For some companies, hiring a contractor to carry out a specific job role can be a better option than hiring an employee, for example if it is for assistance on a particular project.

There can be definite advantages in hiring a contractor, not least the fact that this route can offer flexibility and cost-efficiency. There are, however, some risks, and it’s important to be alive to these.

In this article, employment lawyer Keely Rushmore explains some of the considerations employers should give when hiring a contractor.

What is the contractor’s working status?

A crucial issue is that, although both you and the contractor may intend for your relationship to be one of self-employment (and may well record this in the contract between you), HMRC and the Employment Tribunals might not see it the same way, and the reality of the relationship will outweigh the contractual terms. An individual’s status can have important consequences. If, legally, a contractor is viewed to be a worker, this can trigger employment law obligations (such as the right to paid holiday, rights under the Working Time Regulations and (subject to other qualifications) the right to statutory sick pay). If an individual is viewed as an employee, they will be protected from unfair dismissal (although they normally – but not always – require two years’ service for this), as well as enjoy the right to, for example, maternity or paternity pay. They will also have the right to request flexible working arrangements on day one of their employment under the Employment Relations (Flexible Working) Act 2023 and this request must be treated in the same way as that made by any other employee.

Unhelpfully, a person may be an employee in employment law but have a different status for tax purposes (although the tests are quite similar). A business must work out each person’s status in both employment law and tax law.

What should the contract include?

Assuming that it is clear that the individual is a self-employed contractor, the contract is crucial for governing the relationship, and it is always advisable to have this in place before the contractor starts work. Typical and useful clauses will cover:

  • The payment terms. Will the contractor be paid on completion of certain deliverables, or simply paid an hourly or daily rate?
  • The time commitment from the individual. Given flexibility is a key advantage of a contractor, ensure that the contract provides for this. There should always be an agreed notice period (with the ability to end the contract early in the event of, for example, serious misconduct by the contractor).
  • The status of the individual. Although this is not a deciding factor, the intention of the parties is an important factor when it comes to determining the status of the relationship. It may also be wise to include an indemnity covering the situation where the employee claims to be or is determined to be a worker or an employee (this can apply to both the tax consequences and the employment law consequences, although the indemnity should be carefully drafted and may have legal limitations).
  • Provisions to protect the business. These could include intellectual property and confidential information provisions, together with restrictions on who the contractor can work for when providing services to you, and even restrictive covenants after the relationship has ended. The latter two are more unusual in the context of self-employment (and could potentially cause issues from a status perspective) but commercially you may feel they are needed.
  • Practical issues regarding how the services are to be provided. The more freedom and risk an individual incurs, the more likely they are to be determined a contractor. For example, are they free to work the hours they choose in a location of their choice? Do they bear their own expenses and provide their own equipment? Is the way in which they provide the work their own method? Can they provide a substitute if unable to provide the work personally? As outlined above, if the reality of the situation does not reflect the contractual terms, the Tribunals and HMRC will take this into account.
  • It is important to set out the insurance position. Is the individual covered under the organisation’s policies or do they need to put their own into place?
  • Benefits (or lack of them). A contractor would not normally be entitled to benefits (including the protection of company policies). It is important to spell this out.

It is also important to keep the relationship under review as time goes on, as status is not immovable. An individual may start with you as a genuine contractor, but, as the business grows and they become part of its fabric, there is a possibility that their status will change over time. Should this occur, it is important to alter their status accordingly, ideally with tax advice to avoid any issues arising with HMRC.

It is a lot to consider, but agreeing and shaping the form of the relationship, and documenting it clearly in a contract from the very outset, can prevent issues arising further down the line, or at least put you in a good position to address them.

If you have questions about hiring a contractor for your company, please contact Keely Rushmore.

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This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.