If you are starting a business from scratch or expanding and you need people to work for you, your first crucial decision is whether to employ them or engage a self-employed contractor. Getting this wrong can lead to misunderstandings, disputes and liabilities further down the line.
‘Understanding the difference in employment status is important as this determines your legal obligations. The differences can be subtle, and it can be easy to fall into the trap of treating a contractor as an employee,’ says Patrick Glencross, a Senior Associate in the Employment team with Furley Page. ‘Although the employment route may seem burdensome, it may be the legally correct one and commercially prudent in the long run. If you do go down this route, you then need to take time to prepare to be an employer.’
Patrick Glencross outlines the factors to take into account in deciding how to build a team and the steps for setting up as an employer. A third option is to use agency staff, which is outside the scope of this article.
Employment status – employee or contractor?
It is simpler to take on a self-employed contractor than to employ them as an employee. However, where an individual is taken on as a self-employed contractor (even with the appropriate contract in place), if the working relationship is in reality treated in law as that of employer and employee the individual can bring a legal claim to enforce their rights as an employee. For example, they could claim for unfair dismissal if the relationship is brought to an end. HMRC can also claim for unpaid income tax and national insurance payments.
Even if the individual does not fulfil all the requirements of being an employee, they may still have the status of worker. While this does not give them the same protection as an employee, they have some important rights that a self-employed contractor does not have, such as for unpaid holiday or to receive the National Minimum Wage. This article however focuses on the two categories of self-employed contractor and employee.
We can help you decide whether an independent contractor or employee is more appropriate for your business. This is a complex area, but here are some relevant factors:
- an independent contractor is in effect their own boss; they are paid a fee for the work done and can turn work down;
- a contractor decides how to do the work, whereas an employee is under your day-to-day control;
- an employee is committed to working for you; an independent contractor can decide whether or not to accept new assignments;
- an independent contractor often has a wide discretion to send someone else to do the job but an employee must do the work themselves;
- the wording of the contract is important but is not the end of the story; courts, employment tribunals and HMRC will look at the actuality of the working relationship to determine employment status.
Steps to becoming an employer
If you have decided to employ an individual, you need to get ready and set yourself up as an employer:
Before recruitment
- Work out the role and responsibilities that you want the employee to perform. This will help target your recruitment and ensure the employee understands the expectations. You can build in flexibility so that the role can develop later but the job description should reflect this.
- Investigate funding; depending on the seniority of the role, it may be worth looking into business grants, start-up loans, government-funded apprenticeships or training schemes.
- Determine your budget for the salary, including the on-costs which include tax, National Insurance and pension contributions, as well as any benefits that you wish to offer. Make sure you comply with National Minimum Wage and pension auto-enrolment legislation. This should be done before getting into negotiating a pay package with a candidate.
- Consider if you will need to check the individual’s criminal record through the Disclosure and Barring Service. Depending on the nature of the role this may require a standard or enhanced search.
Before they start employment
- Register with HMRC as an employer before employment starts to obtain a PAYE reference number. This must be done no earlier than 2 months before the employee starts and the Government advises allowing up to 20 working days for this process.
- Take out Employer’s Liability insurance that meets the compulsory requirements and is in place when employment starts or risk being fined. Your policy must cover you for at least £5 million and come from an authorised insurer.
- Make arrangements for payroll. These can be through paying a payroll provider or using payroll software yourself that meets HMRC’s reporting requirements.
- Find out your pension responsibilities and make arrangements for pension auto-enrolment if the employee is aged between 22 and state retirement age and earns over £10,000 a year (£192 per week). Contributions are paid by the business and also come out of the employee’s earnings.
- Ensure the place of work is safe and that extends to arrangements for working from home, to ensure that you comply with fire safety and health and safety legislation. You may also need to consider the need to make reasonable adjustments to your premises in relation to employees with disabilities.
- Check your arrangements for data processing so that you meet your obligations under data protection law when collecting, storing and processing information about your employee. Businesses are expected to explain to their staff how they handle such information, usually in the form of a privacy statement.
- Carry out the necessary pre-employment checks. These will vary according to the role, but will always include checking that the employee has the right to work in the UK or your business risks being fined.
Key legal documents
Your contracts of employment need to be bespoke for your business and should be clear. These are the backbone of the employment relationship. The contract needs to be provided by the first day of employment.
Consider what policies to put in place. We can discuss with you what policies would be appropriate for your business and prepare these for you. These make expectations clear to employees. It is a legal requirement to set down in writing the rules for disciplining and raising grievances. Complying with appropriately drafted procedures will reduce the risk of increased damages if the employee brings certain tribunal claims.
Keep your contracts and policies under review, as your business will continue to evolve and you will need to stay up to date with changes in employment law so that you do not fall foul of your legal obligations.
If you decide to engage someone as an independent contractor rather than as an employee, you should have a written consultancy agreement which sets out the key terms of the engagement and the respective rights, obligations and expectations on both sides.
How we can help
We have helped many businesses get started as employers. We will carefully consider your requirements and ensure that you are starting out as an employer from the best position possible, in terms of contracts, and policies and procedures. We can also advise you on engaging the individual as a contractor or employee. This should help minimise the risk of claims and lay the foundations for good working relations with your new staff. We can assist with the appropriate contract documents.
For further information, please contact Senior Associate, Patrick Glencross, in the employment team on 01227 763939.
