Definition of a contractor
A contractor is a person who undertakes a contract to perform services for a specific clients under specific terms. The wording is explained further down the page. Contractors are normally paid on an ad hoc basis according to their output. This might be measured in time, productivity or deliverables.
The difference between a contractor and an employee
Most tax authorities now measure the difference in 3 ways. Who is in charge of the behaviour of the person performing the work? Are they paid regardless of the work they perform? What is the relationship between the client and contractor?
Contractors relationship with the Client
The contractor is not an employee of the client. If the client terminates the assignment the contractor has no right of redress. The client is under no obligation to offer further work to the contractor, nor is the contractor obliged to accept it. In an employment relationship the employer must offer work to the employee or else
Contractors generally don’t receive any of the statutory rights of employees – i.e. no holiday pay, no sick leave, no redundancy pay. Generally if a contractor is off sick for more than a few days the client has the right to cancel the contract.
How is the contractor paid?
The contractor is only paid based on their output which can be measured in the hours that they work or results. The tax authorities often expect the contract to have a burden of risk on the contractor, i.e. they won’t get paid if they don’t achieve the specified results.
Who controls the contractors behaviour?
The question of who supervises the contractor is a difficult one – all external suppliers are in some measure supervised by the client. The contractor generally has more freedom to decide how and when they perform the services. For example they may supply their own equipment or work site. They may choose their own working hours or take on multiple assignments at once. They may also choose to subcontract elements of the contract.
This freedom comes at a price because the contractor is also held responsible if they make mistakes in their work. They often have to repair these errors at no cost. This is a standard risk which contractors accept.
Other names for Contractors
Contractors may also be known as independent contractors, freelancers or consultants. They may work through a self-employed system, their own personal company or an umbrella company.
Explanation of the definition of a contractor
“Contract” means an agreement (normally written) which explains the services to be provided, who will provide them, who will receive them. Crucially it also sets the terms and conditions of performance – e.g. what the contractor is (and isn’t allowed to do, how the client will reward the contractor for the work, what happens if either party doesn’t do the right thing.
“Perform Services” is a broad term for whatever the client is paying to have done. It can be anything from software development to laying concrete.
“Specific Clients” means that the companies who will receive the services are named in the contract.
“Specific terms” means all the conditions of the assignment such as the duration, location, pay rate, bonuses, working hours, deadlines, equipment required, etc.