Don't get caught out: Is my freelancer actually an employee?

Freelancers look like the perfect solution for small businesses.

But this seemingly simple arrangement can hide unexpected risks that could impact your business.

Why employment status matters

It's not about the contract you write. It's about how the work actually happens.

UK law recognises 3 categories: employee, worker and self-employed.

The line between these can be blurry, which is why the actual working relationship matters so much.

Misclassifying workers can lead to:

• Unexpected tax and National Insurance contributions

• Potential back pay for employment rights

• Tribunal claims

• Financial penalties that affect your business

The key tests for employment status

HMRC and tribunals use several crucial checks to determine if your 'freelancer' is actually an employee:

Control

• Do you dictate when, where and how they work?

• Can they refuse work or choose their hours?

• The more control you have over their work, the more likely they'll be seen as an employee.

Substitution

• Genuine freelancers usually have the right to send someone else to complete the work.

• If you insist on a specific person, that's employee-like.

Mutuality of obligation

• Are you obliged to offer work?

• Are they obliged to accept it?

• Regular, ongoing work suggests employment.

Integration

• Are they part of your team?

• Do they use your equipment?

• Are they on your staff lists or given a company email address?

• Are they included in team meetings or communications?

Financial risk

• Do they bear the financial risk of the work?

• Can they make a profit or loss?

• Employees don't usually carry financial risk, but freelancers often do.

What really matters in your contracts

Your written contract is just the start. Look at the day-to-day reality:

• Compare what the contract says vs how work happens

• Check if the working pattern matches the agreement

• Be honest about the actual working relationship

The grey areas

Employment status isn't always clear-cut.

A case against Uber by a group of drivers in 2021 highlighted the complexity of employment status. Even though drivers were labelled as self-employed in their contracts, the Supreme Court ruled they were in fact "workers", a distinct category with different rights from traditional employees.

Even with a self-employed contract, the actual working relationship can tell a different story.

Protecting your business

Don't leave your business exposed to unnecessary risks.

Arrange a contract review today to ensure that your freelancers are correctly classified.