The distinction between an employee and a freelancer is an important one, especially for employers. Depending on the nature of the employment relationship, the parties have different rights and responsibilities. Even where you engage someone on a freelance basis, the law can deem them an employee if the relationship starts to look like it. So, when does a freelancer become an employee?
A freelancer becomes an employee at different times depending on the circumstances and work arrangement. A freelancer can usually be classed as an employee when the nature of the working relationship suggests so, which may depend on the duration of the arrangement, or the terms within a contract.
In this article, we look at the factors that define an employment relationship and what you can do as an employer to manage your arrangements with freelancers. But first, let’s look at why the distinction between a freelancer and an employee is so important.
Is a Freelancer Considered an Employee?
A freelancer is not considered an employee, as they are self-employed. The distinction between a freelancer and an employee is important because of the different legal and tax implications associated with the two.
For example, a freelancer can’t claim many of the benefits an employee can, such as holiday and sick leave, redundancy pay, or unfair dismissal. They’re also responsible for filling out their own tax returns and paying them on time.
Do Freelancers Have Employment Rights?
Freelancers don’t have employment rights. These include things like holiday and sick pay, but also the right to join unions and access to health and safety cover. As a freelancer, these are all things you must sort for yourself.
But if a freelance relationship starts to resemble that of an employer-employee relationship, then the freelancer might legally be able to access the same entitlements as an employee. As an employer, the financial responsibility for this lies with you. HRMC might also hold you responsible for the tax liabilities of the individual, including National Insurance and pension contributions.
So, understanding the difference between the two helps you avoid unexpected costs or disputes down the track with a freelancer who claims they’ve become an employee.
When Does a Freelancer Become an Employee?
Even where there is a written agreement, a freelancer can become an employee if the nature of the relationship suggests they are. Whether someone is a freelancer or an employee is decided on a case-by-case basis. There are several factors that the law takes into account to make this decision.
Let’s take a look at some of these in more detail.
Work Hours
Freelancers work independently and have control over when and where they work. Freelancers can also turn down work offered to them. Employees on the other hand usually have set work hours and a manager or superior oversees their work. They’re also obliged to do the work they’re asked to do (within the scope of their employment contract).
Multiple Clients
Freelancers have the freedom to work with multiple clients. A freelancer can still work exclusively for a company without becoming an employee, especially if it’s a short-term contract. But if this continues for 2 years, the freelancer may become entitled to the same rights as an employee, if other aspects of the relationship align in this way too.
Right of Substitution
Freelancers have a right of substitution. This means they can send someone in their place to do the work. An employee can’t do this, as they are contractually obliged to complete the work as part of their employment contract.
Pay
Freelancers invoice for their work and usually charge an hourly rate or a fixed fee per project. On the other hand, employees receive a weekly or monthly wage, based on an annual salary.
Tax Status
Freelancers have their own tax status and are responsible for paying and filing their own taxes and National Insurance contributions. Usually, freelancers register with HMRC as self-employed or have their own company. In comparison, an employer is responsible for calculating and paying their employees’ taxes.
What to Do When Hiring a Freelancer
If you’re hiring a freelancer directly, the most important thing to do is to have a written agreement in place before any work starts. Doing so avoids any doubt on behalf of either party as to the exact nature of the employment relationship and manages any disputes that might arise.
But keep in mind that, even if there is a written freelance agreement, if the arrangements start to resemble an employer-employee relationship, then the law and tax office may treat it as one.
Freelancing Marketplaces
If you’re using a freelancing site such as Fiverr, the platform manages these legal arrangements for you. The freelancer signs an agreement with the site and the temporary freelance nature of the relationship is very clear.
HMRC also has a tool where you can check someone’s employment status by answering several questions about the agreed arrangements. The Advisory, Conciliation and Arbitration Service (Acas) also has a guide to employment rights.
Freelancer or Employee – It’s Important to Get It Right!
Given the potential legal and financial consequences, it’s important to understand the difference between a freelancer and an employee. This article hopefully gives you an overview of the situation. But you should always get legal advice about your specific situation, especially if you’re unsure about the exact status of someone you’re taking on, or if you’re looking at taking on freelancers longer term. It’s also useful from a freelancer’s perspective, so you can understand what you are (and aren’t) entitled to.
Check out our other article to learn more about the difference between freelancers and contractors.