UK Contractor or Employee?

We are often confronted with the situation where an overseas business has found a UK based person knowledgeable in the market.

We are often confronted with the situation where an overseas business has found a UK based person knowledgeable in the market. It wants to engage this person to assess the market before making a decision on whether to invest in developing the business in the UK.

Both sides may be drawn to the contractor relationship - not least because there is likely to be less tax to pay. The UK tax authorities are aware of this and once the relationship is on their radar, they will take steps to scrutinise the contract and the relationship. What happens in practice must be consistent with the contract.

How does a contractor relationship work? How does an employment relationship work?
The contractor provides services for more than one client The employee has no right of substitution and consequently has to provide the services themselves
The client has no right of control. The contractor is free to choose how, when and where to work The employer has the right of control meaning that the employee is obliged to comply with the time and place as set out in the employment contract, as well as with the employer’s directions
The contractor is not entitled to employee benefits The employee is paid as agreed in the employment contract and may be entitled to employee benefits
Depending on the amount of annual income, the contractor is subject to income tax and National Insurance Contributions (NICs) The employee is subject to working time regulations. By law, the maximum working hours are 48 hours per week (although the employee can sign an Opt Out clause, which should be stated in the employment contract)
The Intellectual Property (IP) rights in work produced during the course of the relationship vest in the contractor, unless specific provisions to the contrary are made in the contract to transfer or assign IP rights The IP rights in work produced during the course of employment automatically vest in the employer
The contractor has the right to substitute themselves with an equally skilled and qualified contractor The employee’s salary is subject to Pay As You Earn (PAYE) tax and NIC
The contractor should have Professional Indemnity Insurance in place The employer must have Employers’ Liability Insurance for “usual” office based employees in the UK. Premiums cost from £500 per annum
The contractor has a duty to take reasonable care in the performance of their services Notwithstanding a discrimination claim, after 24 months’ service the employee has the right not to be unfairly terminated. There are rigorous rules that need to be followed
The contractor can be sued by the client if their services are defective The employer must provide at least 28 days’ a year of paid holiday entitlement for full time employees, which can include Public Holidays
Such a relationship should be confirmed in a written contract setting out the conditions of engagement including a start and end date, the type of services to be provided, the place where the services are to be provided, the intended rate of pay, reimbursement of expenses, the equipment to be provided and by whom, payment terms and notice periods An employee must be given written employment particulars within 8 weeks of commencing work. These normally go into an employment contract signed by both parties

Governing Law & Jurisdiction

In an employer-employee relationship, the governing law and jurisdiction will be English law and the English Courts and Tribunals. In an independent contractor relationship, the governing law and jurisdiction can be either that of the overseas business or that of the contractor. Each case is different and we recommend advice is sought at the earliest stage.

Whatever the contract says, it is essential that what happens in practice must be consistent with the contract. If you would like further advice on this topic, please contact us.

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