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There are three different classifications for employment in the UK — permanent employees, independent contractors, and workers. Each type of laborer can perform an integral role in your operations, but it’s critical to understand the difference between them before signing a written contract.
If you’re hiring an independent contractor in the UK, you must consider several factors, including new IR35 regulations, to avoid misclassification. Learn more about how to get UK contractors and the different options for paying them.
Employees vs. contractors vs. workers
If your company wants to enter a new market, expand globally, or hire internationally, the method you choose determines how the process works and what your legal requirements are:
- Enter a new market: Entering a new market gives your company access to new resources, financial incentives, and talented laborers with special education or training. Because most countries require a physical location in your chosen country before hiring there, partnering with an Employer of Record (EOR) can make talent acquisition easier.
- Expand globally: For many companies, global expansion is part of a long-term plan to achieve international brand recognition and increase overall profits by establishing several successful locations in different countries. Companies rely on permanent employees and sometimes contractors and workers to create a workflow that suits their industry-specific needs.
- Hire internationally: Hiring internationally lets your company partner with remote contractors to get industry-leading talent free of geographical restrictions. In the UK, this process typically requires working with a recruitment agency or contractor outsourcing company to find the best fit for your upcoming project.
An EOR can help you establish a presence in a new international market and hire permanent employees without the need for a physical location or local subsidiary.
Employees in the UK are full-time and part-time laborers who hold a permanent position with your company. They are a part of your payroll, and you are legally required to contribute toward their benefits package, including National Insurance, paid time off, and pension schemes, where applicable. Laborers are considered an employee if:
- You are obligated to provide them with work, and they are obligated to accept it during the duration of their time with you.
- Your company determines how they complete their assigned tasks, including when and where.
- Management retains control over the employees’ schedule, training, and career growth.
- The employee is paid hourly, weekly, or monthly per an agreed-upon salary or hourly rate.
Because employees rely on your company for steady work, payment, and benefits, they are often loyal and incentivized to perform their assigned tasks well. They’re the optimal choice if you’re seeking long-term partners that you can invest in through training, equipment, and knowledge acquired over time.
Independent contractors — sometimes called consultants, self-employed contractors, or a contract for service — may or may not be a part of their own established business entity that performs a project for a company on a fixed-term contract. Companies rely on contractors for short-term, as-needed tasks that are not a part of core business operations.
Contractors are considered such if they:
- Have a specific start and end date for the task
- Are not held to the same rules or management as employees, unless stated in the written contract
- Are directly responsible for their own successes, failures, profits, and losses
- Are free to engage with other companies within your industry as long as they meet the terms of any agreed-upon non-disclosure agreements (NDAs)
- Are not entitled to any benefits, like insurance and paid sick leave, and their tax amount is not withheld from their pay
- Are not a part of your regular payroll and are instead paid per project, per hour, or per other fixed agreement
Depending on where contractors are from, they may be required to pay dual taxes to the country they’re working in and the country they physically live in.
In many countries, laborers are either contractors or employees, depending on the structure of the relationship and details of the written contract. The UK established a third category: workers. The worker category encompasses all those who do not meet the terms of either category.
Sometimes called zero-hour workers, workers are not obligated to work for a company unless they choose to. Likewise, companies are not obligated to offer them work. However, when the worker agrees to work for a company, such as for a special event or short-term basis, they are subject to all the same guidelines as a permanent employee, including minimum wage and accrued paid leave. They are a part of the company payroll. A company might rely on a worker instead of an employee or contractor for special events, where they need extra physical assistance, but not necessarily laborers with a specialized skill.
Where to hire UK contractors
Hiring contractors in the UK is often a necessary part of expanding into the local market, as they can offer regional-specific guidance for localizing your products, services, and marketing. You can find contractors through any of these avenues:
- Recruitment agencies
- Resume or CV databases
- Freelancing websites
- Industry-specific databases
- Virtual job boards
- Social media
- Local outsourcing companies
The biggest advantage of working with a contractor is choosing the most qualified person for the task. When selecting contractors for a project, review their qualifications and experience thoroughly. Ask to see examples of previous work and contact references when possible.
Legal requirements for hiring UK contractors
Both you and the contractor are legally required to uphold everything agreed upon in the written contract. In some cases, contractors may be entitled to basic health and safety protection and may have rights against discrimination. You must take steps to avoid misclassifying the contractor and be preemptive about critical areas of your agreement, including intellectual property (IP) rights and termination guidelines.
1. IR35 and misclassification
IR35 is an intermediaries’ legislation that aims to eliminate the possibility of tax avoidance by independent contractors acting in the same capacity as a standard employee and the companies employing them. Should your company be guilty of misclassification, the misclassified contractor will be given employee status and all entitled benefits retroactively. You will be obligated to make all necessary Pay As You Earn (PAYE) and National Insurance contributions and may be subject to interest and additional penalties or legal fees.
To determine whether you’re engaged in a contractor-employer relationship — rather than an employee-employer relationship — ask the following questions:
- Can this individual refuse to accept an assignment or carry out a task for my company?
- Could this individual substitute another contractor or subcontractor to complete some or all of the project assigned?
- How much control does the company have over this individual’s schedule, location, and method of work?
- Is this individual responsible for a core component of business operations?
- Does this individual receive benefits or reimbursement from the company?
- What position does this individual hold in the management hierarchy?
- Does this individual receive paid sick leave, holiday pay, or vacation time from the company?
- Can this individual work with another company, client, or competitor within the industry and beyond?
In some situations, IR35 may require international companies based outside of the UK with a limited local presence to register for PAYE and operate UK payroll, even when employing contractors. Work with an EOR to learn if your situation qualifies for special considerations.
2. Written contract
Written contracts are the best way to establish clear expectations for your employer-contractor relationship and could be a crucial part of proving you’re not in violation of IR35, should you be audited. Written agreements should include:
- Details about the project, including its scope and involved tasks
- When the contract begins and ends, if applicable
- Compensation amount, frequency of pay, and payment structure
- Who is liable for completing which tasks and providing necessary resources
- NDAs and non-compete clauses, where applicable
- Guidelines for mutual termination and associated penalties
The original owner of a work, copyright, design, invention, or trade secret is typically the rightful owner, but specific terms may be expressed in your written agreement to transfer those IP rights to the employer.
3. Termination and severance
Contractors work on a project-by-project basis, so termination isn’t usually necessary unless the contractor or company fails to uphold part of the written contract or your company decides to cancel a project or task in the middle of a contract. Your written agreement should include a section on termination policies and required notice. Depending on your agreement, you might still be responsible for paying some or all of an agreed-upon deposit.
The Construction Industry Scheme
The UK government has specific regulations for contractors working in the construction industry, known as the Construction Industry Scheme (CIS). CIS contractors register for the scheme, deduct money from their subcontractors’ payments, and submit it to the HM Revenue and Customs (HMRC), which counts as an advance payment toward that subcontractor’s tax and National Insurance payments.
Contractors register for CIS as a standard contractor if they pay subcontractors for construction-related work and business but do not perform the work themselves. Subcontractors register as such if they complete construction work for the contractor who hires them. A contractor can register as both a contractor and a subcontractor.
Tax practices and considerations
You do not pay an individual contractor through PAYE unless you’ve been found in violation of IR35. Contractor are responsible for withholding and submitting their own taxes and insurance, and they may need to register for a Value Added Tax (VAT) in some situations. Payments for independent contractor services are not earnings to be reported for income tax.
How payroll works when paying contractors in the UK
The UK’s official currency is the British pound sterling (GBP). The minimum national living wage is GBP£8.91, and industry expectations vary depending on a laborer’s experience and skills and the current market demand for their services. You and the contractor will agree to a payment structure that is convenient for both of you, including:
- Pre-payment: Pre-payment involves paying contractors for the entirety of their services before the project’s completion. The contractors may use this payment to cover the cost of equipment or resources needed to complete the task, and it assures them that their time will be compensated. Pre-payment can pose a risk to companies if the contractors fail to uphold their end of the agreement or the final product is not up to standards. Be sure to include provisions for a refund in your written contract if using this payment method.
- Payment upon completion: Paying a contractor after the project is finished is a safe way to protect your investment and ensure the final result meets your agreed-upon standards. However, contractors may want to include specific provisions in your written agreement that assures them they will receive minimum compensation for their time.
- Partial payment: Partial payment involves paying the contractor a deposit before the project and the remainder of the payment upon receiving the final product or completion of services. This is a good way to protect both your financial investment and the contractor’s time. Establish a clear timeline for project completion and subsequent payments in your written agreement.
You can also choose between paying per project or per hour, depending on your written agreement and estimated timeline for project completion.
1. Currency and exchange rates
The pound has one of the highest global trading volumes. Exchange rates and transfer fees vary, depending on your country of origin, the payment method, the financial institution you’re working with, and the amount you’re paying.
For a quick reference of current exchange values, GBP£1 is equal to:
2. Payroll handling methods
Several options are available when paying a UK contractor:
- Wire transfers: Wire transfers let you transfer funds internationally between financial institutions. While this is a fast, reliable payment method, your company will be subject to transfer fees.
- Direct deposits: Direct deposits are similar to wire transfers but are better suited for recurring payments because you can determine a specific date that you want your payment to deposit into the contractor’s account. Depending on your bank, you might still be subject to transfer fees.
- Paper checks: Paper checks were once the standard for payment but could get lost, destroyed, or delayed while in transit. In some regions, paper checks may be the only form of accepted payment for contractor services.
- Money orders: Money orders are a quick way to send international funds, but require both you and the contractor to live near a post office or financial institution capable of processing the payment. For this reason, it’s a less convenient and more time-consuming payment method than other options.
- Virtual wallets: Virtual wallets offer a safe and near-instant payment solution for international contractors. While you’re still subject to transfer fees, funds are typically protected by virtual encryption.
Hire employees in the UK with help from Globalization Partners
Working with international contractors in the UK gives your company a flexible alternative to traditional employees while letting you select the most qualified candidate for your upcoming project. Many companies rely on skilled contractors for project-based needs and hire full-time employees for core parts of daily operation.
If your company wants to hire employees in the UK without establishing a subsidiary, Globalization Partners can help. We are a global EOR that handles all international hiring, payroll, and HR management for your permanent employees, including compliance with regional labor laws, without the need for a local branch or entity.