Employee vs. Contractor: How to Classify Workers in the UK (Quiz Included) [2024]
Whether you’re seeking full-time employees or want to hire independent contractors in the United Kingdom, classifying them correctly is essential. Otherwise, you’ll find yourself facing significant fines and penalties.
His Majesty’s Revenue and Customs (HMRC) takes no quarter when it comes to worker misclassification. Not only do they publish a list of companies that failed to comply with the rules, but the penalties can be quite harsh.
In one court case from 2017, an employer was found guilty of having misclassified an independent contractor for a whopping 14 years, and the company had to provide him with and pay for 5.6 weeks of leave for each of the 14 years, not just one.
Learn about how to classify your workers correctly—and stay compliant with UK labor and employment laws—in this guide.
Classifying employees and independent contractors in the UK
The United Kingdom categorizes full-time employees and independent contractors differently, and they have specific criteria for doing so that employers are expected to follow if they want to avoid penalties and fines (more on those later).
What is an employee in the UK?
In the United Kingdom, if you work under an employment contract, you’re an employee, and you have more rights than what the UK categorizes as a “worker” or as an “independent contractor.” Employees and workers—who we’ll discuss more later on for clarity—are both entitled to receive the National Minimum Wage, the statutory minimum number of paid holidays, and to work no more than 48 hours each week.
Employees also have additional rights and receive additional benefits, including:
- Statutory sick leave
- Statutory sick pay
- Statutory maternity/paternity/adoption/shared parental pay and leave
- Statutory redundancy pay (dependent on length of service)
- Time off in the event of an emergency
- Protection against unfair dismissal
- Minimum notice periods before their employment is terminated (dependent on length of service)
- The right to flexible work
What is a contractor in the UK?
In the UK, an independent contractor—who’s also frequently known as a freelancer or a self-employed individual—manages their own work without supervision, is not entitled to any benefits, and takes full responsibility for the running of their business.
Below, you’ll find a useful table that will help you determine if your new hire is an employee or an independent contractor in the eyes of the British government.
Classification overview: Employees vs contractors in the UK
Contractors
Employees
- High level of control over work.
Contractors are their own bosses: They get to decide how, when, and where to complete their work. - Equipment and tools are owned by the contractor. The employer doesn’t provide a laptop or any other equipment to the contractor.
- Less integrated. Contractors tend to be independent, they’re more likely to work remotely, and they use their own tools and equipment. Additionally, they perform “non-essential” jobs that do not require them to be hired full-time.
- No entitlement to benefits and few protections. Contractors are not entitled to any benefits, and they receive few protections, except protection against discrimination and any protections they have written into their contract with the employer.
- Not enrolled in the PAYE scheme. Contractors must pay their own taxes and National Insurance contributions. The employer does not do this for them.
- Allowed to subcontract. Contractors are allowed to subcontract their work out.
- Risk of loss. Contractors may assume more risk and liability for the work they perform.
- Non-exclusive services. Contractors can provide the same services to more than one organization.
- More direction from the employer. Employees’ work is supervised by a manager, and the employer has a say over when they work (unless they’re on leave), where they work, and when tasks are finished.
- Equipment and tools are typically provided by the company. An employee will often be given a work computer and may even receive a smartphone from the company or other, similar equipment to do their jobs.
- Highly integrated. Employees are typically more integrated into the employer's organization, and their work is considered essential to the running of the business.
- Entitled to benefits. Employees are entitled to certain employment benefits and protections, such as the National Minimum Wage, paid sick leave, statutory paid holidays, statutory paid maternity/paternity leave, and so on.
- Must be registered for the PAYE scheme. Employees must be enrolled in the PAYE scheme by their employer so the HMRC can collect taxes and National Insurance from their paychecks.
- Not allowed to subcontract. Employees are not allowed to have someone else do their work for them.
- No risk of loss. Employees are generally protected from liability for work-related issues.
- Exclusive services. Employees must only work for the business they are employed by. Should they choose to get a second job, it must be performed outside the hours of the first and cannot be the same role.
The third UK employment classification: the worker
Ready to hire someone in the UK? For tax, National Insurance, and legal purposes, as we mentioned before, you’ll need to classify them as an employee, an independent contractor, or a third option: a worker.
While it’s tempting to interchangeably use “worker” to mean either an employee or an independent contractor, in the United Kingdom, worker is a classification of its own. So be careful when writing up legal documents like contracts: If you write the word “worker” throughout but you really mean “independent contractor,” you could wind up in hot water.
What is a “worker”?
A “worker” falls somewhere in between an independent contractor and an employee, to put it very simply. They have more rights and protections than a contractor does, but they don’t have as many as an employee.
A person would likely be classified as a worker if:
- They have a contract to work for a business that is their formal and actual employer (in other words, they are not self-employed, and the employer can’t be considered a customer or a client).
- They work “casually or irregularly” for a business (in the words of the UK government website), but they’re still on the payroll and have their taxes and National Insurance deducted from their paychecks.
- Their work is directed by a manager at the company, and they have limited rights when it comes to subcontracting their tasks.
- They work if and when the employer has something for them to do: The employer isn’t required to give them work, and they’re not required to accept it if they don’t want to.
- They’re entitled to some benefits and protections, such as the National Minimum Wage and the statutory minimum of paid holiday leave.
How to determine if someone is a worker
In many ways, “workers” sound just like “employees”—maybe part-time ones, but employees nonetheless. Fortunately for clarity, there are a few distinctions between the two to note.
First, when someone is your employee, you have to have work for them to do, and they can’t just say no to a task. A worker can, and as said earlier, you don’t have to have work for them to do so they can come in.
Additionally, a worker is not entitled to the following benefits:
- Protection against unfair dismissal
- A minimum notice period if their employment is being terminated
- Statutory Redundancy Pay
- Time off if they have an emergency
- The right to ask for flexible working conditions.
Employees are entitled to these rights and protections. And, just to emphasize one final time, contractors are not entitled to any of these rights and protections at all.
Penalties for misclassifying employees and contractors in the UK
When you misclassify your team members, especially if you classify someone as a contractor when they should be an employee, that individual is missing out on benefits they’re entitled to. This includes minimum wage, paid leave and vacations, retirement, and paid maternity and paternity leave, among others. This is the most common type of misclassification. The penalties for it are severe (and you’ll damage your company’s reputation, to boot).
If the HMRC discovers you’ve misclassified an employee as a contractor, that individual will immediately become entitled to all the benefits and protections they should have received as an employee for the entire time they’ve been working for you. So, you’ll have to pay for the time off they should have been getting, the National Insurance and payroll taxes you should have been taking out of their paychecks, and so on. As you can imagine, misclassification is downright expensive.
Furthermore, you can expect the HMRC to enforce its regulations if you’re discovered to have been misclassifying employees. And, if it turns out you’ve been doing it willfully and knowingly, you could face criminal prosecution and jail time.
The bottom line? Classify your employees, workers, and independent contractors correctly.
Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.
