16 January 2025

Are you planning to take on your first employee?

By Gerald Bloye, Associate Lawyer, Hayes + Storr.

If you’re starting a business or expanding, hiring staff is a big step. The first crucial decision is whether to employ someone or engage a self-employed contractor. Getting this wrong can lead to serious legal and financial liabilities.

Employment Status: Employee or Contractor?

Understanding the difference in employment status is important as it determines your legal obligations. The differences can be subtle, and even with a contractor agreement, you could unintentionally create an employer-employee relationship.

This can lead to claims like unfair dismissal and HMRC chasing unpaid tax and National Insurance.

Even if the person isn’t an employee, they could be classified as a ‘worker’ with rights to holiday pay and other protections. Key factors to consider:

  • A self-employed contractor is their own boss and can decide how to do the work.
  • An employee is under your day-to-day control and must do the work themselves.
  • A contractor can turn down work and send someone else to do it, unlike an employee.

Understanding the difference

If the business controls how, when, or where the work is done, the individual is more likely to be a worker.

Example of a worker:

An IT consultant required to work from your office during set hours, using your equipment, and following your instructions.

Example of a genuine contractor:

A website developer who sets their own schedule, works from home, and uses their own equipment.

It’s vital to review the actual working relationship, not just the contract wording, as courts, tribunals, and HMRC will do the same.

Steps to becoming an employer

If you decide to employ someone, here are the key steps to get started:

Before recruitment:

  • Define the role clearly to target your recruitment and set expectations.
  • Budget for salary and on-costs like tax, National Insurance, pensions, and benefits. Ensure compliance with national minimum wage laws.
  • Consider funding options, such as apprenticeships or government schemes.

Before they start:

Register with HMRC as an employer to get a PAYE number. This can take up to 30 days.

  • Arrange employer’s liability insurance to avoid fines.
  • Set up payroll through a provider or payroll software that meets HMRC requirements.
  • Arrange for pension auto-enrolment if the employee meets the criteria.
  • Ensure the workplace is safe, including home-working arrangements, to comply with health and safety laws.
  • Review your data protection processes. Provide a privacy statement explaining how employee data is handled
  • Conduct necessary pre-employment checks, such as verifying the right to work in the UK, to avoid fines.

Key legal documents

You must provide a contract of employment by the first day of work. Contracts should be tailored to your business and clearly set out terms. Policies, particularly on discipline and grievances, are essential. They help manage employee relations and reduce the risk of claims

How we can help

We help businesses set up as employers, ensuring contracts and policies are in place to meet legal requirements. For more information, contact Gerald Bloye on 01553 778900 or email Gerald.bloye@hayes-storr.com.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

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