Employment Contracts Vs Consultancy Agreements - The Pros & Cons

Employment Guides & Advice
Published: 27th June 2022
Area: Employment Contracts

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How To Staff Your Business

One of the many important decisions for any start-up company or one in the early days looking to grow is how to staff your business. There are different options available to you, so do you employ a member of staff or use a consultant?

Employment contracts v consultancy agreements - the difference between the two

Employment contracts set out the terms on which a company wants to employ a person. This is usually with a view to employing a person on a long term permanent basis, unless you use a fixed term contract for a specific project or tasks to be delivered over a fixed period of time.

Consultancy agreements set out the terms on which a company wants to engage a person to deliver services for the company. Consultancy arrangements are usually temporary in nature and relate to the delivery of specific services, projects or tasks.

There are a number of differences between the two, but some of the important differences for a company when deciding which is the most appropriate to use are:

  • Duties: an employee can be instructed to carry out a number of duties that are reasonable and within the employee’s remit/job description. Whereas a consultant will usually carry out very specific tasks in which he/she has expertise.

  • Control: a company can exercise a greater level of control over what an employee does. Whereas a consultant is expected to deliver the services using his/her own skill, in their own way and often in a time scale chosen by the consultant.

  • Hours of work: an employee’s hours of work are usually set by the employer over a set number of days per week. However, a consultant will usually carry out the services in their chosen timescale, but often with a dedicated number of hours/days per month.

  • Equipment: an employee will usually use the employing company’s equipment. Whereas a consultant will often provide his/her own equipment.

  • Tax: an employee will usually be paid through a PAYE system where appropriate deductions for tax NICS will be made. A consultant on the other hand will be responsible for his/her tax arrangements and he/she may charge VAT.

  • Mutuality of obligation: employers are obliged to offer work to the employee and the employee has to accept it and do the work. Whereas consultants have more freedom to pick and choose the work that they accept.

  • Exclusivity: employees are usually prevented from working for other companies or indeed themselves whilst employed. Whereas consultants will usually be able to work for other companies during the period of engagement with your company.

There are of course other differences, but these are some of the more pertinent considerations.

Which arrangement should you choose?

This is an important decision and the choice will usually depend on a number of factors such as, expertise already within the company; money available to pay a salary or fees; and how much control you want to exercise over those joining the company. It is common for consultants to cost more in the short term because they usually bring an expertise and they do not acquire some of the employment related rights (such as holiday pay, pensions and Statutory Sick Pay).

For technology based companies intellectual property (and how you best protect it) will also be a major consideration whether you choose to employ or engage with people to grow your company.

Whichever arrangement you decide on, it is important to ensure that the relationship is correctly documented in order to protect the company moving forward. Failing to put in place employment contracts or consultant agreements can lead to legal and financial risks in the future, so it is recommended you take advice on both the appropriate choice of arrangement and content of the contract or agreement.

For more help and guidance on the topic, please get in touch to find out more about the fixed fee services that we offer.

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