Most small businesses hire a mix of people. A permanent bookkeeper, a freelance designer for the new website, a contractor to cover a busy quarter, a friend of a friend who helps out on Saturdays. It is easy to assume the label you use decides how the law treats them. It does not. Whether someone is employed or self-employed depends on how the work is really done, and getting it wrong can cost you unpaid tax, penalties and claims you did not see coming.
This guide explains how employment status works in the UK, the signs that point one way or the other, how HMRC's own checking tool fits in and what to put in place when you engage someone who is genuinely self-employed. It is a practical overview, not legal advice, so check GOV.UK or speak to an adviser when a case is not clear cut.
Why employment status matters
Status decides two things. In employment law it sets out what rights the person has and what you owe them, from the minimum wage to protection against unfair dismissal. In tax law it decides whether you run them through PAYE and pay employer National Insurance, or whether they invoice you and sort out their own tax.
GOV.UK is clear about the risk. If someone's status is wrong, both they and the business may have to pay unpaid tax and penalties, or lose entitlement to benefits. A contract that calls someone a freelancer does not settle it either. Only courts and tribunals can make a final decision, and they look at what actually happens day to day.
The three statuses in employment law
For employment rights there are three main statuses. Directors and office holders sit alongside them, and we come back to those below.
Employee
An employee works under an employment contract. They get the full set of employment rights: everything a worker gets plus Statutory Sick Pay, statutory maternity, paternity, adoption and shared parental pay and leave, statutory redundancy pay, minimum notice periods, protection against unfair dismissal, the right to request flexible working and time off for emergencies. Some of these need a minimum length of continuous employment.
Worker
A worker does work personally for a reward, usually with only a limited right to send someone else instead, and is not running their own business with you as a client. Casual, zero hours and as required arrangements often fall here. Workers are entitled to the National Minimum Wage, paid holiday, rest breaks, the 48 hour average weekly limit (unless they opt out), protection against unlawful deductions and discrimination, whistleblowing protection and fair treatment if part time. They may also be entitled to statutory sick pay and family related pay. They usually do not get minimum notice, unfair dismissal protection, flexible working requests, time off for emergencies or statutory redundancy pay.
Self-employed
A self-employed person runs their business for themselves and takes responsibility for its success or failure. Employment law does not cover them in most cases. They still have health and safety protection, protection against discrimination in some cases and whatever rights their contract with you gives them. They are not paid through PAYE.
The key takeaway: the label in the contract does not decide status. What matters is how the work is really done: who controls it, whether the person must do it themselves and whether they are genuinely in business on their own account. Check employment law and tax law separately, because the answer can differ.
Signs someone is an employee
GOV.UK lists signs that someone is probably an employee if most of them are true. They have to work regularly unless on leave, do a minimum number of hours and expect to be paid for the time. A manager decides their workload and how the work is done. They cannot send someone else in their place. They get paid holiday, sick pay and family pay, and can join your pension scheme. Your disciplinary and grievance procedures apply to them, they work at your premises or somewhere you specify, you provide their equipment, and they only work for you or any other job is completely different.
Signs someone is genuinely self-employed
On the other side, someone is probably self-employed if they are self-employed for tax purposes and most of these are true. They put in bids or give quotes to get work. They are not under direct supervision. They send you invoices, pay their own tax and National Insurance and get no holiday or sick pay. They work under a contract for services or a consultancy agreement.
The wider signs of running a business help too. A self-employed person usually has several customers at once, decides how, where and when they work, can hire help at their own expense, provides the main equipment, fixes unsatisfactory work in their own time and charges an agreed fixed price.
No single factor decides it. A designer who quotes per project, works for several clients from their own studio and fixes mistakes on their own time looks self-employed. Someone who works fixed hours in your office, takes direction from a manager and has been "freelance" for you alone for three years looks much more like an employee, whatever the paperwork says.
Tax status is a separate question
GOV.UK says it plainly: a person may have a different employment status in tax law. HMRC may treat someone as self-employed for tax even if they are a worker in employment law. So you need two answers. For tax, whether they belong in your PAYE scheme. For employment law, whether they have employee or worker rights.
Someone can also be both employed and self-employed at the same time, for example working for an employer during the day and running their own business in the evenings. That is fine. It only matters that each arrangement is treated correctly.
Using HMRC's CEST tool
HMRC's Check Employment Status for Tax tool, known as CEST, gives HMRC's view of whether someone is employed or self-employed for tax. Anyone can use it, including the business, the worker or an agency. It also checks whether the off-payroll working rules apply and whether a change to the contract affects the result.
A few practical points:
- There needs to be a contract, or one expected. It can be written, verbal or implied.
- Have the details ready: the person's responsibilities, who decides what work is done and when, where and how, how they are paid and any benefits or expenses.
- It is anonymous and you cannot save part way through, but you can save your answers and the result at the end.
- HMRC stands by the result as long as the information you gave is accurate and stays accurate. If the way the work is done changes, run it again.
CEST answers the tax question only. It does not tell you whether someone has employment rights as an employee or worker.
When IR35 comes into play
Many contractors work through their own limited company rather than as sole traders. In that case the off-payroll working rules, usually called IR35, decide whether the contract should be taxed as employment. Who makes that decision depends on the size of your business. Our guide to IR35 for businesses hiring contractors explains the rules, the size thresholds and what a status determination statement is.
Directors and office holders
Company directors are classed as office holders for tax and National Insurance, and have different rights and responsibilities from employees. A director who also does other work for the company may have an employment contract and the rights that come with it. Office holders, typically appointed under a statute, constitution or trust deed, are neither employees nor workers, although someone can be an office holder and an employee of the same organisation if they also have an employment contract.
What to put in place when you engage self-employed people
When someone is genuinely self-employed, make the arrangement match the reality and keep it that way.
- A contract for services. Describe the deliverables, the price or rate and how work is accepted, rather than hours and duties. Avoid employer and employee wording.
- Invoices, not payslips. They invoice you and you pay against the invoice. They handle their own tax and National Insurance.
- Their own way of working. Agree outcomes and deadlines, then let them decide how to deliver. Day to day management is a sign of employment.
- Their own equipment and cover. Expect them to provide their main tools and, where the work calls for it, their own insurance.
- A review over time. Arrangements drift. A six week project that turns into two years of full time work for one client may no longer be self-employment. Look again when the work changes.
- A record of your decision. Note how you reached your view, and keep any CEST result with the contract.
If you get it wrong
Treating an employee as self-employed can mean back payments of PAYE tax and National Insurance plus penalties. The person may also bring a tribunal claim for rights they should have had, such as holiday pay or the minimum wage. Going the other way and treating a genuinely self-employed contractor as an employee is less risky, but it costs you employer National Insurance and admin you did not need.
If a case is genuinely unclear, use GOV.UK's employment status guidance, run CEST for the tax side and get advice. Acas can help with the employment rights side.
How Wizard Application helps
Wizard Application does not decide anyone's status for you, but it helps you keep the facts straight when you hire a mix of people.
- Separate job types. The recruitment ATS starts with Permanent, Contract, Temporary, Freelance and Internship job types, so each role is clear from the first advert.
- IR35 status on candidates. Record a candidate's IR35 status as inside, outside, unknown or not applicable.
- IR35 status on contract bookings. Each contract booking carries its own IR35 status, so the determination sits with the engagement it belongs to.
- Documents in one place. Keep contracts and your status notes with the rest of your records in Document Management.
These fields record the decision you made. They do not make it for you or issue a status determination statement.
Frequently asked questions
What is the difference between employed and self-employed?
An employee works under an employment contract, is paid through PAYE and has the full set of employment rights. A self-employed person runs their own business, invoices for work, pays their own tax and National Insurance and is not covered by most employment law.
Can a contract decide that someone is self-employed?
No. The wording helps, but courts, tribunals and HMRC look at how the work is really done. If someone works like an employee, calling them a freelancer does not change their status.
What is a worker in UK employment law?
A worker does work personally for a reward and is not running their own business with you as a client. Workers get the minimum wage, paid holiday and rest breaks but usually not unfair dismissal protection or statutory redundancy pay.
Does HMRC stand by the CEST result?
Yes, as long as the information you gave is accurate and stays accurate, and you used the tool in line with HMRC's guidance. If the way the work is done changes, check again.
Can someone be employed and self-employed at the same time?
Yes. Someone can work for an employer during the day and run their own business in the evenings. Each arrangement is treated on its own facts.
Status is one part of hiring well. For the contractor side, read our guide to IR35 for businesses hiring contractors, and when you take on an employee, use our employee onboarding checklist.
