Legal Talk 29: Personal Service Company v Employee: Taking on Staff
You're still waiting for Big Corporate to come back to you on your main contract, but in the mean time you are thinking of taking on staff to service new contracts.
You call me, "Hi Legal Coach, I'm thinking of taking on staff, but should I hire freelancers or employees? What's the difference legally?"
Okay, it's pretty straight forward. If you take on employees then of course you pay them a salary and provide employment benefits such as sick pay and holiday pay. Also, the employee has employment rights. You’ll also have to pay more tax (via employer’s national insurance contributions) if you hire an employee compared to if you were hiring a freelancer.
If you take on a freelancer you are not responsible for giving them any employee benefits and just pay the freelancer as an external third party, so sometimes you just might pay the freelancer a day rate. However, the freelancer might have a higher day rate than if you were to hire a full-time employee. This is because the freelancer prices on the fact that they do not have employment benefits and do not have any job security into their day rate, particularly because you might only want the freelancer for a few days' work.
Normally the freelancer will trade through a personal service company. So, for example, if you are hiring Mandy Smith as a freelancer, she might have a personal service company called Mandy Smith Limited and legally it might be Mandy Smith Limited that you hire (the company) rather than Mandy Smith (the individual).
So, in summary, the benefits for you of hiring a freelancer are that you owe no employment duties to the freelancer and pay less tax.
The benefits to the freelancer are that they pay less tax (if they trade through their personal service company) and have flexibility to work on different projects for different organisations (and they might get quite a high day rate compared to if they were a full-time employee).
So, at the start of your venture I would suggest that you hire freelancers rather than full time employees because it is more flexible for you to upscale your workforce and downscale your workforce quite quickly (even if the freelancer’s day rate is more expensive than the full-time employee day rate).
“Got it”, you say. “I’ll start off using freelancers and then see how things work out from there.”
As always, I'm thinking of how I can help your grow your company fast!
Your Legal Coach
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