The distinction between employees and freelance workers

Lately, I have been delivering many presentations on the upcoming changes to employment law in 2026, 2027 and beyond. Outside of the impact of these changes on employers, one of the main topics raised with me is about freelance workers; specifically, when is a freelancer considered to be an employee? The distinction is very important, as misclassification can expose businesses to significant liabilities.

Why the distinction matters

How you classify an individual determines the rights and protections they receive. There are three classifications:

• Employees are the most protected. They benefit from a wide range of statutory protections such as the right not to be unfairly dismissed. They are also covered by the employer’s vicarious liability. PAYE and National Insurance contributions are deducted at source
• Workers personally perform work but are not obliged to accept it, and businesses are not obliged to offer it. They receive certain statutory protections, including the national minimum wage, working time protections, and paid annual leave, but not the full range of employee rights
• Self-employed individuals work under contracts for services. They typically have the right to send a substitute to perform the work in their place and are responsible for the performance of the contract. They are generally responsible for their own tax affairs, do not receive statutory employment rights such as holiday pay, and bear the financial risk of the work

Legal tests for employment status

Courts and tribunals assess employment status using several indicators. No single factor is decisive. Instead, they look at the reality of the working relationship, not just the contractual wording or job title.

Mutuality of obligation is the minimum for an employment relationship to exist. It requires that the employer is obliged to provide work and the individual is obliged to accept and perform it. If there is genuinely no obligation on either side (for example, where the engaging party may offer work which the individual is free to decline), then the individual is unlikely to be an employee.

Over time, the line between freelancer and a worker/employee can blur. An employment relationship may arise where:

• There is an informal but regular pattern of work creating mutual expectations
• The individual becomes integrated into your business
• The individual is subjected to a significant level of control and loses a degree of autonomy, as the engaging party dictates how the work is carried out day to day
• The engaging party provides the tools and equipment needed for the role

HM Revenue and Customs (HMRC) and employment tribunals may reach different conclusions on status. Even if someone is treated as self-employed for tax purposes, they may still claim ‘worker’ status to pursue rights such as unpaid holiday pay or the national minimum wage. This creates a real financial risk if classification is incorrect.

A practical approach

Employment status is fact specific. You should look beyond contractual labels and assess the true nature of each working relationship, using both the established legal tests and the practical reality of the arrangement. Given the risks, it is sensible to review their contracts and working relationships regularly and seek specialist advice where needed.