It's clear how a freelance or contract-based arrangement can benefit small businesses with a limited budget and lack of human resources department, but depending on the specific terms of your arrangement — hours worked, reporting structure, payment schedule, etc. — you may be in violation of some very serious employment classification laws. It is crucial that a company engaging a freelancer/contractor is mindful of how to differentiate a freelancer from an employee and has clear policies in place.
- A contract of service between two parties indicates a contract of employment subsists.
- A contract for service suggests a self-employed status of the service provider.
The key issue of differentiation comes down to tax. Revenue will want to ensure that correct payments are being recorded. A contract of service obliges the employer to operate PAYE as the employee is taxable and therefore the employer carries all the associated tax responsibilities, whereas under a contract for service, the freelancer/contractor is liable to declare tax under the self-assessment system. A freelancer/contractor generally also claims more expenses against potential tax liability which will be scrutinised by Revenue.
Another factor that employers need to consider when differentiating between freelancer/contractor and employee is that if a freelancer/contractor is not considered genuinely self-employed but actually is, to all intents and purposes, an employee, they will have a number of legal constitutional rights, whether it is protection from dismissal, maternity rights, minimum wage rights and more.
There are six main aspects to take into account to ensure your hired freelancer/contractor is not seen as an employee:
Control: Control is based on how much flexibility the individual has with regard to working hours, overall movement and the level of personal responsibility in carrying out the work in question. Individuals who work when and where they want to are considered to be independent freelancers/contractors. If, on the contrary, you require someone to be in the office for a fixed period of time and work according to company policies, that person should be classified as an employee.
Obligation: In a freelance relationship, a freelancer/contractor must feel no responsibility to undertake work and the company mustn’t feel obliged to provide any work. This may seem impracticable but it keeps the relationship at arm’s length, leading to a more interdependent working agreement and less likely to be seen as a full-employment relationship.
Substitution: Legally, an employee cannot substitute themselves with another person, however with freelancing, there is greater flexibility. Freelance contracts should maintain the right for the freelancer/contractor to provide a substitute if they are unavailable.
Equipment and Software: Independent workers should use their own tools or materials to complete a job, whether it is their own laptop and mobile or machinery. Many freelancers/contractors tend to avail of the company premises and stationary if need be, however it is important to ensure they do not have a designated desk or are given a company phone to use during the project.
Training: Businesses shouldn't have to train independent freelancers/contractors, as they ideally should be able to begin projects immediately, producing work that they've been hired for. If a worker requires substantial training to complete a job, they may be considered an employee.
Exclusivity: Freelancers/contractors are self-employed business owners. Generally, they have their own business cards, website and will their services to other companies. Someone who exclusively works for your company puts them closer to employee status.
It is recommended that businesses, most importantly those without a designated HR department, assess a worker's terms of service. Even if a misclassification is an unintentional error, it could cause your business a huge financial and legal headache with fines, penalties, back taxes, additional compensation owed for overtime, etc. being issued.
The contents of this article are necessarily expressed in broad terms and limited to general information rather than detailed analyses or legal advice. Specialist professional advice should always be obtained to address legal and other issues arising in specific contexts.