Spot the difference between an employee and a contractor

Do you know the difference between an employee and a contractor? If not, you’d better brush up on your terminology, as there are vital differences between the two that you’ll need to consider when hiring for a new position.

By Laura Higson-Kirrane

When working for a HR outsourcing business, one of the most commonly asked questions is: what’s the difference between an employee and a contractor? From a legal standpoint, it’s incredibly important for businesses to distinguish between the two. But which is best? Well that depends on the motivations of the company.

There are three key things to think about when distinguishing between employees and contractors; Personal Service, Control, and Mutuality of Obligation.

Personal Service: who can complete the work?

For example, if someone is off sick and they are required to complete the work personally and can’t send a replacement, they are likely to be an employee. However, if someone is absent and can send in someone else to complete the job, they’re likely to be a contractor.

Control: who determines where, when and how the person will work?

High levels of autonomy, minimal instruction, using their own equipment and having control over when they’ll complete the work is typical of an independent contractor. They also have much more input as to where they work from and which days they work.

However an employee will often be given specific instructions on the service they must provide, core working hours, and are more often than not told where they should work.

As an employer, it’s important to be mindful that you can blur the lines between the two. For example, getting a contractor to complete the work with equipment provided by the company could make them an employee and likewise, you must provide equipment to your employees. Failure to do so could make them a contractor.

Mutuality of Obligation; are you obligated to provide work and is the person in question obligated to complete the work you assign?

If the answer is yes, you are likely to be looking at an employee. If you have no obligation to provide work and the person working for you doesn’t have to accept work assignments if they don’t want to, you have a contractor.

There are pros and cons for both options. Hiring employees can increase loyalty towards your company, create a stable workforce and increase team cohesion as your employees are used to working together as a team.

It can also help with training new recruits, as long serving employees have a deeper understanding of the business and can pass on knowledge to their new colleagues. You can provide training and create a more flexible and upskilled workforce.

Depending on the nature of your business, you might need to consider changing work demands, overheads (as you must provide all the tools and equipment employees need to complete the work) and finally, you need to observe employment rights to make sure you’re protecting both your staff and your business.

Hiring contractors can reap great benefits if you work in an environment where work demands change regularly. Having contractors on your books can also enable you to increase and decrease your numbers as per business need. Contractors can also add great value in terms of skillset as typically they have experience of working for lots of different companies and industries.

On the downside, a contractor’s commitment to your business could be less than that of an employee, as they can take on work for other companies whilst they are working for you.

Overall, determining which solution is best for your business really does come down to the individual needs of your organisation, workload and of course, the nature of the culture you are looking to create.

Legally, it’s important that we distinguish the difference as failing to do so could have damaging legal and/or financial consequences for your company. Contractors have far fewer employment rights than employees meaning less considerations have to be made by you, the employer.

As an employer, to ensure you’re legally compliant, it’s strongly recommended that you provide correct written agreements. For an employee this would be a ‘contract for employment’ and for a contractor this would be a ‘contract for services’. This would help protect your interests as an employer against any potential claims, as these clearly define the individual’s role within your business.

Need some help deciding whether you need an employee or contractor to fulfil your role? Just get in touch with our team.