UK Contractor, PEO or Employee?

02 October 2021

An overseas operation may want to hire knowledgeable UK personnel to help assess whether to invest in developing the business in the UK.

An overseas business may be considering:

  • Hiring an independent contractor;
  • Using a Professional Employment Organisation (PEO) as the Employer of Record (EoR);
  • Employing the employee through a non-UK entity in an Employer Without Entity / Payroll-only setup; or
  • Employing the employee through a UK subsidiary or other local entity.

Broadly speaking, key aspects of each scenario can be summarised as follows:



Payroll Only


Employment Law ComplianceNo, however clients remain bound by health and safety legislationYesYesYes
Offer Competitive benefitsNoYesYesYes
Permanent Establishment RiskNoYesYesNo
Visa SponsorshipNoNoNoYes
Stock OptionsNoYesYesYes

Both sides may be drawn to the contractor relationship – not least because there is likely to be less tax to pay. The UK tax authorities are aware of this and once the relationship is on their radar, they will take steps to scrutinise the contract and the relationship. What happens in practice must be consistent with the contract.

How does a contractor relationship work?

  • The contractor provides services for more than one client although exclusivity during a defined and specific project period can be acceptable.
  • The client has no right of control. The contractor is free to choose how, when and where to work. Deadlines for deliverables can be set out.
  • The contractor is not entitled to employee benefits and no tax or National Insurance Contributions (NIC) are to be made by the client unless IR35 legislation applies.
  • The Intellectual Property (IP) rights in work produced during the course of the relationship vest in the contractor, unless specific provisions to the contrary are made in the contract to transfer or assign IP rights.
  • The contractor has the right to substitute themselves with an equally skilled and qualified contractor.
  • The contractor should have Professional Indemnity Insurance in place and bear their own financial risk.
  • No duty of trust or good faith exists between the contractor and the client. The contractor does, however, have a duty to take reasonable care in the performance of their services.
  • The contractor can be sued by the client if their services are defective.
  • The contractor is represented as such to internal teams and clients alike and should not in any way be represented as an employee of the business.

Does a written contract need to be in place?

Such a relationship should be confirmed in a written contract setting out the conditions of engagement including:

  1. a start and end date;
  2. the type of services to be provided;
  3. the place where the services are to be provided;
  4. the intended rate of pay, although payment based upon milestones/KPIs is very much more indicative of genuine self-employment in the eyes of the UK tax authorities;
  5. reimbursement of expenses;
  6. the equipment to be provided and by whom; and
  7. payment terms. Notice periods are not recommended.

How does an EoR relationship work?

PEOs offer EoR services meaning that, for employment law purposes the PEO employs the employee but day to day control of their work remains with the client business.

The PEO takes care of the employer administration such HR, payroll and benefits generally, for a fee based on a % of the employee’s remuneration. In the event of a dispute with the employee, the client of the PEO generally has to use the services of, and take advice from, the PEO for additional charges.

Local employment law must be followed.

How does an employment relationship work?

  • The employee has no right of substitution and consequently must provide the services themselves.
  • The employer has the right of control, meaning that the employee is obliged to comply with the time and place as
  • set out in the employment contract, as well as with the employer’s directions.
  • The employee is paid as agreed in the employment contract.
  • The employee is subject to working time regulations. By law, the maximum working hours are 48 hours per week. (However, the employee can sign an Opt Out clause, which should be stated in the employment contract).
  • A duty of trust and good faith exists between the employer and the employee.
  • The IP rights in work produced during employment automatically vest in the employer.
  • UK social security contributions are to be made by the employer at broadly 13.8% of gross compensation.
  • The employee’s salary is subject to Pay As You Earn (PAYE) tax and NIC withholdings.
  • The employer must provide a workplace pension scheme by law. Contributions to this scheme must be paid from a UK bank account.
  • The employer must have Employer’s Liability Insurance.
  •  Notwithstanding a discrimination claim, after 24 months’ service the employee has the right not to be unfairly terminated. There are rigorous rules that need to be followed.
  • The employee will be entitled to various statutory benefits such as sick leave and pay and various parental leave and allowances.
  • The employer must provide at least 28 days per year of paid holiday entitlement, which can include Public Holidays.

Does a written contract need to be in place?

An employee must be given written employment particulars on or before their first day of work. This is typically provided in an offer of employment letter. On or before the employee’s first day of employment, a contract of employment will be issued which will supersede all former verbal or written agreements once signed by both parties.

Governing Law & Jurisdiction

In an employer-employee relationship, the governing law and jurisdiction are made within the Courts and Tribunals of England and Wales. In an independent contractor relationship, the governing law and jurisdiction can be either that of the overseas business or that of the contractor. Each case is different and we recommend legal and tax advice is sought at the earliest stage. Whatever the contract says, it is essential that what happens in practice must be consistent with the contract.


There is no one solution for every circumstance where businesses wish to utilise the services of a contractor or employee in the UK, so seeking expert advice on the range of options is crucial. Contact us to find out how we can help you.

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