The Employment Rights Act 1996 does not specifically define "contractor," but the law recognises a distinction between employees, workers, and the self-employed. Many individuals who are engaged as contractors assume they have no employment protections, yet certain legal tests have been established to determine whether they might qualify for worker status. 

The right of substitution—the ability to send another person to perform the work—has been a major legal factor in determining contractor status. If a contractor is genuinely independent and has the freedom to send a substitute, they are more likely to be classified as self-employed. However, if a contractor must personally perform the work and operates under significant control from the hiring business, they may legally qualify as a worker, gaining rights such as minimum wage and paid leave. 

Several legal and policy developments have further complicated contractor classification, including: 

• IR35 tax legislation, which determines whether a contractor should be taxed as an employee. 

• The Public Interest Disclosure Act 1998, which extends whistleblower protections beyond employees. 

• Supreme Court cases, such as Pimlico Plumbers Ltd v Smith (2018), which confirmed that personal service and client control are key factors in worker classification. 

The UK government has periodically reviewed employment status laws, considering a simplified two-category framework where only employees and self-employed individuals exist. However, as long as the worker category remains, businesses must carefully determine whether a contractor is genuinely self-employed or falls into another classification. 

Incorrectly classifying a contractor can lead to: 

• Legal claims for unpaid holiday pay and minimum wage. 

• Fines and penalties from HMRC for incorrect tax classification. 

• Backdated employer National Insurance and tax liabilities. 

Businesses that engage contractors must ensure their contracts, tax arrangements, and working relationships are structured correctly to avoid misclassification risks. This document provides an overview of contractor status, key legal considerations, and best practices for compliance. 

Contractors typically exhibit the following characteristics: 

• Independence: They determine their own working methods and negotiate their own contracts. 

• Financial Responsibility: They handle their own tax payments, including Income Tax and National Insurance Contributions (NICs). 

• No Guaranteed Work: Contractors do not have an ongoing obligation to accept work, and clients are not required to offer continued work. 

• Project-Based Engagement: Work is often undertaken per project, on an hourly basis, or through a fixed-term contract. 

Contractors do not have the same rights as employees, meaning they are not entitled to: 

• Statutory sick pay 

• Holiday pay 

• Protection from unfair dismissal 

• Employer pension contributions 

However, worker status (a middle category between employee and self-employed) may apply if a contractor lacks control over their work or must personally perform the service without a right to substitute another worker. 

One of the key factors that determine whether an individual is a contractor or a worker is the right of substitution: 

• A genuine contractor has the ability to send a substitute—for example, a film set designer might send another qualified designer to complete the work. 

• If personal service is required (i.e., the contractor must do the work themselves), they may actually be a worker, which comes with additional employment rights. 

Contractors must comply with tax regulations set by HM Revenue & Customs (HMRC), which include: 

• Registering as self-employed or operating through a limited company or partnership (or other suitable structure). 

• Paying Income Tax and Class 2 & Class 4 National Insurance Contributions (NICs). 

• If annual earnings exceed £90,000 (as of 2024-25), registering for Value Added Tax (VAT). 

• Understanding IR35 legislation, which determines whether a contractor should be classed as a "deemed employee" for tax purposes. 

A key complication is that self-employment for tax purposes does not always mean self-employment for employment law purposes. 

• Tax law only recognises two categories: employed and self-employed, while employment law has a third category: worker. 

• This means that an individual can be self-employed for tax reasons but still be considered a worker under employment law, which could entitle them to rights such as holiday pay and minimum wage. 

• Because of these differing tests, it is sometimes unclear whether someone is truly a contractor, leading to uncertainty for both businesses and contractors. 

Advantages for Businesses: 

• Cost Savings – Businesses do not have to provide benefits like sick pay, pensions, or redundancy payments. 

• Access to Specialist Skills – Contractors bring expertise that may not be available within the company. 

• Flexibility in Workforce Management – Contractors can be engaged on a short-term basis, making it easier to scale up or down as needed. 

• Reduced Administrative Burden – No need to manage payroll taxes, employee benefits, or performance management. 

• Faster Project Execution – Contractors can start work immediately without the onboarding time required for permanent employees. 

• Higher Hourly Costs – Contractors typically charge higher daily or hourly rates compared to salaried employees. 

• Compliance and Legal Risks – Businesses must ensure contracts are correctly structured to avoid legal challenges. 

• Risk of Misclassification – If a contractor is later deemed to be an employee, the business could face fines, backdated taxes, and legal claims. 

• Confidentiality and Intellectual Property Concerns – Contractors may work with multiple clients, requiring businesses to have clear agreements on data protection and IP ownership. 

• Lack of Long-Term Stability – Contractors are not obligated to remain with a business, which can lead to knowledge gaps if they leave suddenly. 

If a contractor is wrongly classified as self-employed when they should legally be an employee or worker, businesses may face: 

• Fines and penalties from HMRC for incorrect tax treatment. 

• Unexpected tax liabilities due to unpaid National Insurance and PAYE obligations. 

• Legal claims for unpaid holiday pay, minimum wage, or other employment protections. 

To mitigate these risks, businesses should ensure that contracts and working practices reflect the actual nature of the contractor’s role, ensuring compliance with employment and tax regulations. 

Engaging contractors in the screen sector allows businesses to access specialised skills and flexibility, but it also comes with legal and financial responsibilities. Businesses must ensure compliance with tax obligations, employment law distinctions, and the risks of misclassification to protect themselves from potential liabilities. 

To ensure compliance, contractors should seek legal or financial advice and structure their agreements carefully.