IR35 & Right of Substitution: Misconceptions V Reality

Right of Substitution. On the surface it seems like a difficult clause to overcome, but hopefully after reading this blog you’ll realise it’s more molehill than mountain. The great thing about this IR35 clause is it’s more of a mindset change than anything, and the main battle is ensuring that all parties involved understand why it benefits them to have one in a contract.

Assuming you’re already aware of what it is [see here if not], we’ll crack on with why we think every client and contractor should be pushing to have one in an assignment. Rather than just giving you fluffy jargon and nonsensical terminology, we’ll be running through the actual benefits of a RoS that matter to the parties involved with some top tips on ways you can dispel four of the biggest misconceptions surrounding the clause.

 

Misconception #1: “The contractor might agree to take the contract on and then because they have the right to substitute, stick a junior in to do the job”

Reality: It goes without saying that no contractor with any modicum of respect for their own reputation would dream of doing this, but that’s beyond the point. As part of their obligation to the end-client in a contract for services arrangement the contractor must provide them with a like-for-like alternative, i.e. someone with the same skillset and experience level as the original contractor. Failure to do so would mean the client would be entitled to terminate the contract with immediate effect.

In a worst-case scenario, the client could exercise their right to terminate the contract, leaving them in the exact same spot they’d be in if the contractor had to leave an assignment without a Right of Substitution clause. But in a more likely scenario they would find themselves in the position of not having to go back out to the market, losing precious time on a project, and of having someone that is trusted by someone who has an understanding of what it takes to work on the project successfully.

 

Misconception #2: “We won’t know the person they’re bringing in as an alternative, what if they’re not as good?”

Reality: A lot of the same principles from Misconception #1 apply here. The contractor’s reputation is on the line, and if you as the end client have gone through the process of vetting this person and trust them enough to work on your important project, you can be safe in the knowledge that they’ll have done the same for anyone coming in. That person is representing their business, and they’ll also be blissfully aware that if they don’t do a good job that you’d be well within your rights to terminate them with immediate effect and to sue them for any damages for not fulfilling the contract.

This coupled with the options of having to go back out to market and start again banking on a recruiter finding you a good alternative, versus an industry expert who has experience working on your project bringing someone in who they know and trust to do the job correctly, should make the thought of having a Right of Substitution clause all the more appealing.

 

Misconception #3: “If they have to leave, I think it would be easier to just go back out to market and find someone else to fill the assignment”

Reality: Without even considering the time lost on a project from going back to an agency to retake requirements, interviewing new people and waiting for them to start the main benefit to the client of having a RoS clause in this scenario is that it will save them money. Here’s why:

1. Any expenses in providing a replacement and any specific training needed for an assignment fall on the original contractor as part of their obligation to the end client
2. The client doesn’t have to worry about finding someone else at the same day rate on the market as the new contractor will be paid the same as the previous one with a RoS clause in play
3. The contractor must cover the expense of any handover period between them and a new contractor starting, so there’s no added expense if there ends up being two people on site for a short period
4. The new contractor will be someone that the original contractor trusts and is confident has the same capabilities, which is something the client can’t be certain of finding when going back out to the wider market

 

Misconception #4: “What happens if we’re coming up to a big release and they suddenly decide they need to bring in a sub?”

Reality: A Right of Substitution clause actually puts the end client in a stronger position in this scenario. As we’ve mentioned earlier, no contractor starts a contract with the thought of not fulfilling their obligations, but with a RoS clause in place if the worst case happens and they do have to leave close to a big release wouldn’t it be better for the end client if they could provide a like-for-like replacement quickly, spend their own time & money getting them up to speed with any training required, and then potentially provide an extra set of hands on site during any handover period?

When you weigh this up against the alternative of the contractor having to leave without the clause, leaving the project without a vital person at a critical time, further compounded by the end client having to take time that isn’t available interviewing and finding a replacement, and finally having to wait and pay for that replacement to get up to speed.

I think in this scenario it would be fair to say that not having a Right of Substitution clause in place is actually the riskier decision to make.

 

So, what needs to go into one to make it worth more than just the paper it’s written on?

A substitution clause needs to be unfettered, meaning that it isn't the client's decision to allow or deny a substitution providing a clause is in the contract. If the client will not allow that or, is denying substitutions altogether than there's a reasonable chance that the assignment will be deemed Inside IR35. A proper clause should include:

• The unfettered right to substitute the original contractor for someone else
• The contractor must pay for the substitute, as you will be sub-contracting the work
• The handover period between the original contractor and the sub-contractor starting must be paid for by the contractor’s PSC
• The client must not have the right to refuse a substitute without a valid reason (i.e. they aren't a like-for-like replacement)

Hopefully at this point both parties should have a clear idea of the benefits of having a Right of Substitution in the contract and will be happy to go ahead. It’s also within the interest of both the contractor & client to complete a ‘True Facts’ questionnaire which will add further weight to your status, a templated example of one is available here:

 

IR35 Working Practices Questionnaire

As a final point, it is worth reiterating that a Right of Substitution isn’t a clause that any contractor would take lightly as part of their agreement. It’s their reputation on the line and if they can fulfil the project they will, the clause is in place as a last resort when in normal circumstances the contractor would have to leave the contract altogether leaving the client without someone to pick up the work,  in some cases several weeks or even months.

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