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Freelancers vs Contractors vs Employees: A Look at the Differences

Estimated reading time: 3 mins

Hiring staff is a bit of a minefield. You may not know whether your skills shortage is temporary or long-term, but if you make the wrong decision, it could cost you money you can’t afford to lose. Here is a quick guide to the three main types of staff: freelancers, contractors, and employees. Read on to find out which one is likely to be the best pick for your business.

Freelancers

Freelancers are self-employed. They usually work from home and may be resident in a different country to you. Most freelancers work for several clients at once. It is common to use freelancers if you operate in a creative industry. For example, if you run a digital marketing agency, you will probably hire freelancers to produce content for you. You may also need to hire freelancers to write code for web applications or design websites.

If you hire a freelancer to do some work for you, they are, for tax purposes, self-employed. This means you are not responsible for paying their tax and national insurance (NI) contributions. Be aware, however, that HMRC will look at the relationship more closely if the freelancer works from your place of business, using equipment provided by you, and has no other clients.

Contractors

Contractors work in a similar way to freelancers. They also work on a self-employed basis and are, therefore, responsible for paying their own tax and NI contributions via the self-assessment system. Some contractors set up their business as a Limited Company.

The main difference between a freelancer and a contractor is that a contractor is hired to work on a specific contract or project for an agreed length of time. This could be a week, a month, or a year. During this time, the contractor is working exclusively for the client.

Contractors are common in the IT industry. Businesses often hire external contractors to upgrade their IT systems or implement a new system. They are used to fill a skills shortage in the same way that businesses hire temporary staff to cover leave and sickness, but usually in more specialised areas. So, if your London office needed to cover an admin employee’s maternity leave, you would contact London based temping agency Staff Heroes to find someone suitable, but if your IT system was in need of an overhaul, you would call on a specialist IT contractor instead.

Employees

Employees are permanent members of staff. They have a contract of employment and are protected by UK employment law, which means you must pay them a fair wage and treat them fairly at all times. As an employer, you are responsible for paying the employee’s tax and NI, plus you will have to pay employer’s NI, and possibly make pension contributions on their behalf. Employees can be paid per hour or per shift. They can also be paid a salary plus overtime if they exceed their normal working hours.

Employees can be expensive. You can’t sack an employee for no good reason and if you make them redundant, you have to compensate them according to how long they have worked for you.

Which One is Right for Your Business?

If you have long-term needs, hiring an employee is probably the right decision, as you can train them up to become a valuable member of the team. But if you only have a temporary skills shortage, it makes more sense to hire a freelancer or contractor, or even a temp. You can always make a temp or freelancer a permanent member of staff, but you can’t do it the other way around.

Weigh up the pros and cons of each and then make

 

About the author /


Simon is a creative and passionate business leader dedicated to having fun in the pursuit of high performance and personal development. He is co-founder of Applied Change, a Business Change consultancy based in the UK. Simon is also an Ambassador for Gloucestershire business. Simon is an Associate Member of the Chartered Institute of Professional Development.

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