Protecting your business from employment risk in a commercial contract

Most businesses are confident in agreeing the main commercial and operational elements of a contract to provide services, but many completely miss out (or mis-judge) the employment related aspects, which can leave them open to significant risk.

So, how should a business go about protecting itself, and what do you need to look out for in relation to the employment risks under a commercial contract?

I recently published an article on employment considerations when pitching for a commercial contract, which only really covered one part of this issue. That was about ensuring that you have identified the employment risks and priced accordingly to ensure commercial viability of the services you aim to provide.

But what comes after that?

Having considered some of the risks, liabilities and costs associated with securing and performing a contract – how do you then ensure that the deal  actually covers those areas, and doesn’t leave you with an unwanted liability?

Well, it’s tempting just to say “instruct a lawyer”, but not everyone wants to do that… and even for those who do, it’s helpful to have an idea of what to look for so that you can work with your lawyer more efficiently.

Starting with some basic principles, lawyers will always come from the position that a properly drafted and detailed contract is a very good thing. Without a written contract for the services you provide, you face uncertainty and risks. These include risks associated with the people you employ to deliver those services.

I’m not going to try and deviate from that view. Certainty and clarity from a written contract should indeed be a good thing. However, an onerous contract can saddle you with unreasonable liabilities. Plus, contract negotiation can be tough, and might get in the way of you starting work.

So some businesses may be inclined to agree a deal on the back of an envelope, or start work and agree the contract later. It happens.

As lawyers, it is tempting to see this as madness, because we know how badly it can go wrong (if it does go wrong)… but we don’t see those that go well, because we didn’t work on a contract when the deal was made, and there is no dispute to argue over at the end. If everyone is happy, then lawyers often aren’t “needed”.

Because we only really see the cases the lead to disputes, we have a tendency for thinking that all poorly written contracts lead to complex disputes, and that clearly isn’t the commercial reality (it’s just the reality we know).

In truth, there can be some areas where no contract is better than an onerous contract, and employment law provides one of these in the form of the TUPE Regulations. TUPE provides a default position (although not always easily understood) to provide for the rights and liabilities of employees to transfer (or not) between employers together with associated commercial services (called a “service provision change”). If you are happy to rely on the operation of the TUPE Regulations, then it can work better for you to stay silent in the contract rather than agreeing a contractual position that leaves you worse off.

Hopefully, though, if you are in the business of regularly providing services to other businesses or organisations, then you will have some form of written agreement governing those arrangements. Sometimes that may be your client’s form of contract, and other times it may be your own standard terms.

With that in mind, I wanted to pick out some of the key employment-related areas you should expect to see, or need to cover or watch out for, in a typical and reasonable contract with your client, so:

  1. Normally, you can expect to be indemnified against claims, risks and losses arising from the actions of a previous employer if you are legally obliged to take on staff who were employed by your client, or a previous contractor, under the Transfer of Undertakings Regulations (TUPE). Without that indemnity, those liabilities would be transferred to you under the TUPE regulations.
  2. You can also normally expect an indemnity in respect of any flawed pre-transfer TUPE consultation process, so long as it isn’t your fault.
  3. If you do benefit from the indemnity protection in respect of the actions of previous employers, you should expect to give mirror image indemnities back to them in respect of any conduct by you; including to a future contractor upon your eventual exit from the contract. But if you don’t benefit from the indemnity protection in respect of the actions of previous employers, it would not normally be reasonable to expect such indemnities from you either.
  4. It isn’t standard, but it is also not uncommon for client to specify the specific team profile and structure (i.e. your team to provide the services), and even the identity of key members of the team. Alternatively, if there is an intention that there will be no TUPE transfer at the end of the contract, a client may want to specify that you have no organised or dedicated team (or individuals) assigned to the services you are providing under the contract.
  5. Depending on the nature of the service you provide, your staff may be required to undergo client specific training, travel, and wear uniform or abide by standards of dress code. The contract should specify who is responsible for these costs.
  6. You should expect to give warranties as to the legally compliant nature of your employment arrangements, which would include immigration status, health and safety, data protection, anti-bribery, and so on.
  7. You should expect extensive data protection provisions, which have become more prevalent and important since GDPR came into force. These provisions may essentially amount to a data processing agreement on their own right. You should not assume that these provisions are standard. Elements of them will be, but they should be carefully reviewed to ensure that they are fit for purpose, appropriate for your particular circumstances, and that you are not unnecessarily providing indemnities for the actions of your staff.
  8. If your client is likely to want access to personal information about your staff, then you will need to ensure that this is adequately covered and that sufficient data protection related provisions are included. Separately, you should also ensure that your internal staff privacy notices adequately cover such arrangements.
  9. You may be expected to take on full responsibility (and liability) for the cost of any damage or loss caused by your own staff, including in relation to: property damage; reputational damage; data loss or security breach; financial loss; etc. You may also be contractually obliged to obtain adequate insurance to cover such risks. Whether or not you are contractually obliged to, you should ensure that you maintain adequate insurance to cover such risks.
  10. The contract should include provisions that provide for an increase in fees in certain circumstances, including staff-related risks and costs such as: Increasing costs related to legal or regulatory requirements; impact of inflationary wages rises, and National Minimum Wage increments; increasing volumes of work and resource requirements, and other unknown changes that will increase the wage cost of you delivering your services.
  11. Contracts will typically contain exit provisions that oblige you to provide certain information or act in a certain way or within a particular timeframe when the contract is coming to an end. This can include not making any changes to the current team structure without your client’s approval, or acting in such a way as to disclose what you would normally consider to be commercially sensitive information in order to assist a client’s re-tendering process.

These are all negotiation points, and the way in which each of these areas are covered in your contract, or not, will depend on various factors including the perceived level of, and appetite for, risk; contract length and the nature of the services; and the relative bargaining position of each party to the contract.

You should not assume that a contract you are being asked to sign is either standard or reasonable.

Don’t sign up to anything you are unsure of, and don’t be afraid to ask for changes to be made. Be careful, however, about how those changes are written into the contract, and seek advice from a lawyer if you want to be sure that you aren’t taking an unnecessary or unwanted 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.