This is a question that you need to get right. Putting a contract in place that has the wrong kind of protections can cost a business dearly.

Problems will usually creep in because the contract in place is not geared to the day to day work being undertaken by the individual, leaving the business without adequate protection when things go wrong.

The wrong type of contract can also lead companies into dangerous methods of practice, for instance by not paying tax or national insurance, or not giving the individual annual leave when they should have it, leaving them prone to prosecutions and financial penalties.

First, discount the more unusual types of arrangement.

In terms of the decision making tree, the first types of agreement to discount are the more unusual types. Firstly, therefore you should ask:

  • Would you like the individual to be a commercial agent of the company (i.e. selling the company’s goods or services as an independent, business to business agent)?
  • Would you like the individual to be an employee shareholder, with the tax breaks that entails?
  • Would you like the individual to be an apprentice?

These contracts are dealt with elsewhere and not in this article.

Second, decide on employment status – freelancer or employee?

The next important distinction to make is whether the individual will be an employee, a worker or a freelancer? Again, we have provided much more detail on making this decision here.

Essentially though, our view is that it boils down to two relatively simple questions. Firstly, how much control over that individual’s work and day to day activities do you require? Do you want them to be part of the team, coming into work and doing what you want them to on a daily basis? If so, this should be an employment contract. Secondly, is the company geared up to taking responsibility for the work being done by that individual? Would they feel comfortable taking that work in-house in terms of supervision and financial responsibility for it? Specialist skills outside the day to day remit of a company, especially where they require high level expertise or expensive specialist equipment, will usually be the domain of the consultant and not the employee.

There is a halfway house between consultant and employee, that is, a ‘worker’. Workers have always created problems of definition but these issues are becoming more and more acute now that we live in the “gig economy”.

Workers will have rights, mainly to paid annual leave, minimum wages, and maximum working hours. There can be a problem where these rights are not given to the individuals because the engaging company believes they are full-blown freelancers.

Problems will usually occur when a company is not clear in its own mind which path they wish to go down; either freelance or employee. As we have pointed out elsewhere, when they want the best of both worlds (for instance the tax breaks, and ease of dismissal) without the downsides (for instance the requirement to run a PAYE system, pay company national insurance, and auto-enrolment pensions).

Third, build the contract around the individual

So, you have decided that you either want an individual to be a freelancer or an employee.

If a freelancer, you need to find out whether or not that individual works through a limited company or not. You are then in a position to decide which type of consultancy agreement to put in place, and hopefully contact us to do this for you for a fixed fee.

If an employee, it now becomes a question of what level of seniority they have. At the top of the pile will be Companies House Directors. They will need a particular type of contract as they are office holders and under a number of statutory obligations. You will also, as a business, want to be particularly careful about their activities.

Are they a non-director but a senior employee? In this case, you can expect a higher degree of sophistication on the part of the individual you are employing. They will therefore be better able to understand a long-form contract. As the individual will doubtless expose the company to greater risk, you will want to have a full set of protections in the contract, including, potentially, restrictive covenants to prevent them from competing with the company either during the employment or for a limited period after it.

If the employee is more junior, a shorter form, easier to understand, contract will be more appropriate. This is quicker to put in place and get signed off and is therefore easier to produce and introduce in greater numbers.

Of course if you have any questions about which is the best option for you, please do not hesitate to contact us and we will point you in the right direction.

You should also ask us about our fixed fee contract drafting service.

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