Last updated: November 1st 2023
Applies to: Business Owners
Running a company comes with all sorts of challenges. Hiring new staff is one of them. Getting it wrong is risky, and it’s key that you know whether your new team is really a freelancer. The changing needs of your company may mean it makes sense for businesses to consider hiring a freelancer.
As a business owner, you have to be innovative, flexible and adaptable to all the changes happening in our workplaces today in order to push your business on. In order to remain competitive, you can grow my business by fully utilising a flexible and agile workforce.
The difference between a freelancer (contract for services) and an employee (contract of service) has a long history in employment law, and the debate continues today.
We cannot talk about the differences without mention of HMRC. They’re mainly concerned with who pays the Tax and National Insurance and as a business it’s vital to clearly understand the different rights and responsibilities of both so as you don’t make any costly mistakes.
Here are some to keep in mind:
Contract for Services – freelancer:
Typically, a contract for services is between a company and a self-employed person or company; therefore, the self-employed person or company is responsible for managing their own tax affairs.
Most freelancers/contractors are legitimate; they run their own businesses and are responsible for the success or failure of that business which includes their profit and loss. They’d usually have more than one client and manage their own tax affairs.
Contract of Service – PAYE – employee:
A contract of service relates to an individual employed by the company (employee-employer relationship). It’s a contract between the employer and the employee. Typically this agreement is for a fixed term period or they have agreed their services on a permanent basis with a notice period to end the contract of service.
The terms of employment will usually be written in a statement of particulars and include things like hours of work, location, holiday entitlement, sick pay, maternity, paternity, shared parental leave, or adoption leave entitlements, right to request flexible working, protection against unfair dismissal etc.
It is, of course, possible to be an employee and be self-employed at the same time. You can hire someone on a traditional employee-employer contract of service (permanent employee) during the day and they may well run their own business during the evenings and at weekends.
Business Reasons for hiring a Freelancer
We mentioned above how important it is to be clear about the differences between an employee and a freelancer. As well as the differences in the rights and responsibilities of each party, let’s consider the reasons for hiring a freelancer in the first place. What is the business case for hiring a freelancer?
- Expertise: One of the main reasons businesses hire freelancers is to outsource a specialist or technical task that they possibly don’t have the skills or knowledge to manage effectively in-house (Graphic Design, Accountancy or Book-keeping, Recruitment, Web Development or Programming, Social Media or Marketing etc.)
- Short-term Project: It’s likely the business has a piece of work or a specific project that has a finite amount of work or budget and therefore, it’s not appropriate to recruit for a permanent position.
- Speed of Delivery: Working to tight deadlines and getting the task done fast will increase the contractor’s profitability. They are keen to get the job done to a high standard and quickly.
- Affordability: Daily rates are likely to be high given you are hiring a highly talented/skilled individual. Compared to a permanent member of staff, you’re not responsible for paying their tax, NI contributions, holiday pay, sick pay, benefits, etc.
- Flexibility: A genuine freelancer may have a variety of clients – across different projects and based across several locations or even different countries. They (usually) want to be able to work at home. And to be a genuine freelancer, they will set their own hours of work. You’re not able to tell them to work X day from 9am until 5pm. This could mean there’s an employee-employer relationship in place, so you must be careful.
- Autonomy: Freelancers are used to working on their own and often have the depth of knowledge and experience to deal with a broad range of situations and scenarios.
Blurred Lines
Where it tends to get a little grey is when a business employs the services of a contractor and start managing them as they would any other member of their team.
We cannot talk about the differences between freelancers and employees without mentioning HMRC. As a business it’s essential we understand the difference and not just in your own opinion but you comply with employment law and the definitions HMRC
Here are some things to watch out for:
- Hours and pattern of work: A freelancer should be in control of when they do the work and not be bound by your office hours.
- What work they do and when, where or how to do it: As the client, you’ll need to think carefully about giving out instructions. You’ve hired an expert and you’re paying for someone that can work independently without being micro-managed or supervised. Of course, you’ll need to ensure the quality and standard of their work is what’s expected and been agreed so do factor in regular checks.
- Operating costs: A freelancer will use their own money to buy business assets, cover running costs, and provide tools and equipment for their work. To be a true freelancer, they will use their own PC or laptop, as an example. Be mindful if your freelancer is based at your office and using your equipment on a regular basis as HMRC may consider this to mean there’s an employer/employee relationship in place (which means you should be paying the tax and NI).
- More than one client: A true freelancer can and often does work for more than one client.
- Provide a replacement: To be considered a real freelancer by HMRC, they’re able to provide a replacement to cover the work if they are unable to that day or if they are working with one of their other clients.
Many business owners I’ve worked with have initially considered hiring a freelancer/contractor as it’s perceived to be a cheaper option. Making sure the relationship is a true freelancer/contractor relationship with you is key so as to minimise the risk of HMRC retrospectively expecting you to cover Tax and National Insurance.
If you feel that your best option is someone you need based from your office, working regular hours of 9am until 1pm, Monday to Friday inclusive and using your equipment, then be mindful that this is an employee/employer relationship, not a freelancer contract.
Making Recruitment Easy for Business Owners
Your People Partners can make sure you don’t fall foul of the HMRC tests for employer/employee versus freelance contracts.
Our team specialises in recruitment for small businesses and helping business owners find both genuine freelancers and new permanent members of your team.
We can make hiring staff simple and provide you with exceptionally talented staff members without the hassle and stress of doing your own recruitment.
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Still need help?
If you would like more advice when it comes to the recruitment process, feel free to get in touch with the team at Your People Partners. We love to help!
