How do you know the difference between an employee and an independent contractor?
Many businesses have a mixture of employees and contractors working for them, especially if the business is in a growth stage. But knowing how to classify your workforce is vital to remain legally compliant. Misidentifying employees as independent contractors can have costly legal implications for your business.
Confusion between employees and independent contractors
When bringing someone new into your business, it is generally clear cut at the outset whether they are an employee or an independent contractor. However, over time the relationship between the business and contractor can evolve, making the distinction less obvious.
Perhaps you first contracted a freelance copywriter to support your marketing team, writing a few articles a week. Over time their role may have progressed, until they are now working for the business on a full time basis, working in your office and being paid monthly, like any other employee. In this scenario, the business will need to review the freelancer’s contract, as it is likely to be unfit for purpose.
Just because someone works irregular hours – such as part-time or term time only – does not stop them being classed as an employee. So how do you know the difference between an employee and a freelancer or independent contractor?
There are several ways to determine the nature of a worker’s role in your business, in order to decide whether or not they should have an employment contract.
11 differences between an employee and an independent contractor
Here are 11 essential differences between an employee and an independent contractor or freelancer.
An independent contractor is self-employed, either as a sole trader or running their own business. Therefore the relationship between your business and your contractor is a business-to-business relationship, not that of an employer-employee, and they should be treated as such.
2. Mutual obligation of work
Unlike an employee, an independent contractor is not obliged to accept work offered by the business. Likewise, the business has no obligation to offer ongoing work to the contractor, and could stop at any point.
3. Control
A business will have a level of control over how an employee carries out their work, whereas an independent contractor will retain control of their own working habits. This could include where they choose to work, their work schedule and how many hours they work per week or month.
4. Substitution
Unlike an employee, who must perform their role themselves, an independent contractor is permitted, in principle, to instruct their own employees or subcontractors to deliver the work on their behalf. Once again, as a business, you can specify the work you wish to be completed, and to what standard, but how the work is carried out is down to the contractor.
5. Payment
An independent contractor will invoice the business for they work they do. They are paid based on the jobs that they complete, or for an agreed period, as opposed to having a fixed monthly salary like an employee
6. Tax and national insurance
Employees are paid through PAYE, with the employer being responsible for deducting tax and National Insurance. Independent contractors calculate all of their own tax and NI contributions and submit their own tax return.
7. Benefits
Employees are legally entitled to a range of benefits such as holiday and sick pay. The employer is also obliged to enrol certain employees on a workplace pension scheme and pay employer contributions. Independent contractors have no claim to pension contributions or other employee benefits.
8. Working for other businesses
Unlike an employee, independent contractors can choose to carry out work for whoever they wish, and your business cannot restrict them from working for competitors. An employee, on the other hand, may have a clause in their contract restricting them from working for competitors during or immediately after their period of employment.
9. Training and expertise
Independent contractors are hired in to complete tasks that they have expertise in. The business has no duty to provide training to the contractor, and can expect the contractor to already have the appropriate level of expertise required for the job.
10. Equipment
Whilst some employees do use their own tools – such as chefs owning their own knives - independent contractors are expected to provide any tools or equipment needed for the job. If the business owns specialised equipment on site that the contractor will need to use for the job, this should be outlined in the contract to avoid confusion.
11. Completion of tasks
An independent contractor is typically paid a fixed fee for the task they have been taken on to complete. If they have to work more hours than expected to complete the task, this extra time is not reflected in their pay. Equally if the contractor makes an error, they will be required to fix or redo the work for no additional charge, whereas an employee will not incur any personal costs for errors made.
Identifying the employee status of your workforce
If the status of your independent contractors has changed over time, it is important to clarify their position to ensure their contract is fit for purpose. You can download one of our range of template employment contracts, or contact us for legal advice or support.
The contents of this article do not constitute legal advice and are provided for general information purposes only.
The Legal Stop offers online legal documents and fixed fee legal services. We believe that legal services should be accessible and transparent, and we aim to provide relevant, practical solutions for businesses of all sizes.
Our range of services includes:
Expertise: Legal Services
The Legal Stop is a straightforward online business using information technology for the public good. We aim to make the law and provision of legal services accessible and transparent to people and businesses alike!