How to tell an employee from the self-employed

 An excerpt from Lawpack's Employment Contracts Kit.

Any person who works for another person or organisation in return for remuneration has a contractual relationship with it. But an extremely important distinction must be made between an employee and a self-employed person, because their legal rights differ in a number of ways.

An employment contract (sometimes referred to as a ‘contract of service’) is the name given to the agreement an employee has with an employer. A contract for services is the name given to the agreement between a self-employed person (or independent sub-contractor) and the person or organisation to whom s/he is providing the services.

To distinguish between an employment contract and a contract for services it's necessary to look at the reality of the relationship, not merely the name of the agreement.

How to tell an employment contract from a contract for services

Questions to consider in determining whether a person is an employee or is self-employed are:

  1. Are there mutual obligations on the employer to provide work for the person engaged and on the person engaged to perform work for the employer?
  2. Is the person performing services for other people as a person in business on his/her own account?
  3. Is s/he working under the orders of the person to whom s/he is supplying the services who controls when, how and what he must do?
  4. Does s/he provide his/her own machinery and equipment?
  5. Does s/he hire his/her own helpers?
  6. Does s/he take a degree of financial risk?
  7. Is the engagement for a specific, finite project or does it carry a degree of responsibility for ongoing administration or management?
  8. Does s/he have the possibility of profiting from sound management in the performance of his/her tasks?

The greater degree of personal responsibility the person engaged undertakes in any of the above, the more likely s/he is to be considered self-employed rather than an employee. 

Other factors may include the method of payment, the method of paying tax and National Insurance, payment during absence for illness or for holidays, membership of company pension schemes and a prohibition on working for other companies or individuals.

Although the above questions are relevant considerations, they will not be appropriate in every case and the answer to the question isn't found by merely using these questions as a checklist. It's important to assess each case individually.

If there is any doubt as to the nature of the relationship, the parties may agree on what the legal situation between them is to be. But it will not be conclusive when questions of tax, social security or statutory employment protection arise. 

If the matter goes to a court or tribunal, all the circumstances will be considered to ascertain the true nature of the relationship.

To add to the confusion, some of the more recent legislation (such as the Working Time Regulations) replaces the term ‘employee’ with ‘worker’. 

A worker includes both employees and others who provide services personally (although not under a client relationship), but doesn't include a person who is genuinely self-employed. This greatly increases the number of people protected by such legislation.

Practical and legal implications 

Rights common to employees and the self-employed:

  • Equal opportunities, i.e. non-discrimination on the grounds of race, sex or disability.
  • To be provided with a safe place of work and system of work.
  • To be paid wages or fees free of any deductions not properly authorised.

Obligations of employees:

  • To obey the employer’s lawful orders.
  • To work faithfully and with due diligence.
  • To give the contractually agreed or statutory minimum period of notice to terminate the employment.
  • To pay Income Tax by way of deductions under the PAYE scheme (which the employer must deduct).
  • To pay employees’ National Insurance contributions (which the employer must make).

Obligations of the self-employed:

  • To work with due skill and diligence.
  • To pay Income Tax under Schedule D.
  • To pay self-employed person’s National Insurance contributions.
  • To fulfil contractual obligations.

HM Revenue & Customs has introduced rules to remove opportunities for the avoidance of tax and Class One National Insurance Contributions by the use of intermediaries, such as service companies or partnerships, in circumstances where the individual worker would otherwise be considered to be an employee. 

The new rules determine that, where workers meet the definition of employees in relation to work done for their clients, they will pay broadly the same tax and National Insurance contributions as an employee, even if they provide their services through an intermediary. 

For further details, please see HM Revenue & Customs website at www.hmrc.gov.uk.


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Published on: October 11, 2010

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