The False Economy of Part-Time Employees and Contractors

If you own or manage a business, getting the right people and building the right team is vital to your success, especially when the Coronavirus pandemic has had a huge impact on ways of working. Thousands of workers have transitioned from onsite employees to full-time remote workers and it’s clear that this shift in expectations about working patterns is here to stay.

In this era of hybrid working as the norm, hiring the best talent is not now simply a question of remote versus in-office workers, but also part-time versus full-time employees or independent contractors. Choosing between employees (full or part-time) and contractors, or a mixture of all three has pros and cons and in some cases the seemingly obvious choice could well prove to be a false economy.

Hiring Part-Time Employees

Part-time employees do offer cost savings over full-time employees for an employer in terms of proportionately lower rates of benefits, sick leave and pension contributions that have to be paid. Part-time employees allow you to staff exactly according to your company’s needs and market conditions and they can also fill in for full-time employees taking sick or maternity leave or work in after-hours technical support or night and weekend hours.

You can bring on staff with the expertise you need, when you need it and part company when that need is no longer there. You can recruit part-timers from a much broader, usually more reliable and mature, talent pool such as women re-entering the workforce, or those who are newly retired but not quite ready to stop work altogether.

However, you will still have to go through the same lengthy recruitment process for part-time positions as you would for full-time roles and there’s always the risk that part-time workers won’t be as committed or loyal to your company as their full-time co-workers. Part-time employees will have less time to invest in learning the ethos of your company and because they aren’t around as much as full-time employees, it could be difficult to integrate them into a coherent and effective team. Because they work less hours, part-timers are less likely to be intimately familiar with the task at hand and the quality of their work, as well as their productivity, can suffer.

If you are thinking of adding part-time employees to your workforce, you can manage the downsides by giving part-timers work that’s engaging and clearly communicating your expectations for full-time and part-time employees working as a team, scheduling meetings or social events at times convenient for both. You could develop strategies for handing off incomplete tasks to other employees and invest in additional training to shore up part-timers’ company knowledge.

But if all that sounds like too great an investment of your time, effort and resources on what could well be a limited duration project or need, it could make sense to hire a contractor instead.

Hiring Independent Contractors

Contractors aren’t your employees. They are one-person businesses who work for organisations usually for a defined period of time. If your business needs someone with specific skills which your firm lacks for a short-term project, hiring a contractor (often also referred to as freelancers) could be a cost saving solution. There’s no need to provide company benefits, holiday pay, sick pay or pension or superannuation payments to contractors and the employer’s legal liability is also reduced.

For many employers, the cost of a contractor is secondary to the quick access to what could be business critical skills which your current workforce lacks or would prove more costly to train up in house. Unlike employees of whatever status, when you hire an independent contractor, you can end the contract without any apparent reason with just a few weeks’ notice.

Some business owners see full-time employees as consistently more costly than independent contractors. It is true that having employees on your books means that you will need to do all the HR work or hire an HR specialist. Contractors will not require that kind of support, but they will charge more per hour as they have to self-fund their own benefits, tax, legal liability and overheads.

Contractors might therefore actually cost more and inevitably will have less loyalty to the firm than employees. They are not solely dedicated to you and might book other future work just when you need them most. It’s true that contractors can help your business through periods of growth or difficulty, but investing in employees, having people on board you can trust to develop the business with you because your interests coincide, is often a better long-term strategy than spending a lot of money on contractors.

Legal Issues Around Employment Status

Anyone hiring contractors, freelancers or consultants rather than employees needs to understand the legal view on their respective employment status as incorrectly classifying a worker can lead to penalties or fines. Employees and independent contractors are treated differently for tax purposes. In fact, even if a worker is not an ‘employee’ for employment law purposes, they may still be an ‘employee’ for tax purposes. So how can you decide if someone is an employee? UK law considers there to be three essential requirements for a contract of employment to exist:

  • Control – if the employer has ultimate control because, for example, they can discipline the worker, then it is likely that the person is considered an employee.
  • Mutuality of obligation – if the worker is obliged to do any work they are given and the party giving them the work is obliged to pay for it they are considered an employee.
  • Personal obligation – if there is a requirement to do the work personally then the worker may be considered to be an employee.

For there to be a contract of employment all of the above requirements need to apply.

Definition of an Independent Contractor

A worker would be considered an independent contractor in law if, for example, they had the final say in how their business is run, provided their own equipment and were free to work for others while working for you. HMRC has developed guidance on when it considers an employment relationship exists. It has also developed an online tool called the ‘check employment status for tax’ tool.

For employers and company owners, determining whether a contractor they take on board is an employee or is providing services through a Personal Service Company (PSC) became even more important on 6 April 2021, when new IR35 tax rules were introduced.

The term Personal Service Company was coined by HMRC alongside the introduction of IR35 legislation and is usually taken to mean a limited company that has a sole director who owns most, if not all, of the shares. Changes to IR35 now make the end-client liable for determining the tax status of contractors who work through a Personal Service Company and the rules require that employment taxes and National Insurance contributions are paid by the end-client business with which the contractor engaged directly.

Contractors Aren’t Suitable for Every Role

Making the right choice between full time employees, part time employees and contractors will depend upon your business circumstances and plans for the future. Understanding the different business needs and the suitability of an independent contractor versus a full-time employee can be complex. It is often tempting to turn to a contractor because the thought of going through the advertising, interviewing and on-boarding process is daunting. But there are situations where hiring a contractor could be the wrong decision, especially if you are trying to build a team for the future.

The most important thing to remember is that a contractor is not an employee. Contractors are independent businesses working for you, sometimes on your premises. If you treat them as employees you run the risk of losing money through having to pay unnecessary IR35 taxes. Getting sound business and legal advice before you consider who you should hire and in what capacity will not only take some of the burden of finding the right people with the right skills off your shoulders but will also safeguard your business from potential penalties and ensure you are getting the best possible value for money out of every hire.