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Using contractors and subcontractors
It is common for businesses to use contractors and subcontractors instead of hiring permanent staff when the work is short-term, expert skills are needed but only for a finite period or the extent of the workload is unknown.
Contractors are not employees of the business but have a contract to provide certain services. Subcontractors undertake a contract from a contractor.
This guide explains the different roles of contractors and subcontractors, sets out how your business might benefit from using them, as well as outlining some of the potential disadvantages.
Contractors and subcontractors - the difference
Contractors provide agreed services for a set fee and duration under a contract for services with the business (client). This is not a contract of employment.
Many businesses typically use contractors for:
building work
catering
cleaning
gardening
copywriting services
IT maintenance and support
security services
recruitment
Contractors can charge the client fees by the hour or day or on a lump sum basis. Their contracts often specify milestones for part payment, eg on completion of specific goals.
Subcontractors undertake a contract from the contractor.
Subcontracting - also known as outsourcing - involves the contractor entering a commercial contract to get a job done. Read about flexible contracts and subcontractors on the Acas website.
Subcontractors can be:
large organisations that undertake to complete part of the contractor's contract
employed under a contract for services
small, one-person businesses, partnerships, limited companies or co-operatives
An employee of the contractor cannot also be a subcontractor.
Subcontractors carry out work that a contractor cannot do but for which the contractor is responsible. For example, a building contractor may hire a subcontractor to complete the electrical wiring part of the contractor's building job. The contractor is responsible to the client for the building job including the part performed by the subcontractor.
Subcontractors might work on task-based contracts with no fixed date, long-term arrangements which can be discontinued at any time, or fixed-term contracts.
Pros and cons of using a contractor or subcontractor to provide staff
Many businesses needing extra staff use contractors and subcontractors successfully, but sometimes there can be problems or complications.
Consider the following:
| Advantages |
Disadvantages |
| You can hire a contractor/ subcontractor when you need more flexibity |
Contractors/subcontractors may cost the business more than the employee equivalent day rate |
| You can use a contractor/ subcontractor for one-off jobs and jobs requiring specialist expertise or fast turnaround |
Your business does not acquire or develop skills in-house and relies on suppliers |
| Your permanent staff can concentrate on the core business |
Permanent staff may resent contractors being paid more money for doing similar work to them |
| Some contractors/ subcontractors can start the work or project at short notice, even when large numbers of workers are required |
You have no direct control over the quality of subcontractors' work |
| You can often specify the type and duration of contract you need for the job |
Contractors/subcontractors may not appreciate your business culture and may lack the motivation and commitment of permanent staff |
| You can obtain temporary cover for a permanent staff job or work that needs doing |
You have legal responsibilities for the health and safety of such persons on your site |
| You have no PAYE or National Insurance contributions (NIC) administration for contractors/subcontractors |
Workers can be employees or subcontractors of the contractor - you need to understand relevant tax implications and other rights. For more information see the page in this guide on employment status - implications for tax and worker rights |
You can read about flexible contracts and subcontractors at the Acas website.
Employment status - implications for tax and worker rights
Contractors have contracts for services with your business whereas permanent staff usually have contracts of employment.
Subcontractors undertake a contract from the contractor.
The employment status of those who work for you has implications for worker rights and tax. Look up employment status categories in our guide on employment status.
The employment status of contractors and subcontractors can be complicated. Although a worker may be described as a contractor or subcontractor, the law may in fact consider them to be an employee and they will have the same rights as a permanent employee, such as the right to claim unfair dismissal.
Read about employment status at the HM Revenue & Customs website.
Tax
If you use contractors/subcontractors you will not generally make tax and National Insurance (NI) deductions.
If you provide your services personally through your own limited company or partnership, IR35 rules could apply. You may then have to account for income tax and NI deductions as if you were an employee.
Learn about IR35 rules from the HM Revenue & Customs website or see our guide on individuals, companies and IR35.
Special rules apply to self-employed contractors/ subcontractors in the construction industry - see our guide on the Construction Industry Scheme: the basics.
Worker rights
Contractors, subcontractors and agency workers generally have many of the same rights as permanent staff, including:
National Minimum Wage regulations - see our guide on understanding National Minimum Wage law.
Working time regulations - see our guides on Sunday working and night working and hours, rest breaks and the working week.
Paid leave - see our guide: know how much holiday to give your staff. For agency workers, depending on their contract, you or the agency may be liable to pay this.
Non-discrimination - see our guide on how to prevent discrimination and value diversity.
Health and safety requirements for employing contractors
When a business becomes a client of a contractor and when a contractor employs a subcontractor, all parties have duties under health and safety law.
You can take measures to ensure contractors' safety that are not substantially different from those ensuring the safety of permanent staff. For example:
identify the requirements of the job and assess the risks involved - see our guide on risk assessment - an overview
consult staff and unions on relevant health and safety issues
decide what information and training is required
select an appropriate contractor and ascertain their health and safety policies and procedures
find out about subcontractors' competence
review the way work is carried out and the risk assessment
Ensure that there is co-operation and co-ordination at all times between you/your staff and the contractor/subcontractor. In particular:
provide all parties with information, instruction and training on anything that may affect health and safety
make the contractor and subcontractors aware of your health and safety procedures and policies
provide management and supervision to ensure the safety of contractors/subcontractors
There are actual cases where clients, contractors and subcontractors have all been fined for failing in their health and safety duties, such as failures to:
ensure a contractor's competence
supervise a contractor
take steps to prevent contact with live equipment
provide information about the existence of asbestos
ensure safe operation of vehicles
ensure safe loading to or unloading from delivery vehicles
assess risks to health from regular exposure to high vibration levels
exercise a duty of care towards a subcontractor
provide a formal site induction, risk assessment or method statement
Download advice on contractors' health and safety from the HSE website (PDF). You can also order the HSE guide to managing contractors at the HSE Books website.
See our guides on your responsibilities for health, safety and the environment and how to communicate your health and safety procedures.
Other legal points to consider when employing contractors
You have legal responsibilities when you engage contractors.
Ensure that your business insurance covers contractors and subcontractors working on your site and consider the following:
If you have employees, you need employer's liability (EL) insurance.
Contractors working on your behalf aren't employees - subject to their employment status being determined otherwise - and therefore not covered under EL. You should have public liability (PL) insurance.
Your PL policy should cover contractors working for you away from your premises unless the contractors have their own PL insurance with the same level of cover.
If contractors are working on your behalf, check they have appropriate insurance.
If a contractor works at your premises, eg a builder, they should have their own insurance to protect you, while your PL insurance covers them.
To be certain, consult an insurance adviser and notify your insurer that you are using contractors.
Many businesses aim to incorporate certain clauses and provisions in the contractor's contract for services
Examples include:
Protection of your intellectual property rights, eg material and equipment designs if these will be accessed or used by contractors.
Non-disclosure agreements, if you have to tell contractors about - or they help you develop - confidential aspects of your business.
A project schedule - including performance targets and deadlines.
A payment schedule - this might include payments on account and the criteria to trigger such payments, eg completion of a piece/stage of work.
Penalties for poor workmanship or late delivery.
Minimum quality standards.
Minimum health and safety standards. See the page in this guide on health and safety requirements for employing contractors.
If in doubt, consult a legal adviser before you agree a contract for services with a contractor.
If you aren't involved in choosing a subcontractor, tell the contractor you expect them to address these matters in contracts with their subcontracted workers.
Get the most from contractors and subcontractors
Think about how to get the most out of contractors and subcontractors from the point of engagement through to completion of the contracted work.
Consult your staff
Using a contractor can be successful where there is co-operation and co-ordination between your permanent staff and the contractor.
Get your staff to understand the advantages of using a contractor by setting out any benefits for them, eg they can get on with the core business.
Exercise care when hiring
Take up references and talk to others to determine a contractor's competence.
Check qualifications, skills, membership of relevant trade or professional bodies, quality standards and accreditations.
Find out their policies for health and safety, selecting subcontractors and employee consultation.
Have a written agreement
Agree in writing:
the contractor's responsibilities
the objectives, scope of the work and key deliverables (goals), eg in a project schedule with milestones
resources if the contractor needs access to equipment and/or staff
fees and a payment schedule - you may wish to consider penalty or incentive schemes for under-performance or over-performance
a procedure for resolving disputes, eg review or termination
confidentiality agreements
You have responsibilities when you engage contractors/subcontractors and you should agree a contract for services that will help you to discharge those duties.
For information see the page in this guide on other legal points to consider when employing contractors.
Manage the work
You should manage and supervise the contractor's work, seek evidence of work done and check that contractual obligations are met. Raise any issues at the earliest opportunity.
You can download advice on the health and safety of contractors from the HSE website (PDF). You can also download guidance on contractor management from the Institution of Electrical Engineers website (PDF).
Download guidance on using a consultant from the Institute of Directors website (PDF).
Protect your business from rogue contractors
Finding reliable contractors to work for your business requires that you take some precautionary steps to avoid doing business with unscrupulous outfits.
There are plenty of ways for you to get assurance about the competence and integrity of contractors. Some factors that will help give you the confidence to deal with a contractor include:
Membership of a trade or professional association or other recognised body, including approved scheme operators under the TrustMark initiative for the domestic repair, maintenance and improvement sector.
Status as a licensed labour provider with the Gangmasters Licensing Authority (GLA), in the agriculture, shellfish and related processing and packaging industries. The GLA operates as of 1 April 2005. Once licensing comes into force in 2006, it will be an offence to set up an arrangement with an unlicensed gangmaster. A separate register is held for licensed gangmasters in Northern Ireland.
Quality standards, such as British Standards and ISO standards for management systems. See our guide on quality management standards.
Personal recommendations.
References.
Sight of previous work.
Many associations and bodies set membership criteria and minimum standards in areas such as:
quality systems and training
health and safety
environmental management
deliverables and technical capabilities
financial stability
Search for a trade association at the Trade Association Forum website.
Read FAQs about the TrustMark Initiative at the TrustMark website.
Recommendations from business or personal associates are often good indicators. Try to see for yourself examples of the contractor's previous work.
It is good practice to obtain at least three quotes or estimates. Make sure you understand the terms, any technical details and any aspects that could change such as:
material prices that vary
overtime
night rates
Even if you get personal recommendations, follow up all references provided. Here are some tips when taking up a reference:
let the contractor know you are following up a reference
contact referees in good time so as not to delay your project start
ask specific questions about information the contractor has provided
ask about personal qualities, safety record, work standards, any legal case the contractor is, or has been, involved in
check the authenticity of telephone references and take notes during the call
Here's how the use of a short-term contractor added value to a project
David Macken
System Associates
David's top tips:
"Spend time researching agencies if you decide to use one."
"Check contractors' references meticulously."
"Learn to make decisions quickly."
System Associates is an Internet technologies company delivering integrated software services to public and private sector clients. Based in Maidenhead, the company has 25 employees and regularly uses skilled short-term contractors. Managing director David Macken describes the advantages using the example of a recent project.
What I did
Recruit carefully
"Short-term contractors give us both labour flexibility and the ability to bring in specialist skills as we need them.
"For example, we recently won a major contract to build a portal for the new London-wide e-government agency, London Connects. Part of the project was to categorise and set up large chunks of online content. The skills required were highly specialised and our team was already at capacity, so we decided to employ a team of content editors on short-term contracts.
"We sourced a selection of candidates using Internet recruitment services that specialise in our sector. Interviews and reference checking were essential to make sure the contractors' skills and experience matched their CVs. We also wanted to ensure a good fit with our existing project team."
Agree things in writing
"We selected four contractors who signed contracts with us before starting work. As with all our written agreements, they covered legal issues like terms and conditions but also included project schedules, deadlines and deliverables, fees payable and so on.
"We couldn't afford to keep on a contractor who didn't meet expectations. We therefore specified a one-day notice period for the first four weeks, a safeguard that we often use in short-term contracts.
"Other points to check upfront before employing contractors is their tax status and whether they're covered by your insurance."
Plan and manage
"We briefed our employees beforehand to reassure them that the contractors would meet their needs and to plan how their skills could be most effectively deployed.
"From the contractors' point of view, we made sure that they felt part of the team. Although we expected them to hit the ground running, we arranged inductions and ensured they were included in company meetings and social events.
"The integration of contractors and our in-house team has worked so well that we've asked two of them to join us permanently."
What I'd do differently
Handle recruitment in-house
"London Connects was such a large project that the use of recruitment agencies was appropriate and worked well. However, in general we find that handling the contracting ourselves works better and we've now built a database of trusted contractors who we can approach direct."
Speed up decision-making
"When we first started employing short-term contractors, we didn't realise that the value is diminished if you apply the same processes and timescales used for recruiting long-term employees. We've had to develop new processes that enable us to make quick decisions."
| This content on this page has been taken from the website http://www.businesslink.gov.uk. It is published on our website with the permission of Business Link. It is subject to Crown Copyright. |
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