This Content Was Last Updated on April 5, 2023 by Jessica Garbett
The procedure, law and practicalities for engaging someone as an employee or contractor can be confusing.
Firstly, any business can do this – Sole Trader, Partnership or Limited Company (in the case of a Limited Company the directors are treated as employees in any case).
The business employing someone will be the Employer or Engager, dependant on Employment Status. The person carrying out the work will be the Employee or Contractor, again dependant on Employment Status.
Understanding Employment Status – Law not Choice
A key issue is whether the person you take on is an Employee or a Contractor. This is known as Employment Status and is not a matter of choice, but a matter of law.
Broadly, for an employment relationship to exist all three of the following must be present:
- There must be substantive control over how work is done (i.e. control over the detail of what is done)
- There must be a personal service obligation (the person is obliged to perform duties personally, and cannot delegate or sub contract)
- There must be “mutual obligations” (broadly you must, by contact or custom, be obliged to offer work and the other person to accept it)
If all three are present, then an Employment relationship exists, even if its zero hours; if one or more is missing then its a Contracting / Self Employment relationship. (sometimes known as “Gig economy”).
This is a complex area, and one which often creates tax disputes, but most of the time its clear how an arrangement sits.
Please be aware that Employment Status can be different for tax and other employment rights, hence the occasional reported cases of a Self Employed individual getting, say, holiday pay or unfair dismissal. This is uncommon, but the Working Time Directive and other EC legislation clouds the issue with the concept of a “Worker” (sometimes known as Limb B worker, Contingent Worker or Dependant Contractor) – someone who is Self Employed but still gets employment rights (think Uber or Pimlio Plumbers). Disputes in this area aren’t common, so long as arrangements are documented properly.
Self Employed / Contracting
Where a Self Employed relationship exists, there are few legal obligations on the Engager:
- It is good practice to get the contractors tax reference, but its not a legal requirement
- It is good practice to have a contract covering tasks, rate of pay, payment terms (eg 14 days after invoice) – this avoids disputes. Such a contract should state that it is a Self Employed relationship – although Employment Status is a matter of law, documenting the intention of the parties is good practice can can tip the balance.
- It is good practice to make sure your business insurance includes Employers Liability, especially if the Contractor is on your premises even if they are Self Employed
- There are no obligations to deduct Tax / NI
- Make sure the workplace is safe – Health and Safety rules apply regardless of status.
Where an Employment relationship exists, there are a number of obligations on the Employer:
- Deduct tax and NI from the Employee under PAYE
- Pay Employers NI at 13.8% on amounts over £175 a week (2023/24)
- Offer paid holiday, maternity leave and redundancy pay, in accordance with law
- Unfair dismissal and employment protection rules apply
- Issue a contract or written terms of Employment
- Make sure you have Employers Liability insurance cover
- Ensure workplace health and safety rules are adhered to
- Offer a workplace pension if they earn over £10,000 a year (worked out pro rata each pay period)
It can be seen that there are a lot more obligations when paying Employees.
- Cover teachers – these are likely to be Self Employed as there is unlikely to be control or mutual obligation
- Hiring a teacher to work in a Yoga Studio you own – probably Self Employed, as control will be weak – you will tell them what to do, eg “teach a restorative class” but not how to do it, eg what asanas or pranayamas to use
- Management, Administration or Reception staff – probably Employed, as more detailed control will exist, eg working with your procedures. Its likely that mutual obligations and personal service will be implied in the role – probably Employed, again as there is detailed control, eg working with your procedures. Its likely that mutual obligations and personal service will be implied in the role
- Task based assistance, eg updating website or social media – likely to depend on the detail