenario, rather than a realistic one, and that it actually allows for abuses of the clause, which can be included as a mere paper exercise to divert away from IR35.

The recent controversy surrounding right of substitution
Mathew Taylor’s 2017 report on modern working practices in Britain suggested that too much importance is given to this notional right of substitution. Instead, Taylor argues that there should be increased emphasis on the rights of control to determine whether a person is in business on their own account. The government’s response to the report published in December 2018 corroborated this point, stating that “businesses should not be able to avoid their responsibilities by trying to misclassify or mislead their staff.” However, the reality of exactly who is open to abuse is not so simple. The recent appeals of BBC presenter Christa Ackroyd and Dragonfly Consultancy proved that HMRC was more than willing to dispense with a right of substitution clause when they deemed it ‘invalid’. However, last November a case of London’s Deliveroo drivers losing their right to collectively bargain for statutory rights on the basis of their contracts containing a right of substitution clause points to a possible contradiction. Are these not the very workers who the government claims to want to protect, as individuals who have been somewhat cheated out of their basic rights by the inclusion of a paper clause.

Is a right of substitution clause still necessary for contractors?
Given the suspicion surrounding right of substitution, should contractors be conscientious about including the clause in their contracts? The simple answer is, yes. In the current climate of confusion and contradiction, not having a right of substitution clause in your contract might just as easily lead contractors to be misclassified. Right of substitution is an example of the inadequacy of legislation. For example, this can be seen when the clause is applied to highly specialised contractors, who may struggle to send a substitute with the same skill set, but who are never the less genuine contractors on limited term projects. The increasing demand for such skilled individuals, especially with regard to emerging technologies and hypergrowth companies, must inevitably lead to radical changes in legislation if the individuals most needed to facilitate economic growth are not to be discouraged and penalised. Until then, contractors should continue to include a right of substitution in their contracts. However, for the clause to carry weight, it should take into account the following points which clearly demonstrate the contactor’s rights of control and their day-to-day working practice.

  • The contractor must choose the substitute: The right of substitution clause should be ‘unfettered’, meaning that it does not give the client or the agency the right to vet the replacement. Avoid wording that refers to client ‘approval’ or ‘satisfaction’, as there should be no suggestion that the client has control over the provision of service that the contractor makes.
  • The contractor must pay for the substitute: Any costs incurred in providing a substitute will be at the contractor’s expense. This means that if anything goes wrong, the contractor is responsible for putting it right and bears the cost. This effectively cancels out the need for client approval as the contractor accepts liability for the substitute.
  • The clause must be genuine: It should be noted that even if the substitution clause isn’t likely to be used, the contractor should make sure that it’s a genuine provision. As a demonstration of this, consider putting the clause into effect and using a substitute for an arranged period of time while working on a contract. The fact that the right of substitution clause has been exercised offers further proof that it’s genuine and not just a paper clause.
  • The clause should be consistent: If you’re working through a recruitment agency, make sure that any clauses are included in both the upper level contract, between the agency and the client, and the lower level contract, between the agency and the contractor. Recent changes that transfer responsibility for deciding IR35 status from the contractor to the fee payer mean that it’s in the interests of the agency, the client and the contractor to work together to reduce the risk of IR35 liability. These changes will also apply to the private sector in 2020. Contractors can also confirm and clarify a right of substitution in letter of confirmation signed by the client.
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