What is a contractor vs employee?

One of the most frequently misunderstood distinctions in UK employment is the difference between an employee and a contractor. Many founders assume that calling someone a contractor, or having them invoice through a company, is sufficient to establish self-employment. In practice, whether someone is an employee or contractor for legal and tax purposes is determined by the actual nature of the working relationship, not the label applied to it.

An employee works under a contract of employment, is integrated into the organisation, and has statutory rights including holiday pay, sick pay, and protection from unfair dismissal. A contractor is typically self-employed, has a contract for services rather than of employment, provides services to multiple clients, has greater autonomy over how and when they work, and does not have the same statutory rights as an employee.

Misclassifying an employee as a contractor exposes the business to significant retrospective tax and National Insurance liability, as well as potential employment claims. HMRC actively investigates this area. Before engaging someone who will work closely and regularly with the business, assessing whether the relationship is genuinely self-employed is an important step. Our guide to employee versus contractor status covers the key tests applied by HMRC and employment tribunals.