Freelance or Employee?

‘It’s ok if we employ them freelance, isn’t it?’.

It seems like a harmless question and one we are often asked. In the foreground is a question about legality and in the background is the assumption that this would be preferable.  In this blog we look at both aspects and try to give business owners an answer to that question.

The Legalities

The first thing to understand about the legal position is that paying someone as freelance does not make them freelance in the eyes of the government.  It is surprising how pervasive that assumption is. If only it were that simple!

What follows from this is that we need to know the law and sadly the law is far from clear cut.  Again there is a common perception that it is much clearer than it is.

For example people will often assume that if someone is working part time and has other work, they can automatically be classed as freelance.

In fact the law is so complex in this area, as accountants, we are not qualified to pronounce on the subject and need to leave it to HR professionals.

We can however point to some resources.  HMRC gives the following guidance on Employment Status.

It also provides an anonymous questionnaire to complete which will tell you whether your worker should be on PAYE.  This Employment Status Indicator Tool is actually very useful because it flags up the issues to considers and often makes you realise that if you are careful about some working practices and documentation between you and your worker, you could in fact make it work either way.

If you go through that process you will see it is about whether that person is genuinely running a business themselves, where they work, whose equipment they use, whether they can hire someone else to do the work, who supervises them.

Finally there are HR consultants.  Our clients can call Croner Tax HR Helpline, Federation of Small Businesses also provides support.

Whichever resource you use, it is well worth getting this one in focus.  It can be a ticking time bomb in a business. You may happily employ people as freelancers for years in a business and then find you have years of back dated Employers NI and pension contributions if HMRC come to call.

Is employing someone Freelance preferrable?

Of course there is no universal answer to that question.

There is no doubt that there is less commitment with freelancers.  Potentially if the work is done badly you can get some money back. They also have no employment rights, no holiday pay or sick pay, no pension, no maternity leave and there is no Employers NI to pay.

One might think that makes them cheaper but that is not a given, in fact one could argue it is unlikely.  The basic reason is that in most industries working freelance commands a higher hourly rate than working PAYE for the understandable reason that they do not benefit from holiday pay, sick pay etc and moreover have more work to do in dealing with their taxes.

It is certainly usually that way and if your worker has not worked that out they may very well realise quickly.

There also tends to be a misconception about the burden of responsibility placed on employers.  Not many people realise that employees have no employment rights for two years. You can fall foul of discrimination legislation at any time, but for the first two years you do not need a reason to sack someone.

Maternity pay is another commonly misunderstood responsibility, 92% of which is recoverable from the government.

Finally it is worth noting that the reduced commitment with freelancers cuts both ways as in you cannot expect them to be as committed to the business as an employee.  The relationship with employees is fundamentally different, they are part of the company and on board in a way that freelancers are unlikely to be.