When does a contractor become an employee?

If you’re defining their working hours, or there’s no clear sense of when they’ll stop working for you, there’s a chance your contractor might now be an employee.

Working with contractors has its advantages – they’re often highly skilled, flexible and take up less HR admin time.

If you find a particularly good one, it’s likely you’ll want to carry on working with them when you next need the services they offer.

There is something you need to be cautious of, though, and that’s when a contractor becomes an employee.

Maybe the project they were initially brought in to work on has dragged out, or grown in scope, it’s now taking up all of their working week and there’s no clear-cut end point in sight. Or one project ends, and you offer them another, bigger project…and then another.

While it may still say ‘contractor’ on paper, if the working relationship has evolved into one that more closely resembles employer-employee, you run the risk of opening yourself up to legal disputes and hefty fines.

Signs that your contractor might now be an employee

Here’s what to watch out for:

• You’re defining the hours they work
• There’s an expectation that you’ll keep providing them with work, and that they’ll be available to perform it
• They’re using your company’s equipment rather than their own
• There’s no contract covering the work they’re currently carrying out
• There’s no clear completion date or definitive end to the project
• You’ve requested that they work solely for you
• They’ve ended up on payroll

Why does this matter?

If a contractor ends up working under terms that resemble that of an employee, they also acquire the employment rights of an employee, including a right to holiday and sick pay.

If you’ve built a strong and positive relationship with a contractor, it can be difficult to imagine that they’d ever press claims against you. But it’s not unheard of for contractors-turned-employees to try to claim back, through the courts, the pay they’ve missed out on. In such a situation you’re also likely to be liable for backdated National Insurance taxes and PAYE. Arguably, it’s a risk not worth taking.

What should you do?

The best way to avoid getting caught out is to ensure that the documentation you have in place to define the working relationship with the contractor accurately reflects what happens in practice, and that you keep this paperwork under regular review so that you spot changes in the relationship sooner rather than later.

We know it can be tricky to prioritise this kind of due diligence, but the repercussions of not doing so can be costly!