What is the difference between an employee and a contractor?

Not everyone who works for you will necessarily be considered an employee. Some individuals may fall under the category of contractor, but what is the real difference between an employee and a contractor? Why does it matter, and which alternative is best for your business?

As a small business accountant who offer a top quality HR advisory service, we frequently get asked these questions. While it is legally important to distinguish between the two, the answer to which is more appropriate for you is largely dependent on the needs and motivations of your organisation.

Why must you know the difference between an employee and a contractor?

It is important to define the status of an employment relationship, as employees are entitled to certain benefits and employment rights that contractors are not. Failure to classify the type of relationship correctly has several legal and financial consequences.

When determining this relationship, it is important to consider who carries out the required work. Is it the individual or can they send a replacement of their choice? If it is the individual, then they are likely to be an employee and if they can replace then it is likely they are a contractor.

Another factor is who has the control over the work and where and when it is carried out. If you have this control for example the worker has set work time, place of work and duties then they are most likely an employee as opposed to a contractor who is more independent and calls the shots!

It is also important to consider how obligated are you to provide work, if you are obligated to employ someone for a 40-hour week at a set wage and they are obliged to accept it then they are an employee as opposed to a contractor who can turn down work.

Which should you choose?

There are many benefits of having an employee as opposed to a contractor, employees are arguably more committed, more productive, and you have more control over them, for example when they work and when they take their annual leave, what they are paid.  They can also save you money as can help with the training of new staff.

It is important to note that employees are protected by the Employment Rights Act 1996 and are entitled to receive a statutory redundancy payment, maternity, paternity and adoption leave and pay, and the right not to be unfairly dismissed. It is your responsibility to issue them with a contract and handle their pay and tax and NI deductions as opposed to contractors who are self-employed.

On the other hand, contractors are more flexible, so you can hire when you need them, and you are not obligated to provide work. Contractors have their own liability insurance and have a specialist skill set so you do not have to spend money on training them.  They handle their own pay and deductions once you have paid their invoice.  They can however be less committed if working for many companies and there is a risk they can let you down or go to a competitor.

As an employer having considered the above you will make an informed decision as to what works for you be it having employees or contractors.

At Accounts & Legal we have bolstered our HR Services for small businesses and have a team of experts on hand to help you with any queries you have or challenges you may be facing. Get in touch with us today and one of our team will contact you directly.