Restrictive Covenant - options

[GoForIT]

I've been working through an intermediary (I have Ltd co and work outside IR35) for a few years. The margin is in my opinion high but minimal power to force a change. There's a restriction clause preventing my company from working with the end client for x months after contract ends. I'm shortly to re asked to extend so considering leaving as had enough of the lost income or, thinking of starting a new Ltd co and contracting with the same end client via a different party. I can't see anything in the restriction that would explicitly prevent this but wondered if there may be some generally applicable legal position on the viability of doing something like this as it seems a bit too easy. The end client has no restriction and is fine with whatever I choose to do. Appreciate thoughts/experiences from anyone that has been through similar.

[NotAllThere]

The client may also have a restrictive covenant, so they may not be happy to play ball with you.

Either suck it up, or tell your agency to cut their margin or you walk. And mean it.

[northernladuk]

I've been working through an intermediary (I have Ltd co and work outside IR35) for a few years. The margin is in my opinion high but minimal power to force a change. There's a restriction clause preventing my company from working with the end client for x months after contract ends. I'm shortly to re asked to extend so considering leaving as had enough of the lost income or, thinking of starting a new Ltd co and contracting with the same end client via a different party. I can't see anything in the restriction that would explicitly prevent this but wondered if there may be some generally applicable legal position on the viability of doing something like this as it seems a bit too easy. The end client has no restriction and is fine with whatever I choose to do. Appreciate thoughts/experiences from anyone that has been through similar.

Definitely won't work. The handcuffs are there to protect the intermediary's revenue stream. Changing the entity you are working through makes no difference. You personally will still be doing to work so you personally will be interrupting the revenue stream so the handcuff stands. I mean, if it were that easy no handcuff ever would stand. The lawmakers have done their diligence so the legalese will be very well documented. Bigger, more powerful and cleverer people will have tried this and there in no generally accepted way around it which speaks volumes. If there was we'd know about it and the steps to counter it would be part of the contracting 101 book.

Why do you think there is minimal power to force a change? If you've got a lot of history on the accountant then you hold position and knowledge power. The cost to replace you will far exceed the extra bit of money (which is out of profit already) to replace you. I'll bet everything I've got you are in a much better position than you think. The only way to get the rise is to make it stick though. You cannot simply threaten to leave knowing full well you won't. They'll just pull your pants down and send you back in. If you are that hacked off then start the process to leave, then when you've put the fear of god up them go back in and say you'll only stay for X and then let them stew over it. They'll probably meet you half way so go in high. Make sure you know exactly what the margins are and understand their operating costs. If it costs them 50 quid a day to manage you then don't try cut their margin to 20 quid. It simply won't work. They do need costs and then margin so work a figure out that realistically gives them that and benefits you.

Consultancies often charge like 1k for a 450 contractor because they have internal management costs. Obviously sometimes they take the piss and there isn't, there is just a bum on a seat but often there is a genuine case that your work has to be backed up by internal people not directly billing. Make sure you understand the model properly.

And are you really outside if you've been there a few years? Did they provide an SDS? Are the answers to CEST still the same? Have you slipped in to client D&C? Have you been there that long they will still take a sub etc? Hard keeping outside IR35 on a long term engagement via a consultancy to a client as part and parcel tends to blow it. I guess you aren't on the hook but I'd be having a sanity check. Might need to do something about that as part of your rate negotiation.

[GoForIT]

On the positive side, no issue at the client contract (probably their in-house service agreement) - they checked and will not care if the intermediary is not happy with things.

My question is essentially - the restriction applies to my company, is it feasible to use a new Ltd company entity to avoid the restriction in the contract? Or is this such a stupid idea I should drop it immediately :-)

[Lance]

On the positive side, no issue at the client contract (probably their in-house service agreement) - they checked and will not care if the intermediary is not happy with things.

My question is essentially - the restriction applies to my company, is it feasible to use a new Ltd company entity to avoid the restriction in the contract? Or is this such a stupid idea I should drop it immediately :-)

read it very carefully.....

But also bear in mind that they need to be able to prove it to enforce it. Could they find out? What evidence could they get?
I have once fought a covenant, albeit I had to pay a lawyer £1500.

The lawyers letter basically said "prove it or f*** off". And that was the end of that.

[northernladuk]

On the positive side, no issue at the client contract (probably their in-house service agreement) - they checked and will not care if the intermediary is not happy with things.

My question is essentially - the restriction applies to my company, is it feasible to use a new Ltd company entity to avoid the restriction in the contract? Or is this such a stupid idea I should drop it immediately :-)

I'll be willing to bet the people that said they don't care are not the people that call the shots ultimately. When a legal challenge comes in from the agent another team will step in and shut your plan down. It's one thing not caring if the intermediary aren't happy, it's another breaching contract. It's a legal restriction, not a matter of the intermediary being not happy. Clients generally aren't in the habit of fighting legal challenges on behalf of a single contractor.

And we've answered your question, no it is not feasible. You are the key person here and no amount of fluff is going to get round the fact the intermediary has suffered a loss because of your actions.

The best way out of your situation is negotiation and there are a few different areas. You can negotiate a rate rise with the intermediary by threatening to hand your notice in and then when it's in re-negotiate your pay. The other thing you could do is get the agent and the client to talk about possible ways around this. The client may strong arm the intermediary to say drop the handcuff or jeopardise future business, they may agree on a buy out or may not come to an agreement at all. If you are going to leave you've nothing to lose by trying to get them to talk.

I think there is a lot more detail here you can work with. You mention intermediary but haven't stated if it's an agency with a bum on seat approach or an consultancy offering you out on consultancy rates. As I said before it's not uncommon for a small consultancy to charge a client 1k a day but only pay you half that. That's their business model and non of your business really. A lot of contractors don't understand consultancy model and think they should be getting the 1k a day which is completely wrong.

There is also detail around how the intermediary is engaged and if you really can find another route in to the client via a different intermediary. Many clients have a PSL on agents so may be difficult to do and also if it's a managed service piece of work you may not be able to get another just to slot you in.

I would take a guess you don't understand your situation properly but that's only on the basis you've not mentioned it so I could be wrong but it sounds like a common complaint we get about consultancies charging a hell of a lot more and the contractor not being happy with it which is totally different to a bum on seat agency taking the piss with their cut. We often call this a newbie tax because you didn't negotiate hard enough.

Out of interest what margin do you call high in your opinion and tell us your engagement model.

[northernladuk]

I'm still not 100% about the IR35 aspect either. If you've been there a few years it sounds suspiciously like something a perm can do so not really outside. What is to say if you go with another intermediary or direct to the client they'll play safe and put you inside as I suspect you could be already.

So you are really trying to push down a direction that ultimately fails anyway.

[GoForIT]

Thanks, there is some food for thought there. I've deliberately not provided too much detail here. I understand intimately the client PSL model, know the margins and although happy with my rate do not like the lost money for no ongoing value provided by the intermediary. Enjoy the role so a walk away option is not really what I'm looking at so would be a baseless threat. Agree partly with the IR35 comment, I do have an SDS that gets reviewed periodically and changes in scope of my role are handled in a documented way with clear offer/agreement stages so despite the contract duration I think we're doing the best here that we can - also client is "large". Thanks for comments/opinions, will drop the idea :-)

[northernladuk]

Fair enough. Sometimes knowing the rate the client is paying can ruin a perfectly good gig. We've seen it a number of times on here where someone has been happy with work and rate and then finds what the agency is being paid and it just consumes them.

Always ask the agent/whoever if they are on a fixed rate commission and try get them to confirm in an email. We know agents will try every slimy trick in the book but most will stop short of outright lying and putting the evidence in writing. If they are on fixed rate then there is nothing you can do about negotiation and you are getting the best you can. If they don't admit they are then you know you've possibly got wiggle room on negotiation. They've made their profit and most decent ones will throw a couple of 10's of quid your way after a few extensions. Even if you aren't going to leave the gig it's always worthwhile speaking to them about an uplift if you've been there a couple of extensions. They've made their money and it's now a long easy burn for them so you might get lucky.

You say intermediary so maybe not an agency and the above won't work but can't harm to ask.

Good luck.

[ladymuck]

You have a better chance of going direct if the client chooses to end the relationship with that agency/intermediary. In that scenario, there is no loss of earnings to claim because they are no longer a supplier to the client. Sounds like that might be unlikely to happen though.