The Differences Between An Employee and Independent Contractor
By Will Elton, Updated: 2023-05-24 (published on 2019-05-16)
What’s the difference?
For a business owner, it is imperative to understand the difference between “employee” and “contractor or self-employed person” to comply with the different rights and obligations your business has depending on the qualification.
An independent contractor or self-employed person is not employed by the company but rather serves as an independent expert who provides a service to the client on a self-employed basis.
Independent contractors are not protected by employment rights like company employees. The entire basis of the relationship between a client and an independent contractor or self-employed person is contractual and subject to less statutory regulation. This subsequently means that core duties of an employee such as some level of fidelity or confidentiality are not provided with an independent contractor. Thus, in some cases it might be useful to consider entering into a Confidentiality Agreement with the independent contractor.
An employee is employed by the company and protected by employment rights as set out in his Employment Agreement as well as in statutory regulations. In return, an employee has more extensive obligations towards his employer, i.e. with regard to fidelity and confidentiality.
How to differentiate between “employee” and “contractor”?
|Factor||Employee||Contractor or Self-Employed Person|
|Control over work procedures, working time and method||No – normally the employer decides.||Yes – contractor typically sets hours needed for job at hand.|
|Ownership and provision of work equipment, tools and materials||No – usually employer will provide.||Yes – typically contractor will have tools needed for job at hand.|
|Whether the person is properly regarded as part of the employer’s organisation||Yes.||No – usually a contractor or self-employed person is not considered part of the organisation of the client.|
|Insurance and tax responsibilities||Typically an employee bears no responsibility with regard to insurance or tax.||Yes – an independent contractor will usually be responsible for their own insurance and tax.|
This list provides some guidelines. However, other factors may be considered to help qualify the relationship such as the traditional structure and practices of the trade or profession concerned or the payment structure (salary, lump sum, etc.).
Example Case : Bob The Programmer
Bob is a programmer. Your company contracts with him to write a program to manage the company’s inventory. Is he an employee or an independent contractor?
If Bob works within the premises of your company, has to comply with company working hours, your company owns and provides the work material and equipment (i.e. the IT tools to write the program), and your company bears the financial risks as well as the responsibility to provide insurance and pay taxes, then Bob would qualify as an “employee”.
However, if Bob works outside company premises with his own material and equipment (i.e. the IT tools to write the program) and is not bound by any working hours, but solely to deliver a product, then Bob would most probably qualify as an “independent contractor”.
It is important to be aware of the qualification of the relationship in place with the persons that work for you. In case a person hired qualifies as an employee, she will be entitled to more rights. Furthermore, while there is not a conclusive test and it highly depends from case to case, the criteria mentioned above can help identify the type of working relationship and related obligations. Effective contract management plays a crucial role in determining and clarifying the nature of the working relationship. By properly documenting and managing employment contracts, businesses can establish the appropriate legal framework, clearly defining the rights and obligations of both the employer and the employee. This not only ensures compliance with employment laws but also helps mitigate potential risks and disputes by providing a solid foundation for the working relationship. Contract management enables businesses to proactively address the qualification of the relationship and establish the necessary terms to protect the interests of all parties involved.
For more information on when to outsource, hire independent contractor or prepare a Consultancy Agreement, check out the following:
- Do’s and don’ts of hiring an outsourcing company
- Hiring a consultant for your UK business? A Consultancy Agreement is a must.
For more information on hiring processes in general as well as pitfalls to avoid:
This article does not constitute legal advice.