When Does A Freelancer Become An Employee?

Two men shaking hands with "Freelancer?" on one and "Employee?" on the other.

The distinction between an employee and a freelancer is an important one for everyone involved. Depending on the nature of the employment relationship, the parties have different rights and responsibilities. So, it’s vital to understand when a freelancer becomes an employee.

A freelancer becomes an employee at different times depending on the circumstances and work arrangement. A freelancer can usually be classed as an employee when the nature of the working relationship suggests so, which may depend on the duration of the arrangement, or the terms within a contract.

In this article, I’ll look at the factors that define an employment relationship in both the UK and the US. The rules can be different depending on where you live. I’ll also discuss why it’s important to get things right, and point you to some resources that can help.

Note: This article is for educational purposes only and does not constitute legal advice. If you are unsure of anything, consult with a legal professional.

Is A Freelancer Considered An Employee?

A freelancer is not considered an employee, as they are self-employed. The distinction between a freelancer and an employee is important because of the different legal and tax implications associated with the two.

For example, a freelancer can’t claim many of the benefits an employee can, such as holiday and sick leave, redundancy pay, or unfair dismissal. They’re also responsible for filling out their own tax returns and paying them on time. You can learn more about this in our guide to becoming a freelancer.

Do Freelancers Have Employment Rights?

Freelancers don’t have employment rights. These include things like holiday and sick pay, but also the right to join unions (at least not in the same way as an employee) and access to health and safety cover. As a freelancer, these are all things you must sort for yourself.

But if a freelance relationship starts to resemble that of an employer-employee relationship, then the freelancer might legally be able to access the same entitlements as an employee. As an employer, the financial responsibility for this lies with you. The tax authorities might also hold you responsible for the tax liabilities of the individual, including National Insurance (in the UK) and pension contributions.

So, understanding the difference between the two helps you avoid unexpected costs or disputes later down the road with a freelancer who claims they’ve become an employee. Let’s take a closer look at this, starting with freelancers in the UK.

Freelancer vs Employee In The UK

Under UK law, the distinction between a freelancer and an employee centers around control, financial risk, and the nature of the engagement. Employees typically work under a contract of employment, entailing a higher degree of control by the employer, set working hours, and often, a provision of workplace benefits.

They also benefit from extensive employment rights, including sick pay, holiday entitlement, and protection against unfair dismissal. The employer is also responsible for collecting tax and National Insurance contributions through Pay As You Earn (PAYE).

On the other hand, freelancers operate as self-employed individuals, providing services to clients under specific contracts. They enjoy autonomy in how they work, bear the financial risks of their business, and generally lack the employment protections afforded to employees. This freedom comes with responsibilities, such as handling their taxes.

What IR35 Means For UK Freelancers

IR35, a critical piece of legislation, was introduced to combat tax avoidance by workers that supply their services to clients through an intermediary, such as a limited company, who would otherwise be employees if they didn’t use this intermediary. In other words: claiming to be self-employed when in reality they’re operating as if they were an employee, in order to pay less tax.

It aims to ensure that workers, who would be classified as employees if they were providing their services directly to the client, pay broadly the same tax and National Insurance contributions as employees.

For freelancers, understanding IR35 is vital. If your engagement falls within IR35, you’re deemed an “employee for tax purposes,” and this classification significantly impacts how you’re taxed. The rules are intricate, and whether IR35 applies depends on various factors, such as the degree of control the client has over your work, whether you’re obliged to accept work and provide personal service, and your level of financial risk.

Note: IR35 typically does not affect sole traders

Navigating IR35 can be complex. Misclassification can lead to hefty tax liabilities and penalties. As a freelancer, it’s vital to assess each contract and working arrangement against IR35 criteria. If you’re inside IR35, you must pay income tax and National Insurance contributions as if you were an employee, though without gaining the corresponding employment rights.

For clients and organizations hiring freelancers, the responsibility often lies with them to determine the IR35 status of their contractors. Incorrect determinations can lead to financial penalties, making it essential for businesses to thoroughly understand and apply the IR35 rules.

I won’t go into more detail on it here, but the Gov.UK website has a handy resource on it if you want to learn more. They also have a tool for checking your status yourself. Just be aware that it can give you an inconclusive result, so it may only be useful as a guide.

Freelancer vs Employee In The USA

In the USA, the primary difference between freelancers and employees lies in the nature of their contractual relationship with those they work for. Employees work under an employment contract and are typically subject to the employer’s control in terms of how, when, and where work is done.

They are usually entitled to various benefits and protections, such as minimum wage, overtime pay, workers’ compensation, unemployment benefits, and protection under labor laws. The specifics of these can vary from state to state.

Freelancers, also known as independent contractors, operate under a different set of rules. They usually have a more flexible relationship with their clients, retaining control over how they perform their work. Freelancers are not entitled to the benefits and protections that employees receive, and they have a higher degree of freedom regarding their work schedule, clients, and methodology.

Tax Implications

One of the most significant distinctions between freelancers and employees in the USA is how they are taxed. Employees have taxes withheld from their paychecks by their employer (similar to in the UK), covering federal and state income taxes, Social Security, and Medicare. Employers usually also contribute to Social Security and Medicare.

Freelancers, however, are responsible for their tax obligations. They must pay self-employment tax, which covers their Social Security and Medicare contributions, and make estimated quarterly tax payments to the IRS. This requirement demands a higher level of financial management and planning from freelancers compared to traditional employees.

The Importance Of Correct Classification

Misclassifying an employee as a freelancer can have serious legal and financial repercussions for businesses. If a worker is incorrectly classified as a freelancer, the employer might be liable for back taxes, penalties, and interest, as well as potentially owing back pay and benefits.

The IRS uses several criteria to determine a worker’s status, including the degree of control over the work, the financial arrangement, and the relationship’s permanence. For freelancers, understanding these distinctions is crucial for compliance with tax laws and for making informed decisions about contracts and working relationships. For more information on this, the IRS has their own guide.

When Does A Freelancer Become An Employee?

Even where there is a written agreement, a freelancer can become an employee if the nature of the relationship suggests they are. Whether someone is a freelancer or an employee is decided on a case-by-case basis. There are several factors that the law takes into account to make this decision.

Let’s take a look at some of these in more detail.


Freelancers typically have control over how they operate. Obviously you can have contracts in place that clients agree to and perhaps outline some stipulations, but these are generally only associated with the work itself (i.e. what you are doing for them). They won’t typically dictate where or when you work, and usually it’s just a case of agreeing on the scope and the deadline.

The waters can get a little muddy here though with the specific legal language and IR35 if you’re in the UK. So again, if you’re ever unsure, it’s best to consult with a legal professional.

Working Hours

Freelancers work independently and have control over when and where they work. Freelancers can also turn down work offered to them. Employees on the other hand usually have set work hours and a manager or superior oversees their work. They’re also obliged to do the work they’re asked to do (within the scope of their employment contract).

Multiple Clients

Freelancers have the freedom to work with multiple clients. A freelancer can still work exclusively for a company without becoming an employee, especially if it’s a short-term contract. But if this continues for a long period of time without the freelancer working for other clients (especially if the main client enforces this fact in the contract), the freelancer may become entitled to the same rights as an employee, if other aspects of the relationship align in this way too.

Right Of Substitution

Freelancers in the UK also have a right of substitution. This means they can send someone in their place to do the work. An employee can’t do this, as they are contractually obliged to complete the work as part of their employment contract.


Freelancers invoice for their work and usually charge an hourly rate or a fixed fee per project. On the other hand, employees receive a weekly or monthly wage, based on an annual salary.

Tax Status

Freelancers have their own tax status and are responsible for paying and filing their own taxes. Usually, freelancers register with HMRC as self-employed or have their own company. In comparison, an employer is responsible for calculating and paying their employees’ taxes.

Other Considerations

Freelancers usually are not integrated into the company in any way, meaning they’ll not typically attend meetings or training sessions with full-time staff (other than perhaps those they are working for directly). You also don’t usually lead a team of employees as a freelancer, nor do you have access to the company’s tools or resources (although there may be exceptions).

Can You Be Freelancer While Working As An Employee?

Balancing a freelance career while being employed is a scenario many professionals consider. Whether for financial reasons, pursuing a passion, or gaining more experience, the idea of freelancing alongside a traditional job can be appealing. But it’s not always viable.

Legal & Contractual Considerations

First and foremost, check your employment contract and company policies. Some employers have clauses that restrict or regulate secondary employment or freelance work, especially if it poses a conflict of interest or impacts your job performance. It’s crucial to understand these stipulations to avoid breaching your contract.

Note: While freelancing can seem like a great way to make extra money on the side of your 9-5, it’s usually not worth risking losing your stable income source in the process!

Time Management & Work-Life Balance

One of the biggest challenges of freelancing while employed is managing time effectively. Balancing the responsibilities of a full-time job with freelance commitments requires excellent time management skills. Ensuring that your freelance work does not interfere with your primary job responsibilities is key. Maintaining a healthy work-life balance is also essential to avoid burnout.

Tax Implications

When it comes to taxes, combining employment and freelancing changes how you report income. Your employer will typically withhold taxes from your salary, but as a freelancer, you are responsible for paying your taxes on self-employed income. This dual status requires careful financial planning and possibly consulting a tax professional to ensure compliance and to avoid overpaying.

Professional Growth & Skill Development

Freelancing while you’re employed can offer significant benefits in terms of your professional development. It allows you to diversify your skills, build a broader network, and potentially explore new career paths. These experiences can enhance your resume and may even open doors to future career opportunities.

Ethical & Professional Standards

Maintaining a clear separation between your employment and freelance work is crucial, especially regarding client confidentiality, use of resources, and intellectual property. Using your employer’s time or resources for freelance projects is generally unethical and could have serious professional consequences.

Employer’s Perspective

Some employers may view freelancing positively, considering it as a way for employees to develop new skills and bring more value to their primary job. Open communication with your employer about your freelancing is advisable to maintain trust and transparency. But you need to remember that it’s not always possible or practical, and some employers simply won’t allow it.

Working with freelancers can have major implications for employers. So they need to carefully assess whether it’s more practical for them to work with freelancers or if they should hire permanent employees.

Should Businesses Hire Freelancers Or Employees?

If you’re hiring a freelancer directly, the most important thing to do is to have a written agreement in place before any work starts. Doing so avoids any doubt on behalf of either party as to the exact nature of the employment relationship and manages any disputes that might arise.

But keep in mind that, even if there is a written freelance agreement, if the arrangements start to resemble an employer-employee relationship, then the law and tax authorities may treat it as one.

Freelancing Marketplaces

If you’re using a freelancing marketplace like Fiverr, the platform often manages these legal arrangements for you. The freelancer signs an agreement with the site and the temporary freelance nature of the relationship is very clear.

Freelancer Or Employee – It’s Important To Get It Right!

Given the potential legal and financial consequences, it’s important to understand the difference between a freelancer and an employee. You should always get legal advice about your specific situation, especially if you’re unsure about the exact status of someone you’re taking on, or if you’re looking at taking on freelancers longer term.

It’s also useful from a freelancer’s perspective, so you can understand what you are (and are not) entitled to.

Check out our other article to learn more about the difference between freelancers and contractors.

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