Understanding the Key Differences Between Employees, Workers, and Contractors
- Lilac HR
- Nov 17
- 4 min read
Understanding the difference between employees, workers and contractors is key for any business owner to avoid unpleasant tax implications or worse - back dated employee entitlements such as sick pay or holiday pay.
We often see this issue come up where businesses are engaging self-employed contractors on a regular and often full time basis rather than employ staff. We're going to share the problems with these practices, the risks they pose to your business and how to avoid them.
Understanding the Terms
Employee
An employee is an individual who works for a company under a contract of employment.
They are typically entitled to benefits such as holiday pay, statutory sick pay and family leave and pay.
Worker
This category is fairly broad and can refer to employees, agency staff and independent contractors/freelancers too.
This term generally refers to anyone providing services, regardless of the employment type.
Contractor
An independent entity hired to perform specific tasks or services.
Usually works on a project basis and does not receive any employee benefits.
Usually self-employed or working under another business.
Employee vs. Contractor: Key Differences
Employees | Contractors | |
Control & Autonomy | Usually have set hours and responsibilities. Employer dictates how and when tasks are completed. Employer is obliged to provide work and the employee is obliged to complete the work. | Usually have more flexibility and control over how and when they complete tasks. The employer is not obliged to provide the contractor with work and the contractor is not obliged to accept the work. |
Benefits & Compensation | Employees receive a regular salary, benefits and statutory entitlements to sick pay, holiday pay, maternity leave and pay etc. | Contractors are typically paid per project with no extra benefits and no entitlements to holiday pay etc. |
Duration of Work | Employees are continuously engaged until the contract is terminated. | Contractors usually engage for specific projects with defined timelines and there is no requirement for the contractor to be offered work. |
Personal Service | Employees are not entitled to send a substitute to complete the work for them, they must personally deliver the services. | Contractors are not required to provide the service personally, they are able to provide substitutes to complete the work. |
The Risk of Hidden Employees
If you already hire your team under employment contracts then the risk of a hidden employee is next to zero. However, if you hire contractors on a regular basis, you will need to ensure that they are true to the definition of a contractor.
If it is deemed that your contractor is in fact a hidden employee, you may be liable for back dated holiday pay, sick pay and potentially other benefits such as pension contributions.
Here's how to protect yourself from this happening:
Have a clear Contract for Services in place.
This is a document that outlines the relationship between the business and the contractor, including who is liable for tax payments, payment of invoices and the right of substitution.
Ensure your actual working relationship reflects the Contract for Services.
HMRC will consider the actual working relationship as well as what the contract says - so make sure they match up.
Reduce your reliance on contractors.
Utilising contractors for project work is absolutely fine, but make sure you're not relying on them for your day to day business regularly.
Contractors should be conducting work for other organisations as well as yours - they shouldn't be solely relying on your business for their income.
If you have any contractors regularly working for you on a full time basis, ensure they have a regular break between projects to help to maintain their contractor status.
Factors to Consider When Hiring
Hiring in any business is a big decision and often the choice between self-employed freelancers and employees is a major consideration. Here's a few things for you to think about:
Business Needs
Evaluate whether you need long term support or project based help. Long term support is best suited to employees whereas freelancers or contractors are great for projects.
Budget Considerations
Often the worry with hiring employees is the idea of paying holiday or sick pay, but in reality once you have adjusted your budget to paying a the same amount each month, this shouldn't derail your business finances. Plus, contractors are often much more expensive than employees - even with employers NI and pension contributions!
Expertise Required
Assess whether specialised skills are required in which case a contractor might be more appropriate than in house support.
Control requirements
Determine how much control you want to have over the work and how it is completed. Often, you have much more control over the work when it is completed by employees rather than contractors.
The Benefits of Each
Advantages of Hiring Employees.
Stability: Employees are more invested in the company culture.
Loyalty: Potential for more long-term commitment and lower turnover.
Advantages of Hiring Contractors.
Flexibility: Hire and fire contractors as needed without long-term obligations.
Variety of Skills: Access to a diverse skill set without extensive training.
There are major benefits to hiring both employees and contractors - depending on what it is you are looking for in your business. We don't mind which you do, but make sure you understand the risks of overusing your contractors.
📝 In need of a Contract for Services? Check out the templates we have on the How to HR Toolkit
Comments