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Should you classify workers as employees or freelancers?

by Alexandra Pasareanu

9 June 2022

Employee or freelancer? As a UK employer, it’s your responsibility to ensure your workers are classified correctly. Find out how!

Like most businesses, you may at some point wish to outsource some work to freelancers instead of formally employing someone. When it comes to the “employee versus freelancer” decision, it’s important to clearly define and understand the type of workers you use. A worker’s employment status as a freelancer, contractor or employee will determine their employment rights. As an employer in the UK, it is your responsibility to ensure your workers are classified correctly and that their corresponding rights are recognised.


Employee Status

The Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003, s. 4) lists three types of arrangement, each of which falls within the definition of employment. These include:

  • Any engagement under a contract of service (which covers most employees). There are also:
  • Any engagement under a contract of apprenticeship.
  • Any engagement in the service of the Crown.

Under a contract of service, the terms and conditions of the employment need to be established.

Beside the contract, there are other factors that need to be considered to determine if an employer / employee relationship exists.


Factors that indicate employment include:

  • No right of substitution: The agreement is personal to the specific individual and they are not permitted to send a substitute to do their work.
  • Control: Is the individual under your direction on what they do, how and when they do it?
  • Pay structure: A set hourly wage, entitlement to overtime pay and regular payments are usually associated with employment.
  • Hours: Is the individual required to work fixed hours per week?
  • Location: Are they working at the employer’s premises, and is that a requirement?
  • Dismissal: What provisions are there for terminating the engagement?
  • Benefits: Would they receive benefits such as holiday pay, sick pay, medical insurance, life insurance, a company car, or others?
  • Continuous work: Are there long periods where they work for the same and only business?

The answers to the questions above will provide you with an idea of whether or not a person will be considered to be employee.


An individual is also likely to be an employee if they are subject to the following:

  • A formal induction process
  • A standard contract
  • Standard working hours, holidays, etc.
  • A dress code or uniform
  • Security passes or access codes

Of course, the list above is not exhaustive, it highlights some of the factors that may differentiate an employee from a freelancer.


Freelancer Status

There is no single factor that defines self-employment. HMRC will probably treat an individual as self-employed if they:

  • Run a business for their personal gain
  • Have their own business insurance
  • Work for/with several customers at the same time
  • Can decide how, where and when they do the work
  • Can hire other people at their own expense to do the work for them
  • Have their own items or equipment to do the work
  • Charge an agreed fixed price for the work
  • Rectify any uninsured mistakes at their own cost
  • Self-employed workers are responsible for dealing with their own tax affairs.


“Off-Payroll” Working

Sometimes, workers may provide their services through an intermediary, often a limited company owned and managed by them. Your business contracts with and pays the company, which then pays the worker.

Such arrangements have in the past been used to reduce or avoid employment tax and National Insurance contributions for the worker. HM Revenue and Customs introduced regulations, originally referred to as “IR35”, to counter them. These broadly operate to ensure that in circumstances where, but for the interposition of the company, the worker would be directly employed by your business, their company must operate PAYE on all income from that contact.

Unless your business is medium-sized or larger (as defined), the worker’s intermediary is responsible for deciding their employment status and whether the regulations apply in relation to the contact with you. Note though that if your business is part of a wider group, its size is determined by reference to the group as a whole.


The Risks to Your Business

If a worker you engage wishes to be treated as self-employed, or you choose to deal with them as such, but the agreement with you is determined by HM Revenue and Customs as having the characteristics of an employment relationship – then your business will be required to pay all tax and National Insurance contributions calculated as due under the Pay As You Earn Regulations.

This is in addition to a range of other sanctions which apply (as examples but not limited to) for failing to offer a workplace pension scheme or not having Employer’s Liability Insurance. Both are legal requirements for employers.


How We Help:

If you are struggling to determine the employment status of your workers or understand the implications of each, our experts can help. Our payroll team is experienced in helping employers establish the best route to take.

Whether you’re a first time employer or are looking to change your payroll provider please get in touch. Let’s start a conversation!

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