Why retainers are bad for consultants

A retainer fee is a fixed amount of money that a client agrees to pay, in advance, to secure the services of a consultant or freelancer. The fee is typically not associated with the success of a project or based on achieving particular results. A retainer is often paid in a single, lump sum, or on an ongoing basis (typically monthly or quarterly). [About.com – Consulting/Freelance]

The problem is that retainers create mutuality of obligation (MOO).

The significance of mutuality of obligation is that it determines whether there is a contract in existence at all. Without mutuality of obligation there can be no contract of any kind.

Only when the basic requirements for mutuality of obligation have been identified is it possible to then consider whether the contract is a contract of employment or a contract for Services (self-employment).

The basic requirements as to the mutual obligations necessary to determine whether there is a contract in existence at all are:

• that the engager must be obliged to pay a wage or other remuneration, and
• that the worker must be obliged to provide his or her own work or skill.

These basic requirements could be present in either a contract of service or a contract for services and, on their own, will not determine the nature of a contract.

According to HMRC, the irreducible minimum requirements for a contract of employment are:

• the requisite mutuality of obligation present;
• a sufficient degree of control being exercised on the part of the engager;
• other provisions of the contract being consistent with a contract of employment

The very nature of a retainer fee arrangement attaches to it obligations, i.e. for the client to pay the freelancer an ongoing fee in return for the expectation by the client for the contractor to make themselves available, normally at short notice.

It’s almost impossible to argue that retainer fees would not fall within IR35 and be treated as Deemed Payments.

In order to stay outside of IR35 you will need to carefully consider the contract and identify employed status factors that will put you outside of IR35.

steve@bicknells.net