Employing contractors: essential UK laws & responsibilities to get right

Contractors offer valuable skills and flexibility, but misclassifying them as employees can be costly. Here’s how to navigate UK contractor law and avoid the headaches.

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While understanding how to pay employees has its own share of pitfalls, navigating contractor legalities – IR35 and umbrella payroll, anyone? – can be even more complex. Wearing all the hats in a small business is tough, and payroll can feel especially confusing at times, and navigating the complexities of contractor employment law can feel like one hat too many. 

This article is your guide to employing contractors in the UK with confidence. We’ll break down the differences between contractors and employees, explore the pros and cons of working with contractors, and highlight the key laws you need to know.

Contractor vs employee: what’s the difference?

The fundamental distinction between a contractor and an employee lies in how much flexibility and control they have over the work they do for you.

Employees work under the direct supervision and control of the employer, following specific instructions on how, when, and where to complete their tasks.

Contractors, on the other hand, are self-employed individuals or companies brought in for specific projects and provide services to your business under a pre-agreed contract. 

  • They provide services for a specific project or timeframe.
  • They are responsible for their own taxes and national insurance contributions.
  • They typically have more control over how they work and use their own equipment.
  • Contractor rights and rights for the self-employed are different, with fewer employer obligations towards contractors.

There are upsides for the contractor to these arrangements. They have more control over how they complete the work, often working independently, using their own tools and equipment, and providing services to multiple clients simultaneously.  But, contractors miss out on benefits that employment brings. They are responsible for their own equipment; have to fill out their own tax returns and although they can work on a commission pay structure,  they aren’t guaranteed the kind of benefits that employees receive.

For a business, there are plenty of benefits for working with contractors, rather than taking on more employees.

Benefits and drawbacks of employing contractors

Employees bring stability and a dedicated team, plus potential for career growth and succession planning. They also add significant overheads that can be challenging for small businesses not yet experiencing rapid growth. 

Working with contractors can be particularly appealing for small businesses with a keen eye on their cash flow. Here are some of the main benefits, plus drawbacks to consider:


  • Better control of your cost base: keeping an eye on your all-important EBITDA,  there’s a benefit to spending on contractors for time-limited projects, rather than committing to the overheads of expanding your workforce.
  • Removes cost of benefits: a staff member’s cost to a business goes beyond their basic pay; the employer has to add in pension contributions, workspace costs, equipment provision, and paid time off for holiday or sick leave. A contractor, on the other hand, is typically costed to the delivery of the project alone.
  • Access to specialised skills: contractors can bring unique expertise to your projects, often at a lower cost than hiring a full-time employee with equivalent experience.
  • Flexibility: hiring contractors allows you to scale your workforce up or down depending on project needs.
  • Reduced administrative and managerial burden: with a contractor, there’s far less work to do for a manager, beyond ensuring the project is delivered and feedback is given. You don’t need to consider career growth conversations or performance reviews, for example, or involve them in regular meetings about the team, department or wider business.


  • Less control: Because contractors are independent businesses, you don’t have the same level of control over them as you do with employees. You can’t directly give them orders or manage their day-to-day activities in meetings in the same way. Employees are answerable to their manager and ultimately the company. Contractors typically answer to a contract that defines the scope of work and deliverables.
  • No guaranteed availability: contractors may have multiple clients, reducing their immediate availability for your needs.
  • Misclassified workers: incorrectly classifying someone as a contractor when you’re effectively using them as an employee can lead to legal and financial penalties.

Contractor law: essentials for small business

Here are the key legal considerations when employing contractors in the UK:

1. Comply with IR35 regulations

IR35, also referred to as the off-payroll working rules, is a set of UK tax regulations designed to prevent “disguised employment.”

These regulations aim to prevent tax avoidance by ensuring contractors pay the appropriate taxes. 

Unfortunately, determining a contractor’s IR35 status can be complex. The rules consider various factors beyond just job titles. These may include the level of control the client has over the work; the provision of equipment, and substitution rights (i.e. can the contractor send someone else to do the job?)

Consider seeking professional advice from an accountant or employment lawyer if needed. Resources like HMRC’s employment status checker can offer a starting point.


2. Create a written contract

When employing a contractor, a written contract is an assurance and protection for both parties. It can stipulate the nature of the work required and delivery timeframes, plus give a business intellectual property rights over any work delivered.

If the contract value exceeds £10,000 and the work spans more than a year, a written contract is legally required. This requirement is stipulated by the Consumer Contracts Act 2015 (for contracts with consumers) or the Supply of Goods and Services Act 1982 (for contracts with businesses).

Even for contractor work of lesser value, a written, signed contract is a sound idea. Don’t skip this step, in particular, if it’s your first time dealing with a contractor or freelancer. A written contract offers valuable protection in case of misunderstandings or disputes. 

Some key things to outline at the most basic level might include the scope of work, payment terms, confidentiality requirements, and intellectual property ownership.

There are a few situations where a written contract with a contractor might not be legally required or strictly necessary:

  • Short-term, low-value contracts: for very short-term, low-value engagements (think a one-off graphic design project for a few hundred pounds), a written contract might be considered overkill.  However,  even in these cases, a simple email outlining the key details can still be helpful to avoid misunderstandings.
  • Established, ongoing relationships: if you have a long-standing, trusted relationship with a contractor you’ve worked with successfully multiple times, a formal written contract might not be essential.
  • Simple, straightforward engagements: for very simple, straightforward engagements where the scope of work and expectations are crystal clear, a written contract may not be necessary. But, a contract can still offer some peace of mind and help to avoid disagreements down the line, and may be worthwhile if it’s a new contractor you’re dealing with.

3. Check information about the national minimum wage and living wage

Generally, contractors are not entitled to the National Minimum Wage (NMW) or the National Living Wage (NLW). This is because they are considered self-employed and set their own rates. Of course, they are able to set rates that match or exceed the National Minimum or Living Wage.

For an employer, it may seem appealing to choose a contractor whose rates undercut the National Living Wage. But, there are some exceptions where this could present a legal issue:

  • Limiting substitution: if a contract restricts a contractor’s ability to send a substitute to complete the work, it strengthens the argument that they are more like an employee, and potentially entitled to NMW or NLW.
  • Regularity of work: The Living Wage Foundation seeks to protect potentially vulnerable workers in supply chains. Their guidelines state that if a contractor works for you for more than two hours per day for eight consecutive weeks, they should be paid the Living Wage (higher than the NMW for those over 25). This applies particularly to sectors with a high use of subcontractors, such as cleaning or care work.

The legal responsibility to pay the correct wage to a qualifying contractor sits with the employer. If you’re unsure about a contractor’s status, it’s best to seek professional advice from an HR specialist, accountant, solicitor or financial advisor to avoid any potential legal issues.


Here are some resources that can provide more information:

4. Conduct the relevant right to work checks

It’s your legal responsibility as an employer to ensure your contractor has the legal right to work in the UK. This involves conducting right to work checks before they start work. 

The government provides a right to work checklist to help you with the process. 

You can also use an identity service provider to verify their documents electronically. Failing to conduct right to work checks in the UK can result in a civil penalty of up to £20,000 per “illegal worker”. This is a significant increase from the previous maximum penalty of £15,000, which came into effect in February 2024.

What are the risks and penalties of getting contractor setups wrong?

Misclassifying a worker as a contractor can have significant consequences, including:

  • Backdated tax and National Insurance contributions: you may be liable for unpaid taxes and contributions for the misclassified worker.
  • Holiday pay: the worker may be entitled to claim backdated holiday pay or other employee benefits.
  • Fines: HMRC can impose significant fines for non-compliance.
Misclassification woes: who needs them?

HM Revenue & Customs (HMRC) take a firm stance on misclassification. 

The penalties can range from a fixed penalty of £400 to a sum of the court’s discretion based on the number of workers misclassified and the length of time for which it occurred. For example, one of the most notable cases was Uber in 2021. The company was fined nearly £1 billion for their misclassification of workers. In severe cases, you might even face prosecution of up to 10 years, though this would be unusual for a small business owner scenario.

Misclassified workers may also be entitled to claim backdated employee rights they weren’t receiving as a contractor. This can include paid holiday, sick leave, and potentially even National Minimum Wage top-up payments.


Employing contractors can be a valuable strategy for small businesses seeking specific skills and project flexibility. However, it’s crucial to understand the legal landscape to avoid costly misclassification issues. 

By following the correct steps, and by prioritising clear communication with your contractors, you can enjoy the valuable benefits they offer, while ensuring a smooth and compliant experience for your growing business.

Written by:
Stephanie Lennox is the resident funding & finance expert at Startups: A successful startup founder in her own right, 2x bestselling author and business strategist, she covers everything from business grants and loans to venture capital and angel investing. With over 14 years of hands-on experience in the startup industry, Stephanie is passionate about how business owners can not only survive but thrive in the face of turbulent financial times and economic crises. With a background in media, publishing, finance and sales psychology, and an education at Oxford University, Stephanie has been featured on all things 'entrepreneur' in such prominent media outlets as The Bookseller, The Guardian, TimeOut, The Southbank Centre and ITV News, as well as several other national publications.

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