Preparing your business for the employment risks in commercial contracts

How can a business prepare itself to withstand unexpected employment risks and liabilities when pitching for new commercial contracts?

Many businesses are built upon providing a service, either directly to another business, or on behalf of that other business towards its clients, customers, or service users.

If that sounds like you, then your business model is probably based on growing by winning new contracts, most likely of increasing value and duration. But in doing so you are exposing your business to an increasing liability – People.

So, what do you need to look out for, and how can you manage the risk those people represent?

Let’s take it as given that you offer a great service, at good value. Why wouldn’t more clients want to use your services? Perhaps they can see that you will do it better, or more cost-effectively, than they or the current contractor can do it. Or maybe you can help them do something they’ve never done before. Who cares anyway, new work and new clients are always good, aren’t they?

Well, not always. Whether you consider yourself a contractor, or an outsource provider, or something else, people (in the form of employees and workers) are either part of your solution, or part of the problem you are solving, or both. And as employees and workers have legal rights, it’s important that the solution you are pitching to your new client takes into account the risk and cost associated with those rights. Otherwise your solution, and the contract you enter into, might not be commercially viable.

Let’s take it for granted that you have already taken into account the impact of inflationary wages rises, increasing volume requirements, and other “business-as-usual” employment risks, that’s just part of business.

But there are several other people-related risk factors, that businesses often miss when pitching for new work, but which you really should consider and protect against, including:

  1. You may be legally obliged to take on staff. If there are staff currently employed by your client, or an existing contractor, carrying out the same kind of work that you will be, there are legal regulations (“TUPE”) that may automatically transfer their employment to your business (together with all of their rights). That can be helpful if you need to scale up, because it means you may not need to recruit so many new hires. However, if you already have all the staff you need (or if you don’t need staff), you might be picking up the cost of making several long-serving employees redundant, together with an added dose of dismissal risk. You may also be picking up risk if the current employer has not adequately consulted with the transferring staff. You either need to pass that risk on, or account for it in your contract pricing.
  2. Your contract pricing may be fixed or controlled in a way that means you cannot respond to increasing costs related to legal or regulatory requirements (such as unexpected increases to the National Minimum Wage, or a requirement to employ or deploy additional compliance resource). While you may have accounted for the impact of inflationary wages rises, increasing volumes of work, and known National Minimum Wage increments, there may be various unknown changes on the horizon that will increase the wage cost of you delivering your services. You either need to ensure that such cost increases lead to an increase in the contract price, or account for the risk in your initial contract pricing.
  3. You may be taking on responsibility (and liability) for the cost of any damage or loss caused by your own staff and suffered by your client (be that property damage, reputational damage or financial loss etc). The bigger your client, the bigger that risk could be. You need to ensure that you can obtain adequate insurance to cover such risks, or judge whether it is a level of risk that your business can tolerate, perhaps with contract price adjustments to reflect that risk.
  4. You may be contractually obliged to carry the cost of redundancies at the end of the contract term. Depending on how your contract comes to an end, you may either be left with the cost of making redundancies or covering the cost of those redundancies being made by someone else. Generally speaking, the contractual terms at the end of the contract should reflect what happened at the start of the contract, but that isn’t always the case. Either way, you need to either pass the risk on, or account for it in your contract pricing.

Depending on the circumstances in which you are pitching for the new work, it may be possible to negotiate terms in the contract to cover some of the risks above, particularly if you aren’t dealing with an institutional client.

But if you are pitching to an institutional client or bidding in a complex tender process with an existing draft contract, then there may be very little room for negotiation on the contract terms, other than price. In which case you will need to adjust your contract pricing or take other steps to limit or avoid the risk of being left with an unviable contract and an unmanageable cost or risk.

The content of this article is not intended to be specific legal advice.  If you require any assistance in relation to this area of law, please contact Matt Huddleson.