The benefits and pitfalls of employing independent contractors within the gig economy

By Kirsten Cluer, HR Consultant and owner of Cluer HR

Following Gary Smith’s recent victory against Pimlico Plumbers in a landmark legal case for workers’ rights, huge ramifications are expected for freelance workers in the so-called gig economy.

The Supreme Court ruled that despite the former plumber being VAT-registered and paying self-employed tax, he was entitled to workers’ rights under section 230(3)(b) of the Employment Rights Act 1996.

UK employers in the gig economy should now be more cautious when looking at hiring contractors following the landmark ruling, due to it blurring the line of knowing when a self-employed contractor with no employment rights, becomes an employee that is entitled to paid holiday and the national minimum wage.

But what are the benefits and pitfalls of hiring contractors?

Well, a case can be put forward for both hiring and avoiding contractors and subcontractors, depending on the circumstances of the task at hand.

For instance, a company may engage a contractor and/or subcontractor if it needs more flexibility for a specific job or task. They can also be the most efficient option for one-off jobs that require specialist expertise or fast turnaround.

Another advantage of hiring a contractor and/or subcontractor is that most can start working at very short notice, even when large numbers of workers are required. Employers can also specify the type and duration of contract required for the job at hand.

Hiring a contractor also means a company’s permanent staff can concentrate on the core aspect of the business. But, if a contractor needs to be brought in to offer temporary cover for a permanent staff role, they won’t be entitled to employment rights, which can save a company a considerable amount of money. These rights include benefits such as sick pay, holiday pay and maternity and paternity pay. Employers also don’t have to make any PAYE or National Insurance contributions.

Alternatively, a contractor/subcontractor may cost a business more than the equivalent daily rate for employing someone to take on the job on a permanent basis. This could potentially cause workplace disputes as permanent staff may resent the contractor for being paid more money for doing a similar job role.

Employers must also understand the relevant tax implications and other rights of any subcontractors, who may be employed by the contractor they hired to carry out the work.

Another problem with hiring a contractor is that they may not appreciate the businesses’ culture and may lack the motivation and commitment of permanent staff. Also, by relying on contractors and/or subcontractors, a business will fail to acquire and develop skills in-house.

In addition, if the contractor brings in a team of subcontractors to help carry out the required task, companies will have no direct control over the quality of their work.

Overall, it depends on the circumstances of the work needed to be carried out. For instance, if the work requires specialist expertise and needs a quick turnaround, a contractor and/or subcontractor could be the most efficient option.

However, if a contractor and/or subcontractor is hired for a prolonged period, it could end up costing the company more money than it would to employ someone, and even result in the contractor being entitled to workers’ rights, as with the Gary Smith case.

Therefore, caution must always be taken when weighing up the options of hiring a contractor, to avoid falling in the grey area that has now shrouded the gig economy.