Contractor vs Employee
Last updated: February 2025
Quick Comparison
| Aspect | Contractor | Employee |
|---|---|---|
| Substitution | Can typically send a qualified substitute | Must perform work personally |
| Mutuality of obligation | No obligation to offer or accept future work | Employer must provide work; employee must do it |
| Control | Controls own methods and schedule | Employer controls how work is carried out |
| Tax | Invoices the client; manages own tax | PAYE; tax deducted by employer |
| Risk | Bears financial risk; can profit or make a loss | Receives fixed salary regardless of business performance |
What Is a Contractor?
An individual or limited company providing services under a contract for services, operating as a separate business entity.
Key Features
- • Operates through own limited company or as sole trader
- • Can send a substitute to perform the work
- • Provides own tools and equipment
- • No mutuality of obligation between engagements
Best For
- • Specialist or interim roles
- • Scaling teams quickly for projects
- • Accessing skills not available in-house
What Is a Employee?
An individual working under a contract of employment with full statutory protections under UK employment law.
Key Features
- • Entitled to minimum wage, holiday, pension auto-enrolment
- • Subject to employer's direction and control
- • Cannot send a substitute
- • Protected against unfair dismissal after 2 years
Best For
- • Core, ongoing business functions
- • Roles requiring deep company integration
- • Positions where control over work methods is essential
When to Use a Contractor
Engage a contractor when you need specialist expertise for a defined period, the individual genuinely operates their own business, and you do not need to control how the work is performed.
When to Use a Employee
Hire an employee when the role is integral to your business, requires ongoing supervision and control, and the individual will work exclusively or primarily for you.
Which Does Your Business Need?
The distinction depends on the reality of the working relationship, not just the contract wording. Use HMRC's CEST tool as a starting point, but seek professional advice for borderline cases.
FAQ
What happens if HMRC reclassifies a contractor as an employee?
The engaging business may owe backdated PAYE, employer NI, interest, and penalties. For medium and large businesses under off-payroll rules, the fee-payer is liable for the tax.
Does a contractor need their own insurance?
Yes. Contractors typically need professional indemnity insurance and public liability insurance. Employees are covered by the employer's insurance.
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Get Started FreeThis is guidance for UK businesses, not legal advice. Consult a solicitor for complex matters.
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