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Contractor vs employee - know the difference

A man working as a builder inside a house, representing that builders can work as either a contractor or employee

If you are looking for work or hiring someone, you need to know the difference between a self-employed contractor vs employee in the UK. These two types of workers have different rights and responsibilities under UK legislation, and it’s important to understand them before entering into any agreement. 

In this article, we’re going to give you more information on what an employee is, what a self-employed contractor is, and HMRC’s check used to distinguish between a contractor vs employee in the UK.

What is an employee?

As defined by the Employment Rights Act 1996, an employee is a person who works for an employer under a contract of service or apprenticeship. 

Also known as a contract of employment, this is a legally binding agreement between the employer and employee contract that sets out the terms and conditions of the employment, including employment conditions, rights, responsibilities and duties. 

A contract of employment consists of ‘express’ terms (stated in writing or given verbally) and ‘implied’ terms (arising from legislation, custom, workforce agreements, trade union agreements, etc.).  An employee has employment rights under the Employment Rights Act 1996, such as:

  • statement of employment particulars;
  • National Minimum Wage;
  • statutory minimum level of paid holiday;
  • statutory minimum level of rest breaks;
  • protection against unlawful deduction from wages;
  • protection from unlawful discrimination;
  • Protection for ‘whistleblowers’
  • subject to certain criteria, entitlement to statutory leave and associated statutory pay (i.e. adoption, maternity, parental, paternity, sick, etc.).

What is a self-employed contractor?

A self-employed contractor is a person who provides services to a business under a contract for services and not via an intermediary such as an agency or a limited company. This contract specifies the scope, duration, fee and payment terms of the service, as well as any other relevant details. 

A contractor doesn’t have the same employment rights as an employee, but they have more control over their work, such as:

  • choosing when, where and how to work;
  • setting their own rates and invoicing for their services;
  • paying their own tax (e.g., income tax, National Insurance and, if applicable, VAT);
  • managing their own expenses and risks;
  • owning their own tools and equipment.

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Self-employed contractor vs employee: how to tell the difference?

So, how can you tell whether you or your worker is a self-employed contractor vs employee in the UK? This can be challenging, especially if they have some characteristics of both. The label that the parties use is not enough to determine the true nature of the relationship. 

HMRC’s ‘Check Employment Status for Tax’ test uses certain factors to distinguish between a contractor vs employee:

  • Personal service
  • Control
  • Financial risk
  • Part and parcel
  • Business on own account
  • Ownership rights
  • Working time available
  • Workers contracts

Personal service

Personal service is when a worker performs work themselves. A requirement to do the work themselves is an essential feature of employment. The right to send a substitute indicates the worker is not an employee. If the client can reject a substitute, this indicates there is some requirement for personal service.

Control test 

The ability of a hirer to control, or have the right to control, a worker can be a strong indicator towards employment. There are four distinct areas of control: what work is done, how the work is done, when the work is done and where the work is done. 

In short, when it comes to the contractor vs employee distinction, the more control the worker has, the more likely they are a contractor. The less control they have, the more likely they are an employee.

Financial risk

Where an individual incurs significant financial risk, with a view to making a profit, this indicates they are running a business and are self-employed. However, a low level or absence of finance risk does not necessarily mean the worker is an employee. 

A self-employed person is usually in business taking risks (e.g., paying for their own taxes and expenses) to make profits, whereas a person working for someone else generally receives wages or salaries.

Part and parcel

This considers the level of integration of the worker into the organisation. Generally, the more integrated a worker is into the organisation, the more likely they are an employee. The more separate and distinct they are, the more likely they are a contractor vs employee.

Business on own account 

Running an independent business points towards self-employment. Working for a number of separate clients consecutively or concurrently or entering into a large number of short-term contracts with multiple clients suggests self-employment. 

Working for a single client for a long period is more indicative of employment.

Ownership rights

Where a worker retains ownership of assets, including intellectual property, created during a contract or sells them to the organisation when the work is completed indicates an independent business. 

If the worker can exploit the assets for profit, self-employment is indicated. 

If ownership and / or the ability to exploit the assets for profit sits with the organisation, it is more indicative of an employment relationship.

Working time available

This considers how much of a worker’s available working time the contracted services will take up. Working time does not necessarily refer to a standard Monday to Friday, 9 to 5. If a worker typically works 40 hours per week, someone with significant personal commitments may not have as much time ‘available’ to work.

Workers contracts

This considers whether the contract in place restricts the worker’s right to work for other clients, as well as whether the contract forms part of a series of contracts, and whether self-employed work of a similar nature has been done in the last 12 months.

Restrictions are an indicator of employment. The pattern in which workers provide their services and looking at how contractual relationships evolve can be indicative of an enduring relationship that suggests employment.

Whether the worker has undertaken similar self-employed work of a similar nature for other clients in the last 12 months can indicate self-employment, a key factor in determining contractor vs employee status.

A worker can be employed for one engagement and self-employed for others. Having some employment does not prevent other engagements from being self-employment and vice versa. 

A worker may also perform different work for different engagers. The same work for multiple engagers, exploiting skills and expertise, suggests a business. A wide range of work for different engagers suggests the work is unrelated and not part of a business, an important consideration in contractor vs employee situations.

The ‘Check Employment Status for Tax’ tool considers a range of indicators and produces a result.  HMRC will stand by the result provided the information is accurate. Where there are subsequent material changes to contracts and / or working arrangements, the original result may no longer be accurate and a new check could be required.

If you’re still unsure after using the ‘Check Employment Status for Tax’, you should seek professional advice (e.g. Beany). 

Who are Beany? 

We’re an online accounting firm that is always right here for you, and our advanced technology lets us serve you much more closely and effectively than a normal accountant would.

We have a dedicated team of certified accountants and a support team to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Talk to one of our team members or register today.

Charlotte Wass

Charlotte Wass

General Manager, Beany UK

Chartered Accountant and Chartered Tax Adviser based in London. I love autumn, otters and Malteasers, and I hate spiders, peanut butter and the London Underground.

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