Our community - Digital39 - Navigating Hiring Choices: Employees vs. Consultants for Startups

Dear Kingsley Napley,

I am one of the founders of a tech start-up called KNow Wear Limited. We produce a wearable wellbeing device which is linked to a health, wellbeing and social platform. We have recently completed a raise and we want to put some of the money towards hiring a software developer and a head of marketing in order to help develop and market our product. As these will be our first hires, can you let us know whether we should bring them in as employees or consultants? What are the differences between them? And are there any other pre-hire actions we need to take?

Yours sincerely,

KNow Idea

Dear KNow Idea,

The first thing to consider is what type of working arrangement you plan to have with the individuals as this will determine what their employment status will be. UK law recognises three types of employment status:

• employees, which is your classic “master-servant” style relationship, where the employer determines what, where, how and when the employee’s work will be done; employees most commonly have set days and hours of work each week; and they must provide work personally, meaning that they cannot substitute themselves with anyone else;
• self-employed contractors (or consultants, as you refer to them), which is where an individual (either directly or via a personal service company) runs a business for themselves and takes responsibility for its success or failure; they often provide their own equipment; they can decide when they work and what work they complete (they don’t have to accept the work they are offered and the company is not obliged to give them work); and they are generally able to substitute their services (i.e. send someone else to do the work on their behalf); and
• workers, which is a sort of middle-ground between the two. This is a more casual arrangement, often without set hours or days of work.

Employment status is important because it governs an individual’s rights in employment law and the extent of the business’s responsibilities to them. For example:

• Employees have a number of statutory rights including the right to statutory sick pay, rest breaks, annual leave, minimum wage, minimum notice periods, redundancy pay and the right not to be unfairly dismissed (subject to a qualifying period of service). This in itself is important because it means that employers cannot easily get rid of an employee once they have been employed for a minimum of two years – employers will need to have a fair reason (there are five potentially fair reasons for dismissal set out in law) and follow a fair process in carrying out a dismissal, which can present commercial challenges. The trade-off for this more prescriptive arrangement is that the employer has more certainty and control over these sorts of workers and can, for example, more easily restrict their outside business interests and post-termination activities.
• Workers are also entitled to certain statutory rights including minimum wage, holiday and rest breaks. As with employees, the employer will need to deduct tax and national insurance from their wages. However, they have no right to a statutory minimum notice period on termination or to a statutory redundancy payment if made redundant. They also have no ability to claim unfair dismissal.
• Self-employed contractors have even fewer rights. They are responsible for their own tax (they often agree a specific price or fee for a piece of work or project) and they have the ability to work for multiple businesses at the same time. As such, it is much harder to restrict the outside business interests and/or post-engagement activities of contractors.

Ultimately, KNow Wear Limited will need to consider what the commercial realities of the working relationship will be based on what its key priorities are. For example, if what you really want is certainty that once you have made these hires, the individuals will provide services to the company for set days and hours each week; they will be fully integrated into the organisation and act under your direction and instruction; and you will be able to restrict their activities outside of work both during and after employment in order to protect the business’s intellectual property and confidential information, then you will most likely employ them as employees (as opposed to engaging them as workers or consultants).

In terms of pre-action hires, KNow Wear Limited will need to:

1. Ensure that the individuals have the legal right to work in the UK. To do this, you must complete a right to work check on the prospective hires before employment begins. You should also set out in the offer letter that employment is contingent on the individual having the legal right to work in the UK.
2. Register as an employer with HMRC. You are able to do this up to four weeks before the new employees are paid for the first time.
3. Obtain employer’s liability insurance. You need to have this in place from the employees’ start date.
4. Set up a workplace pension schemeand establish whether the new hires need to be automatically enrolled in the scheme.  If so, make arrangements for them to be enrolled and for the company to make the relevant minimum contributions to the scheme on their behalf.
5. Draft the employment contract (or other appropriate contract if they will have a different employment status). Employees are entitled to a statement setting out particular key terms of employment from the first day of employment.
6. Draft a basic staff handbook. This will contain key employment policies and a privacy notice.

We hope this helps and wish you the best of luck with your first hires!

Yours sincerely,

Kingsley Napley