As your business grows, you’ll need to bring in additional people to help. Employing someone is usually seen as the most obvious solution.
However, being an employer carries important duties and obligations. To help you decide if your business is ready for an employee, Net Lawman have looked at two alternatives.
1. Using a self-employed contractor
What does this involve?
Hiring a freelance or self-employed person under a contract for services – as opposed to a contract of employment.
Advantages: Your business benefits from skilled labour under a flexible contract without taking on the responsibilities and costs of being an employer.
Disadvantages: Whether HM Revenue & Customs treats the contractual relationship as employment or self-employment is unfortunately not your decision. What matters is whether the arrangement resembles employment and has all the trappings of employment. Finding yourself to be an unintentional employer could be disastrous. You may be liable for fines, backdated tax liabilities, and compensation to your “employee”.
To make sure this does not happen, the way your contractual relationship works in practice must not look like employment. In considering such an issue, a judge will generally, look at four factors: control, integration, mutuality of obligations and economic reality.
- Control is the extent to which the contractor can decide how the work is performed. Under a contract for services, a contractor is likely to be able to choose between doing the work himself, and sending someone else. It is also likely that he will be able to choose when and how to do the work. An employee is more likely to have specific hours of work, a specific place of work, and must perform the work himself or herself.
- Integration is the extent to which the contractor is part of the business. A contractor will be excluded from company benefits and pension schemes, and cannot be disciplined under normal employee procedures.
- Mutuality of obligations is the extent to which the business is required to offer work to the employee, and whether the contractor is obliged to take it. A contractor should have the choice as to whether to take work or not. In a situation of employment, not only does the employee not have the choice to work, but neither can the employer refuse to give him work.
- Economic reality is the extent to which the contractor bears the financial risk of acting as an independent business. Contractors are likely to have to correct unsatisfactory work at their own expense, pay their own taxes, provide their own equipment, invoice the business, and buy any materials required for the job themselves.
So to make sure your contractor is seen by HMRC as an arm’s length contractor and not as an employee. You should use a written contract for services that:
- does not force the contractor to abide by employee rules, such as dress codes (with the exception of health and safety) or hours of work
- establishes that the contractor is responsible for paying his own tax and National Insurance payments
- requires the contractor to invoice the business before payment is made
- requires the contractor to provide the training, materials and equipment required for the job himself
- allows the contractor to sub-contract the work (unless inappropriate)
Importantly, also make sure that the contract is followed – that what the contract stipulates is what actually happens on the ground. A written contract provides strong evidence of intention, but not the full story.
2. Licensing space
What does this involve?
Your business can license use of space and other facilities to a self-employed contractor. He or she then pays you for the right to offer services to your customers in your premises.
Advantages: As well as paying you a licence fee for “rent” of the space, he or she might share profits with you. If you don’t grow as fast as you expect, your risks are limited. Such an arrangement is further still from employment because the contractor bears greater financial risk.
Disadvantages: You also share the rewards.
This arrangement is commonly used in consumer service industries such as beauty and health. For example, if you run a hairdressing salon, you might “rent” a chair to another hairdresser. That person would pay your business a fee for occupying the space. In addition, he or she would agree to your contract terms regarding marketing, prices and the service he or she gives.
Under a similar arrangement, an acupuncturist might pay for a licence to use a room in a pharmacists shop, or a personal trainer might pay to license a room in a gym.
If you license space, you need a licence agreement with the self-employed licensee that also specifies the additional services that you will provide and how your business relationship will work.
Hopefully these alternatives give you ideas as to other ways in which you can gain extra help to expand your business, without becoming an employer.
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Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.