What is the difference between an Employee, Worker and an Independent Contractor?

Defining the employment status of your team from the beginning is crucial, to establish the foundations of the relationship expected, ensure your team is fulfilling their obligations and you, their rights. In many businesses, there are employees, workers and independent contractors. In order to distinguish between them, we must break down the types of employment status.

 

What is an employee?

An employee is someone who provides services to an employer in return for guaranteed work, a monthly wage and additional employment benefits. An employee may work on a temporary, permanent, fixed-term or part-time basis, the terms of which must be set out in a legal document called the Employment Contract, which must be made at the beginning of the employment.

An employer has certain responsibilities towards its employees and must take on any financial risks related to them, as well as other obligations such as providing paid holiday leave and protection from unfair dismissal. Employers must also take financial risks such as deducting tax from their monthly wage and providing Employers Liability insurance. There is also mutuality of obligation; the employer is obliged to provide work, and the employee must accept the work. An employee must also do the agreed amount of hours of work, and may not delegate the work to someone else.

Benefits of an employee-employer relationship include having greater access to resources, as the employee is available to you during set work hours and will work for you exclusively at a time period and workplace chosen by the employer. You will also have more control over how the employee works, due to the work being done in accordance with workplace guidelines. Another benefit is that employees are usually more loyal to the business and must give reasonable notice before terminating their employment, and vice versa.

What is an independent contractor?

An independent contractor, also known as a consultant or freelancer, is usually either registered as a sole trader or has their own independent company that they operate through. Contractors are usually hired for specialised skill sets which are needed for a defined period of time, to work on a specific project, so are usually good for urgent work demands.

Independent contractors do not have the same benefits as employees but can operate more flexibly in the workplace as they have autonomy over their own work. Contractors are also able to work in more than one company and are less embedded in the organisation, bringing a more objective view to projects. Contractors also bear their own financial risks, and will be responsible for any mistakes in their work and must correct the work for free.

They are responsible for NI deductions of their income and are remunerated on a ‘per job’ basis, so they are not entitled to paid holiday leave. There may also be a lack of loyalty and less control over the work being done, which may result in uncertainty and issues over intellectual property as they legally own the rights to the work created by them unless a contractual agreement has been put in place to protect this (Independent Contractor Agreement).

Grey Area

Although an employee and independent contractor are defined by statute, a grey area of law involves a third employment status, the ‘Worker’. This is a status between an employee and a contractor, on a zero-hours contract, which includes bolstering work during busy periods and events, for example, Christmas. Due to the Gig economy, there is a rise in workers, as the labour market becomes more common, the status is increasingly more common, for example, Uber and Deliveroo drivers.

Workers on zero-hours contracts are not obliged to take work, nor is the employer obliged to provide, but employers still have control over how the work is performed, similar to in an employer-employee relationship. Workers are also entitled to the National Minimum Wage, and the right to holiday, so a Worker Agreement should still be drafted to set out the foundations of this relationship.

Importance of legal agreements

Although defining your team’s employment status should be relatively straightforward, issues usually arise when a relationship has evolved over time, and the original agreement may no longer be fit for purpose, essentially placing you in breach of your legal employment obligations e.g. your freelance contractor is working for you full-time and being paid monthly, so he should be entitled to employee benefits.

In order to combat this, the legal stance is that regardless of the written agreement, it is the working arrangement that will determine one’s employment status. An individual can start working as a contractor, but the status will shift if circumstances change, for example, control shifting to the employer regarding the working hours and how work will change, or if mutuality of obligation arises, where the employer is expected to provide work, and the worker must accept it, thereby shifting the status to employment.

Defining the category your worker comes under is crucial, as it can cause a significant financial impact if agreements are not kept up to date. By having legal agreements in the first place, and constantly reviewing working relationships to ensure they haven’t changed, you can minimise your financial losses.

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