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How to stay compliant when hiring contractors

Failure to classify permanent employees and contractors can result in heavy fines and reputational damage for companies so its vital employers keep updated and are aware of the key differences. The experts at Dolan Accountancy explain everything you need to know

Job seekers are increasingly chasing higher levels of flexibility, greater variety in their work and more autonomy over their careers. It’s no surprise then, that more are turning to contract work. A recent study revealed six in ten (56%) small and medium-sized businesses in London have seen an increase in permanent staff requesting to move to contract roles in the past three years.

As this shift continues to emerge, employers must keep up to date with the differing regulations of hiring employees versus contractors. There are many unseen risks in working with contractors, including potential issues around compliance with local laws and misclassification of employees. In recent years, there have been many high-profile cases where companies have been hit with significant fines and suffered reputational damages due to wrongly classifying contractors as permanent employees in their workforce.

Here is everything you need to know about hiring a contractor to make sure you classify them correctly*.

How to determine a contractor vs employee:

One of the most important factors for employers to be aware of is to establish the difference between a permanent employee and a contractor. Each type of worker has specific legal statuses and tax obligations so it is crucial for employees to classify them correctly.

Sometimes, the difference between contractors and employees is clear enough, but the difference is not always so easy. For example, if your company offers flexible work hours and allows people to work remotely, you might not be able to tell upfront. So what exactly is the difference?

Contractors are self-employed individuals who provide services to a business. Generally, they’re hired for their specialist skills, and or to help a team during busy periods.

Employees, on the other hand, have an employment contract and are provided with regular work and employment rights.

One of the key differences is the level of control the business has over the person.  Employees have more legal protections and benefits, but less control over their working hours, place of work, payment structure and freedom to pursue other jobs. Contractors, on the other hand, are self-employed, so can decide what projects to take on and can take on multiple clients if they choose.

How to avoid common mistakes when classifying workers:

An employer-employee relationship comes with certain obligations such as taxes, national insurance contributions, as well as employment law protection, but when a company hires a contractor, the employer does not have to make these contributions – nor do they have to ensure the rights and protections dictated by the employment laws.

To determine whether your worker is classified as a permanent employee or a contractor, you can ask yourself the following questions:

  1. Where, when and how does the person work?

Employees usually have set working hours and job locations as part of their contract with their employer, whereas contractors typically work at a location of their choice and have much more flexibility in how they work. Make sure to correctly define working schedules as full-time or part-time.

  1. Who pays for business expenses?

Employers tend to cover business expenses for employees including equipment, office space and expenses, as well as benefits like pensions and health insurance. Contractors are typically responsible for covering their own expenses and taxes. It’s important to outline expense details within any contracts with independent contractors so that you can ensure tax and legal compliance.

  1. Is the work temporary or ongoing?

Does the project have a specific endpoint and are they working for other companies? Contractors are free to establish relationships with other businesses at the same time as yours, whereas employees are permanent and indefinite and can only end with a termination or resignation.

  1. How is the person being compensated?

Employees are paid a regular salary, decided on a monthly or hourly rate and may be entitled to annual bonuses or company incentives. Contractors are paid by their output and are not entitled to a steady amount each month. They are not typically entitled to bonuses or incentives.

As more and more companies are looking for greater flexibility when it comes to employees, hiring a contractor can be highly beneficial.  Although a worker’s status as an employee or a contractor depends on several legal factors, the best type for your business depends on the needs you are trying to fulfil. What level of flexibility, control and time commitment do you need? If you are considering hiring a contractor it’s important to speak to an expert for advice and guidance.

*Advice provided by he experts at Dolan Accountancy

www.dolanaccountancy.com

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