Taking on your first or second hire? The trickiest question is also the easiest to get wrong: is this person an employee, or are they genuinely self-employed? This guide gives you the answer, the few things your employment services contract must legally include, and the costly trap to avoid.
The label you write down does not decide it
Here is the part most employers miss. Calling someone self-employed in a contract does not make them self-employed.
What decides their status is how the relationship works day to day, not the words on the page. HMRC and an employment tribunal look at what actually happens. Who controls the work? Who carries the risk? Can the person send someone else in their place?
So you can write "contractor" at the top, pay them on invoices, and still have an employee in the eyes of the law. Get this wrong and the bill lands on you, not them.
Employee or self-employed? The quick comparison
Most hires fall clearly on one side once you look at how the work really happens.
| Employee (contract of service) | Self-employed / contractor (contract for services) | |
|---|---|---|
| Who it is for | Someone who works under your control, on set hours, in an ongoing role | Someone in business for themselves, working for several clients and sending invoices |
| Rights they get | Holiday (5.6 weeks), sick pay, notice, a pension, and unfair-dismissal protection after six months | Very few employment rights. They arrange their own cover |
| Tax and NIC | You run PAYE: deduct their tax and National Insurance, and pay employer NIC | They sort their own tax through Self Assessment. You usually pay the invoice in full |
| What the paperwork must say | A written statement of the main terms, given on or before day one | A clear contract for services: the project, the fees, and that they control how the work is done |
| Main risk to you | A missing or late statement: a tribunal award of 2 to 4 weeks' pay per worker | Wrong status under IR35: backdated PAYE, National Insurance and penalties |
Not sure which side someone falls on? GOV.UK's employment status guidance, the free CEST tool (Check Employment Status for Tax), and Acas all help you check. If money is changing hands, confirm it before the first payday, not after.
What your employment services contract must include
Every employee, and most workers, must get a written statement of their main terms. This has been the law since April 2020, and it is due on or before their first day. One single document can cover it.
Your written statement (think of it as the contract) must set out:
- Your business name, plus the employee's name, job title and start date
- Pay, and how often you pay it
- Working hours and days
- Holiday entitlement (at least 5.6 weeks a year) and holiday pay
- Where they work, or that the role is remote or hybrid
- Notice periods on both sides
- Sick pay and any other paid leave
- A probation period, if there is one
- Pension and auto-enrolment details
- Any training you require
Miss this, and a worker can claim 2 to 4 weeks' pay at a tribunal, on top of any other claim.
Once it is signed, those pay, tax and pension details need to flow straight into your payroll. Auto-enrolment means most staff must be put into a pension, with at least 8% of qualifying pay going in, and at least 3% of that from you. The Pensions Regulator sets the rules, and our auto-enrolment pension support handles the lot.
Paying people "on invoices"? Mind the IR35 trap
Plenty of small firms pay people on invoices to keep things simple. That is fine when the person is genuinely self-employed. The danger is IR35, the rules that catch "employees in disguise".
If HMRC decides your contractor was really an employee, you can be billed for the PAYE and National Insurance you should have deducted, plus penalties and interest. The wording matters, but so does the real working pattern.
A self-employment contract for services should match reality. The person controls how they work, can turn down jobs, and can send a substitute. If that is not true, you may have an employee.
Work in construction? Check whether CIS or PAYE applies first. And if you do need to run payroll, here is how to register for PAYE and what Employer NI looks like in 2026/27.
Making a senior hire? Protect the business
A senior or director-level hire needs more than a standard contract. You want clear terms on confidentiality, and sensible limits that stop them poaching your clients or staff if they leave. The legal name for these is post-termination restrictive covenants. Most people just call them non-compete terms.
Keep them fair and tightly drawn. Courts only enforce limits that go no further than needed to protect the business. A blanket ban rarely holds up.
A director is not automatically an employee either, so the paperwork needs care. If you are also sorting out ownership and shares between founders, see our founders agreement service.
Contracts and disabled employees: your duty to adjust
The same day-one contract rules apply when you hire a disabled person. There is one extra duty to know about.
Under the Equality Act 2010, you must make reasonable adjustments so a disabled employee is not put at a disadvantage. That might mean flexible hours, different equipment, or a change to how the work is done.
You do not have to write every adjustment into the contract. It is wise to record what you have agreed, in writing, alongside it. That protects both of you if questions come up later.
When a free template isn't enough
A free template can work for a simple, short-term role. It stops being safe as soon as the stakes rise.
You need a properly drafted agreement when:
- you are taking on your first employee and want it right from the start
- you are making a senior or director-level hire
- you need confidentiality or non-compete terms that will actually hold
- you use contractors and want to manage IR35 and status risk
- your contracts are over a year old, or pre-date the Employment Rights Act 2025
A template does not know your business. The gaps only show up when something goes wrong, and by then it is expensive.
Why have an accountant draft it?
At Zmartly, your agreement is drafted and reviewed by an ACCA-qualified accountant who sees the whole picture. The same person knows how the pay, pension and tax in the contract feed through to your payroll and your HMRC bill, so the contract and your numbers always agree. Our employee contract services sit inside fixed monthly plans, so you know the cost up front.
Get your contract sorted, for a fixed fee
Hiring should not keep you up at night. Zmartly drafts clear, current employment agreements that protect your business and meet your legal duties, all for a fixed monthly fee with no surprise bills. Book a free Tax Health Check and we will have your paperwork ready before your new starter's first day.
FAQs
Do I legally need a written contract for a new employee?
Yes. Every employee, and most workers, must get a written statement of their main terms on or before their first day. It has been the law since April 2020. One document can cover everything the law asks for.
Can I just call someone self-employed to avoid PAYE?
No. The label does not decide it. HMRC looks at how the work really happens. If the person works like an employee, you can be billed for backdated PAYE, National Insurance and penalties under IR35.
When can a new employee claim unfair dismissal?
Under the Employment Rights Act 2025, there is a six-month qualifying period, starting 1 January 2027. Before they pass that point, ordinary unfair-dismissal claims usually do not apply. Some claims, such as discrimination, can still be made from day one.
How much holiday must I give?
Full-time staff are entitled to at least 5.6 weeks of paid holiday a year. Part-time staff get the same, worked out pro rata.
What pay rate must I use?
You must pay at least the current National Minimum or National Living Wage for the 2026/27 tax year, which applies from 1 April 2026. Check the current rate on GOV.UK before you set anyone's pay.
This guide is general guidance, not personal advice. For your exact position, book a free Tax Health Check with Zmartly.
