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Engaging as Employee or Contractor – Know more in Detail

Engaging as Employee or Contractor – Know more in Detail

IR35, also known as HMRC is the designation of the Inland Revenue Press that came into action in 1999. The purpose of IR35 was to amend the tax rules for employees, contractors, and “working off the payroll” in general. Individuals classified as off-payroll workers include:

  • Through an intermediary, an individual worker delivers services to an end-user customer.
  • Another person, an employment agency, or a corporation managed by the worker can act as an intermediary.
  • The end-user customer pays the intermediary, who then pays the worker. Alternatively, if the intermediary is a limited business, the worker receives profits.
  • The transaction is exempt from Income Tax and National Insurance Contributions since the end-user client pays the middleman.

Now, before you take on an assignment, you must decide whether you want to engage as an employee or a contractor. You must stick to the choice you make as any changes can become a complicated and costly affair. Many workers prefer being flexible, i.e., being a contractor with the benefits of a company employee. However, all workers must classify as either employees or contractors, which entails accepting the benefits and drawbacks of both.

Working as an employee

Employees generally receive all the benefits they are entitled to when they are properly employed by a business or corporation. Benefits may include:

  • Maternity leave.
  • Holidays and sick pay.
  • Redundancy payments.
  • The right to claim unfair dismissal.

However, there are chances that by working as an employee, workers receive lower pay and less flexibility in terms of when and where they work.

Working as a contractor

Contractors are more likely to earn a higher income and be flexible about what services they provide to their clients. This also gives them control over their taxes once they prove that they are not an employee of their client.

However, choosing to be a contractor entails giving up employee protection rights apart from paid holidays and sick pay when they do not work. In some cases, this might balance out with the comparatively lower pay of an employee.

Changing roles from employee to contractor

It might be difficult for workers to change roles from an employee to a contractor as they will have to prove to the authorities that they are not working as disguised employees. The inability to prove this can result in penalties thus reducing the financial benefit of becoming a contractor.

Becoming a contractor is easy and the pay is high. However, contractors do not receive any employee benefits. Employees may ask their company for similar flexibilities a contractor enjoys before they switch roles.

Before making the switch, consider having a decent client base so that work still comes in. This way, relying on the employer will not be necessary.

Changing roles from contractor to employee

To make the change from a contractor to an employee, workers will have to prove to the authorities that their working style as a contractor was different from their role as an employee. This way, they can avoid complications with the IR35. Do note, that this can be difficult to prove, especially if you were working with the same company as a contractor before switching to permanent employee status.

Switching roles from being a contractor to becoming an employee during an assignment may also have severe financial consequences such as:

  • Complications with IR35.
  • A difference in pay.

Once a contractor proves their case, they can switch to permanent employee status and receive all the benefits an employee enjoys. However, this major switch must be made after thorough consideration of the long-term impact as it may lead to uncertain circumstances.

What makes contractors ‘disguised employees’?

IR35 or HMRC decides if a contractor is a disguised employee based on these factors:

  • Personalised service: Employees usually deliver their services in person, unlike contractors. If the contractor always delivers their services in person, they may be a disguised employee.
  • Control rights: Businesses may control and direct the contractors on how and where they desire the tasks to be carried out. This might resemble an employer-employee relationship.
  • Obligation: Businesses hire contractors to complete certain tasks. However, a contractor is not obligated to do those tasks, unlike an employee.
  • Right of engagement and substitutions: Contractors may choose to send someone else, or hire employees to work for their clients. Both ways, it supports the contractor’s claim to be self-employed.
  • Financial risks: This is one of the key factors that determine whether a contractor is independent of the company or is acting as a disguised employee:
  • Contractors invest their own time and money to provide their clients with the best possible services.
  • Both parties negotiate and arrive at a fixed price. If the project gets terminated, the contractor might face a loss.
  • The contractor may have to improve and re-work some services for no additional pay.
  • Termination of contract: When employees want to quit their job, they submit a resignation notice. Contractors may be able to resign immediately, albeit facing the risk of a lawsuit from the client.


Whether workers engage as employees or contractors, depends on them. Both services offer their own pros and cons in terms of flexibility and tax benefits. Individuals must thoroughly evaluate which job role suits them better in the long run.