The Legal Side of Growing Your Team – Employees vs Freelancers

As your business grows, you’ll likely reach a point where you need help — someone to take on tasks, deliver services, or bring in new expertise. But before you take someone on, it’s crucial to understand the legal differences between employees and freelancers, and the implications of each.

Getting this wrong can lead to unexpected tax bills, employment tribunal claims, or legal disputes — even if both sides intended it to be a freelance relationship.

In this guide, we’ll explain the differences, the risks, and how to make the right call for your business.

What’s the Difference in Law?

In UK law, there are three main categories of people who do work for a business:

              1.           Employees

              2.           Workers

              3.           Self-employed contractors or freelancers

The category someone falls into determines what rights they’re entitled to and what obligations you, as a business owner, have.

• Employees have the full suite of legal rights: minimum wage, sick pay, maternity/paternity leave, unfair dismissal protection, notice periods, pension contributions, and more.

  
  

• Workers have limited rights: mainly related to pay, working time, and holidays.

  
  

• Freelancers are self-employed and, in most cases, don’t get employment rights — but they do have commercial protections under their contract.

  
  

The key issue is: labels don’t matter. What matters is how the relationship works in reality.

In an ongoing case, the Employment Appeal Tribunal decided that Coastguard Rescue Officers are legally workers, rather than volunteers, when they are carrying out activities for which they can claim remuneration, such as formal training or being called to emergencies. 

This case - Groom v Maritime & Coastguard Agency [2024] EAT 71 has important consequences for all businesses, and is to be reconsidered by the Court of Appeal in November 2025. 

Key Legal Tests

Courts and the tax man will look at several factors to determine whether someone is genuinely self-employed or an employee:

• Control – Do you tell them when, where and how to work?

• Substitution – Can they send someone else in their place?

• Mutuality of Obligation – Are you obliged to provide work, and are they obliged to accept it?

• Integration – Do they appear to be part of your team (e.g. company email, listed on the website)?

• Financial risk – Do they invoice you and manage their own tax, or do you pay them like payroll?

If most of these point to an employment-style relationship, they may be an employee in the eyes of the law — even if you’ve called them a freelancer.

Why It Matters

If HMRC or a tribunal decides your “freelancer” is really an employee or worker, you could face:

              •            Backdated PAYE/NIC payments

              •            Penalties for failing to enrol them in a pension

              •            Claims for unpaid holiday, sick pay, or notice pay

              •            Potential unfair dismissal or discrimination claims

This is something Pimlico Plumbers found to its cost in 2028.

It’s not just about compliance — it’s about cost, risk, and reputation.

When to Use Freelancers

Freelancers can be ideal when:

              •            You need short-term or project-based help

              •            The work is specialist or outside your core operations

              •            You want flexibility without ongoing commitments

              •            The freelancer has their own business and works with other clients

Just make sure you’re not treating them like staff day-to-day. If they behave like an employee, a court or HMRC might decide that’s exactly what they are.

When to Employ Someone

Hiring an employee makes sense when:

              •            You need ongoing, regular help

              •            You want more control over how and when the work is done

              •            You want to invest in someone as part of your team long-term

              •            The person depends on your business for their main income

Yes, there are more legal responsibilities — but also more stability, loyalty, and scope for building your internal culture and capabilities.

IR35 – A Special Case

If you hire freelancers through their own limited company, IR35 might apply. This is a set of tax rules that can require you (the client) to deduct income tax and NICs as if the person were an employee — even if they operate via a company.

Since 2021, medium and large businesses are responsible for checking IR35 status and handling tax accordingly. Even smaller businesses should understand the risks.

Protecting Yourself – Whichever Route You Take

To reduce the risk of disputes or reclassification, always:

✅ Use written contracts – Set out the terms clearly, including rights, responsibilities, and the nature of the relationship.

✅ Reflect the reality – Don’t just write “freelancer” on the contract; make sure the working relationship matches that in practice.

✅ Stay compliant – If hiring an employee, register with HMRC as an employer, issue a contract of employment, and follow employment law.

✅ Take professional advice – A short consultation can help you make the right choice and avoid major pitfalls.

We Can Help

At Your Legal Team, we work with businesses at all stages of growth — from first hires to full HR systems. We can:

              •            Review or draft freelancer agreements or employment contracts

              •            Help you decide what kind of hire is right for your needs

              •            Guide you through IR35 or tribunal risks

              •            Provide a retainer service for ongoing legal HR support

Hiring help should feel like a step forward, not a legal minefield. Let us help you do it properly from the start.