Employee or contractor? 8 tips for new employers

Taking on a new hire? Make sure you don't fall foul of employment law by reading up on the differences between recruiting an employee or contractor

Sometimes, it can be tricky to work out whether you have taken on an employee or a contractor – especially if you’re new to running your own business. But it’s no less important to find out as employees have a different set of employment rights that businesses need to take into consideration.

However, there are a few quick questions that you can ask yourself to confirm whether you have employed the services of a contractor, or added an employee to your  business.

Whilst there is a third employment status of ‘worker’, who don’t have the same employment rights as an employee, we will only be covering the difference between an employee and contractor here.

What are the difference between employees and contractors?

Getting back to the question at hand then, it is worth understanding that there are benefits to both sides of the employee/contractor coin.

Firstly, let’s take a look at the employee angle. Taking on an employee obviously means that you have an individual working purely for you and your business, giving you a very valuable resource. If you want to have this resource available at all times during agreed (and legal) working hours, then this is the choice for you, and can be much more beneficial in the long term than a contractor might otherwise be.

However, contractors do have their plus points too. For example, you may not want to have to organise PAYE or National Insurance contributions for another staff member; with a contractor you don’t have to. Furthermore, contractors don’t fall under the bounds of employment law, so you don’t need to provide benefits such as sick pay or holiday to them. You only use them (and pay them) when you need them. And it’s just a little bit less HR admin to handle too!

8 questions to ask about your prospective ‘hire’

1. What hours do they work for you?

If you’ve agreed that an individual should work a set number of hours for you every week or month, then it is likely that you’ve taken on an employee.

2. How are they paid?

Do you pay the individual regularly? For example by the hour, week, or month? Not the kind of one off, £50 per hour contracting job for which you might usually receive an invoice, but an agreement to pay them each month, £X per year? If this is the case, you probably have an employee on your books.

3. Where do they work?

Does the individual, as part of their agreement with you, have to work on your premises and exclusively for you? Or even at premises that you decide on? If you answered yes to this, you probably have an employee.

4. What level of involvement do they have in the business?

Looking at this the other way around, if the individual risks their own money, uses their own equipment, has final say in the running of the business, or hires people to work for them, they are likely to be a contractor and not an employee.

5. Are they ‘controlled’ by anyone?

For example, if they have no say over the work they choose to do, then they are likely to be an employee rather than a contractor.

6. Are you obliged to give them work?

If yes, and they have an obligation to complete this work, they are likely to be an employee.

7. Can they get someone to do their work?

If your ‘hire’ is able to delegate their role to another outside party, it’s likely that they are a contractor, as it’s likely you will be working with them as a company rather than for the role they provide as an individual.

8. Do they work for you all year-round?

If they work for you for a continuous period of two years, then they could start to be covered by employment rights. A contractor working solely for one customer would typically need to have a break in service of at least four weeks each year to avoid becoming an ‘employee’.

And there you have it, a basic guide to deciding whether you have chosen to take on an employee or contractor. It’s certainly worth knowing if you don’t want to fall foul of employment law, not to mention HMRC!

Kirsty Senior is co-founder and director of citrusHR, the HR service taking a fresh approach to HR for small business and charities in the UK.

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