Need extra help in your business but can't afford full-blown employees? Hiring an independent contractor to pick up the slack may be the way to go. Here's a look at the pros and cons of going down this route and what you'd need to do to make it legal.
What is an independent contractor?
Independent contractors are self-employed workers. They can be sole traders, partnerships or limited liability companies. They work under a contract for services either for a fixed period or on an as-needed basis.In contrast, employees work under an employment contract. The contract is permanent, unless:
You fire the employee
The employee quits
You change the terms of the contract by agreement
How is an independent contractor different from an employee?
The main difference between an independent contractor and an employee is the working arrangement. Over the years, the UK courts have developed several tests to distinguish between the two. These include:
The ‘How, What, When and Where' test. If you tell a service provider which task to carry out and when, where and how to perform it, that person is an employee.
Can the contractor send a replacement, or do he have to do the job personally? Again, in the second case, the person is an employee.
In an independent contractor relationship, you're not obliged to provide work. And the independent contractor doesn't have to accept every job. In contrast, as an employer, you have to assign regular work, and the employee can't turn it down. This is called the mutuality of obligation.
If the contractor is part and parcel of your business, they're an employee. For instance, if you've put them in the ‘Our Team' section of your website. Or because you've given them duties you'd give an employee, such as appointing them as the office First Aider.
Why is it important to distinguish between independent contractors and employees?
For starters, because it'll affect your relationship. Dealing with an independent contractor isn't the same as dealing with an employee. There are different rights and responsibilities at play.
More importantly, the government's all over it.Some businesses have been disguising employees as independent contractors to avoid paying minimum wage, holiday pay, sick pay and other benefits. Uber, Deliveroo and Pimlico Plumbers have recently been sued for this reason.
The government has a bill in the works that aims to put a stop to this practice. If it becomes law, service providers will be considered employees by default. It'll be up to employers to prove that a person is an independent contractor.HMRC also has a rule called IR35 designed to combat ‘disguised employment'. This policy has been in force since April 2000. If you're in breach of IR35, you'll have to pay the tax and Class 1 National Insurance you should have deducted. Plus interest and penalties, of course.So, put simply, it pays to have your legal ducks in a row.
Hiring employees vs. hiring contractors: The pros and cons
Employees and independent contractors both have their pros and cons.The pros of hiring employees include:
You can decide which tasks they work on, manage their schedule and keep a close eye on them.
You can train them as you see fit, including sending them to conferences, courses or seminars of your choosing.
You automatically own the rights to any intellectual property they create on the job.
Long-term employees are a dependable source of expertise and continuity. They gain knowledge and experience about your business and culture as the years go by. You also have full and exclusive access to them during working hours.
The cons of hiring employees include:
You have to pay them the same salary each month, whether you've got work for them or not.
You have to calculate their taxes, deduct them from their wages and pay HMRC using the PAYE (pay as you go) system.
You have to pay National Insurance and make pension contributions on their behalf. Plus, you have to pay statutory sick pay and holiday pay and buy employers' liability insurance.
You can fire an employee only if you have legal grounds to do so. The employee can sue you for compensation if they can prove you've fired them unfairly.
They're responsible for paying their taxes and National Insurance contributions.
They're accountable for their wellbeing. Which means you don't have to buy employers' liability insurance or worry about sick pay, holiday pay, pension contributions and other benefits.
You pay them only when they work. This is great if you need only occasional help or help to get a specific project off the ground.
It's easy to dismiss them. Depending on your contract, you can typically do it without reason by giving a few weeks' notice at most.
The cons of hiring an independent contractor include:
You can't supervise them or control their schedule. As long as contractors hit their deadlines, they can work when, where and how they see fit.
Most independent contractors work with several different businesses. So, they aren't always available. They can also assign the work to someone else.
They can decide to raise their fees at a moment's notice, which means you might no longer be able to afford them.
You'll need to make sure you protect your rights. For example, you don't automatically own intellectual property rights. You'll need to negotiate this and put it in writing. Similarly, they may sue you if they're injured while working at your premises.
What forms so I need to hire an independent contractor?
You don't need to fill out any forms to hire an independent contractor in the UK. In fact, hiring one is as easy as making a verbal agreement. You could call someone up, agree to terms, and they could be rolling up their sleeves and getting to work the very next day.That said, it's usually a good idea to have a contract in place. This protects both you and the contractor should something go wrong. And, should HMRC decide to audit you, it'll prove your relationship isn't ‘disguised employment'.
How do I draw up an independent contractor agreement?
An independent contractor agreement can be a super simple one-page document or a 20-page whopper. It depends on the situation.Many independent contractors have their standard terms. That said, any contact is open to negotiation. Which means you could either propose changes or provide your version as a starting point.
There are lots of templates you can download and customise, such as those on Law Depot and LegalContracts. Or, even better, you could ask a solicitor for advice.As a rule, simple contracts work well for small, straightforward jobs. More complex or sensitive tasks will usually need more detailed terms.
What should I include in an independent contractor agreement?
Again, it depends. That said, here are some of the important clauses it's always worth including:
An independent contractor clause
It may sound obvious, but it's good to have it in writing as proof of your relationship. The clause would state that the contractor is in business for themselves and responsible for paying their own taxes, National Insurance contributions and other work-related benefits. It would also state that they can do the work when, where and how they see fit, without your interference.
A non-disclosure clause, or NDA
Also known as a confidentiality clause. It's especially important if you have to give the contractor sensitive information, such as access to your financials, to do their job.
An intellectual property clause
This sets out who owns the copyright to the work. It's worth including if you're hiring a creative, such as a copywriter, graphic designer or app developer.
A termination clause
These terms set out how you can end the agreement. Usually, it'll say that either of you can end it by giving X number of days or weeks' notice. Some independent contractors may want to include a ‘kill fee' in case you decide to cut the project short.
How do I hire independent contractors?
You can't control, supervise or train independent contractors. So, it's best to be extra careful when hiring them.Here are a few tips and tricks to help you get the most out of your relationship:
Check their credentials and, where applicable, their portfolio. Who have they worked with before? Do they have testimonials from previous clients? And what do they say? Do you like their past work?
Don't commit to a large project from the get-go. It's worth starting with something small to test the waters. That way, you can see whether it'll be a good fit without spending too much money.
Be clear and upfront about what you want to accomplish. The more information you can give at the outset, the better equipped the contractor will be to do a good job.
Avoid bidding sites like Upwork, Freelancer.com and PeoplePerHour. These typically offer meagre rates, so the best people avoid them. It's usually better to use business directories, social media or run a Google search. Alternatively, ask a colleague or friend for a recommendation.