Freelancing vs zero hours contracts: An employer's guide

A practical guide to help employers understand the differences between freelancing and zero hours contracts

written in partnership with

Dianne Lambdin

HR Consultant and Employment Law Specialist

The demands on businesses who want to grow in fast moving, competitive markets has created two interesting and distinct methods of hiring skills and getting work done:

  • On-demand freelancers, commonly referred to as the 'gig economy'
  • Employees, with zero-hour contracts

Both options have their place in a modern recruitment and HR strategy. But it is very important for a business to understand they are very different from an employment and tax status.

In this guide

freelancer vs zero hours contracts

Freelancing: Tax and employment status

freelance tax and employment status

Freelancers are typically self-employed and offer their skills under a contract for services. Freelancers can also work through an intermediary, for example their own limited company or an employment agency.

A freelancer will not be employed by your company and will not have employee status.

It is essential for tax and employment law purposes, any freelancer you work with is clearly not an employee, or you may fall inside the IR35 legislation and liable for things like tax and national insurance.

Zero Hours Contracts: Tax and employment status

zero hours contracts tax and employment status

A zero hours contract is, quite simply, an employment contract that does not guarantee a minimum number of regular hours each week. Employing a member of staff on a zero hours contract gives you the ability to manage your payroll costs as revenue goes up or down.

But zero hours is still ‘employment’ and just like other employment contracts (i.e. permanent, temporary, full-time, part-time, fixed-term, term-time only, or annualised hours) – gives the individual ‘employee status’ and a range of employment rights and responsibilities, including the following:

The range of statutory rights are variously related to the length of continuous service with the employer and the number of hours worked and pay received. This can result in employees on zero hours contracts actually being entitled to far less, on a pro rata basis, than their regular colleagues.


Considerations for hiring through freelance marketplaces

If you are a business working with a freelancer through a marketplace, you need to ensure you have made the necessary checks and have a robust contract for services in place to ensure you don’t fall foul of employment and tax legislation (IR35). The contract can be instigated by you or the freelancer.

Firstly, HMRC will want to ensure the correct tax is being received (i.e. PAYE and national insurance). IR35 is legislation designed to combat workers who fraudulently claim to be contractors for tax benefits, therefore, it’s essential the freelancer is IR35 compliant.

It’s crucial, for tax and employment law purposes, the freelancer is considered to be genuinely self-employed and not, to all intents and purposes, an employee, otherwise, you may be liable to pay the tax and national insurance due (and incur penalties). Also, if the freelancer is found to have ‘employee status’ then they will have a range of statutory rights including protection from dismissal, minimum wage and holiday entitlement; they may also be entitled to maternity, paternity, sick leave and pay - and so on.

As a company engaging a freelancer, you should be aware of how to distinguish a genuine freelancer from an employee.

There are three main factors to consider:

There are other points to consider, for example, not treating the freelancer as an employee, not giving access to employee benefits or fully integrating them as part of a team for the benefit of clients. It should usually be clear both internally and externally that the individual is a freelancer.

One final point, the wording in any contract or agreement will not necessarily be enough to persuade HMRC or an employment tribunal; they will look at what actually happens in practice and the intentions of the parties when deciding whether the status is that of freelancer or employee.

In summary

For businesses, the legal and practical aspects of using different types of worker or employee can be a mine-field. The most important point is to be clear on the worker’s employment status and then comply with the relevant employment legislation and tax rules for that type of worker.

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