Beating the IT contract crunch: i) client cuts

Client tactic: Cutting IT contractor pay rates mid-contract

Background

In an economic downturn (and occasionally an upturn or recovery), client companies pursue cost savings by cutting the pay rates of their IT contractors during their contracted period. Contractors are asking whether such 'mid-contract' rate reductions are permitted under law, and what options they have to contest the cut. Contractors need to know how to best assess their grounds for objecting to the cut before they decide to accept or reject it. And contractors are also asking whether they should build a clause into their contract(s) prohibiting the client/agent from cutting their pay at a whim in future.

CUK advisor:

As a contractor, consider:

•How long is left on the contract?
•How much pay have you received so far and has it covered work to date?
•What other work can you find?
•Could you arrange a lesser term or lighter workload, in the prospect of finding other work in your free time?
•Is it your pride, reputation or mortgage at stake?

Then look at your contract:

•Is there a clause that permits the other party to vary the terms of the contract in certain circumstances, and have those circumstances occurred?
•Is the contract divisible and have you reached the end of one section?
•Is there a clause that allows or precludes variation or demands compensation in the event of a variation?
•Is the pay rate allowed to be dependant on something, either external or performance related?

Also look to see if the contract specifies circumstances in which you can waive your right to strict adherence, i.e. have you albeit unwittingly allowed them to cut the rate in order to permit the contract to continue?

What the law says

Case law suggests that even where variation procedures set out in a contract have not been strictly followed, variations have still been allowed. Our free-market system prefers minimum interference in the mechanics of business. However, favouring the traditionally weaker party, judges have indicated that the power to vary like this should be exercised honestly, in good faith and not arbitrarily.

There are general rules that performance of contractual obligations must be exact and complete. If the other side have not stuck to the terms of the contract, they may have breached the contract and you would be able to claim damages for the loss suffered i.e. you would (in court) get at least what you were due under the terms of the contract.

Please be aware that there are exceptions to this, and this general review of the problem does not constitute tailored advice. It goes without saying that independent tailored advice must be sought depending entirely on the contract and your needs. However a breach by the other side could mean that you are no longer obligated to fulfil your side of the contract.

What to do?

•Threaten to/only partly perform your side of the contract.
•Negotiate or engage someone to negotiate for you.
•A claim form landing on the client's desk may make them see sense and send out a message that you are not to be taken lightly.
•Issuing a claim is a last resort, but remember that engaging solicitors and/or serving the other side with a draft claim may prove useful negotiating tools.
•Always attempt to negotiate these items before signing a contract. A good place to start is to draw up your own standard contract which you can attempt to use in all situations.

Client tactic: Cutting IT contractors' days mid-contract

Background

In this economic downturn, client companies are pursuing cost savings by cutting the number of days their IT contractors are permitted to work, during their assigned period. Contractors are asking if such mid-contract reductions to the days/hours assigned is permissible under the law, and what grounds they could cite to contest the reduction. Contractors are also asking whether they should build a clause prohibiting the client from cutting the length of their assignments in future. And is the same course of objecting to the action recommended if clients cut contractors' notice periods?

CUK advisor:

These questions, while raising separate issues, all revolve around the legality of your employer/client company unilaterally changing the terms of your contract.

The simple answer is that even as a self-employed contractor you have the contractual rights that any other party who signs a contract would have. In addition there is no statutory definition of self-employed and/or employed so be sure that you are not in fact likely to be classed as an employee, as this would afford greater rights and wider remedies under employment legislation. In many cases the assertion that individuals are not "employees" rests on the alleged absence of mutuality of obligation on the employer to provide, and the worker to accept, work.

As a contractor, consider the practical implications

To begin with, honestly assess your practical situation.
•What sort of contract are you looking at? How much has been written down, and how much has been altered verbally?
•Can you offer to work from home on a reduced weekly rate?
•Legitimately will you be able to complete the work on time on reduced hours?
•What is the damage to your business and can you make the free time work for you?
•Look at it from the other side - How drastic a change is it really? Is it merely restructuring of your hours (i.e. have the hours been cut or arguably just the days?)

Then look at your contract:

•Is there a clause that permits the other party to vary the terms of the contract in certain circumstances, and have those circumstances occurred?
•Is the contract divisible and have you reached the end of a section?
•Is there a clause that allows or precludes variation or demands compensation in the event of a variation?
•Are the hours/days allowed to be dependant on something, either external or performance related?
•Have you breached any terms in the contract?
•Have you waived any of your rights verbally or otherwise?

What the law says

Under self-employment there is no statutory minimum notice period or right under which you may claim unfair or constructive dismissal. Your contract may or may not cover the variations that you are asking about. If it does cover the variations but you believe that the correct procedure has not been followed to vary the terms, case law suggests variations may still be allowed. The system prefers minimum interference in business but the power to vary like this should be exercised honestly, in good faith and not arbitrarily.

Remember the general rule that performance of contractual obligations must be exact and complete, or else there may have been a breach of contract. Remember that a breach may lead to damages and the ending of your obligation to fulfil your side of the contract. However, also remember that everything written here is dependant entirely on circumstance and cannot constitute specific advice tailored to individual circumstances.

What to do?

•Threaten to walk away from the contract without fulfilling your obligations.
•Negotiate or engage someone to negotiate for you.
•A claim form landing on their desk may make them see sense and send out a message that you are not to be taken lightly.
•Issuing a claim is a last resort, but remember that engaging solicitors and/or serving the other side with a draft claim may prove useful negotiating tools.
•Always attempt to negotiate these items before signing a contract. A good place to start is to draw up your own standard contract which you can attempt to use in all situations. A contract that will avoid these sorts of situations is well worth the time drawing up. If in doubt, seek professional help.

Client tactic: Cutting IT contractors mid-contract

Background

In this economic downturn, client companies are pursuing cost savings by laying off/terminating IT contractors with almost immediate effect, in some instances even if their contract specifies a 4-week notice period. Contractors, understandably, are asking what options they have for recompense, and how they should defend themselves in this situation. However, many contractors will be mindful of their status as 'career contractors', meaning not burning too many bridges might be as important to them as standing up for their company and, ultimately, their livelihood.

CUK advisor:

Self-employed consultants are not employees and cannot therefore enjoy the statutory right not to be unfairly dismissed. If you were an employee then you could argue breach of contract, unfair dismissal and/or redundancy, provided you had the requisite tenure. In addition if you opted to 'walk,' you would have a strong claim for constructive dismissal – i.e. your contract was altered in a way that meant you were in all but words, dismissed unfairly.

But for a contractor, or self-employed consultant:

Look at your contract first

Ask yourself:
•How does the contract deal with termination?
•Are they claiming the work was unsatisfactory?
•Have you breached any terms allowing early termination?

Is there a:
•Clause that permits the other party to halt performance of the contract in certain circumstances, and have those circumstances occurred;
•Clause that precludes variation or demands compensation in the event of a variation?

Is the contract:
•Divisible into sections,
•Capable of fulfilment by substantial performance;
or
•Has there been acceptance of incomplete performance from you in any way?

What the law says

Case law suggests that even where variation procedures set out in a contract have not been strictly followed, variations have still been allowed. However judges have indicated that the power to vary like this should be exercised honestly, in good faith and not arbitrarily.

There are general rules that performance of contractual obligations must be exact and complete, and that a contract is only discharged when both parties fully perform their contractual obligations. Refusal to do so may amount to a breach that assuming no exception applies, entitles the innocent party to claim damages for any loss suffered and the innocent party to treat himself/herself as discharged from further obligations under the contract.

So...

Depending on the contract:

•You may be entitled to refrain from fulfilling your side of the contract. Refusing, for example, to supply the client with the software until you are paid for the remainder of your contractual term. But, assuming the other side is canny, you have already fulfilled enough of the contract to make it irrelevant if you pull the plug at this point. This is a lesson that every contractor should learn and remember.
•You could pursue a claim for damages, issue a claim against them and drag them kicking and screaming through the small claims court. A claim form landing on their desk may make them see sense. It is not rocking the boat but sending out a message that you will not be taken lightly.
•Alternatively, and preferably assuming you have the law on your side, you can negotiate a satisfactory end to the contract. You have the right to damages and non-fulfilment and you hopefully have enough of the job still in hand (or it may be worth even inventing that little bit extra to make it so), giving you a decent position from which to challenge. Issuing a claim is a last resort, but remember that engaging solicitors and/or serving the other side with a draft claim may prove useful negotiating tools.

Taking the longer-term view

To unilaterally end a contract with a contractor may cause problems, as detailed above, and it is often worth considering how best an ongoing relationship can be managed - as the contract was drawn for a specified term and there may well be good reasons for that. It is often worth considering a renegotiation of terms rather than a final end. These are difficult times we are living in with worse apparently on the horizon. Maintaining good relationships and a third party's help, even at half-speed, could prove of more use than burning bridges.

CUK was advised by Michael Coyle, director of Lawdit , a legal firm specialising in intellectual property, internet and technology law.