Aug 6, 2023

Breaking Down the Types of Employment Contracts in the UK

Depending on the nature of your business, you may be ready to bring some additional support on board. If you are consistently selling out of product, closing on days when you would like to serve customers, or booked out onto a waitlist, bringing on an extra set of hands will open new doors for your business. Having sufficient labour to meet the needs of your client base is the first step to scaling your business. 

Adding employees to your roster is an effective way to expand your work capacity—but what different types of employment contracts are there? And how do you know what kind of employee will best suit your needs? 

The type of employment contract you need will largely depend on your business model. For example, do you need short-term support for specific tasks or someone on a reliable schedule? Or perhaps you just need a list of on-call professionals to choose from when needed. 

Whatever your needs, it is vital that you select the correct designation for your workforce. Different laws apply to each class of workers, and misclassifying your labour is not only unethical but illegal. Read on for some guidance about the different types of U.K. employment contracts. 

What Type Of Employment Contract Do I Need? 

The correct employment contract for your business depends on your model and stage. Before deciding upon the type of workers you want to work with, consider the needs of your business carefully: Do you need someone reliable around the clock or just an on-call specialist? 

There are a few major types of employment contracts in the U.K.:

  • Permanent
  • Fixed-term
  • Agency staff
  • Freelancer & contractor
  • Zero-hours

If you own a typical brick-and-mortar business that requires a clerk or serving staff, you’ll likely have them under a full or part-time contract and need to follow certain requirements for minimal hours. For fixed-term contracts, such as labourers to complete a specialised construction project, you’ll still need to follow requirements for pay, but different laws apply. 

Freelancers and contractors are different types of employees: They typically deliver by piece and are only signed on for one task. This is different from a zero-hours contract, where you are not required to offer hours, but neither are they required to accept work on-demand. 

Permanent Part- and Full-Time Contracts

These are the most common types of U.K. employment contracts and the ones most people think of when picturing employment. Full or part-time employees are employees contracted to work for you regularly, predictable basis. While the schedule may change from week to week slightly, the contract you sign with these employees will denote a specific number of minimum hours. 

Full or part-time employees are ideal for businesses where you need additional labour for the foreseeable future. Some companies who may benefit from this type of employment contract include: 

  • Foodservice establishments, such as cafes and restaurants
  • Manufacturers who produce on a regular schedule
  • Logistics companies who hire people throughout the supply chain
  • Retail shops employing cashiers or stock clerks 
  • Organisations operating in healthcare or healthcare-adjacent industries
  • Business firms with normal operating hours that must constantly be staffed 

The above is not a comprehensive list, and you may find you need full- or part-time employees in other circumstances. It’s also important to note that permanent contracts can offer variable hours, meaning that the time commitment made by workers with this arrangement may differ depending on your organisation’s specific requirements.

Pros And Cons Of Permanent Contract Employees

Some benefits of hiring employees under this type of employment contract include consistency, predictability, and a spare set of hands during their scheduled work hours. Despite these benefits, they can also be one of the more costly types of employees. 

Employees under your business must be provided with statutory sick pay, parental pay and leave, mandatory vacation time in line with their designated hours, and any other required worker payments depending upon your district and industry.

In addition to these expenses, you must also provide them with a payslip showing their paycheck deductions, such as National Insurance Contributions (NICs). You must also register with HM Revenue and Customs to oversee your full or part-time employee’s payroll, tax and NICs. Employers are also required to carry employers’ liability insurance for all permanent employees. 

While nobody likes to terminate employees, the possibility of this occurrence is important to consider in the case of permanent employees. Employees in permanent positions have a legal right to notice of termination in advance, as follows: 

  • One week of notice for employees who have been employed from 1-24 months 
  • An additional week’s notice for each continuous year of service, up to a maximum of 12 weeks

As well as notice, employees must be given fair reason to have been let go. If you do not intend to need employees long term and are not prepared to handle the notice process, you may need a different type of employment contract for your small business. 

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Fixed-Term Employees

Suppose you know you will only need an employee for a particular time, such as until a specific project is finished, or provide coverage during maternity leave for a permanent employee. In that case, there are a few different routes to pursue. 

Fixed-term employees are one of the most popular ways to staff your business for a designated length of time. Fixed-term employees can be contracted for either a certain period of time or until a specific task is completed. Some popular uses for fixed-term employees include: 

  • Labourers hired until a construction project is completed
  • Holiday staff working through a specific time of year 
  • Developers or specialists needed to build a program but not maintain it 

Fixed-term employees must be treated the same as permanent employees at your business and have the same legal protections and rights as your regular workforce. You must maintain employers’ liability insurance for all fixed-term employees and handle their withholdings for NICs, taxes, and other deductions.

The main difference between fixed-term employees and permanent employees is the specified length of their contract with your business. While permanent employees require documentation and a lengthy process to terminate and often require termination pay, fixed-term employees do not need to be “terminated” once their contract ends.

If you do not have further need for a fixed-term employee once their contract is up, you simply part ways with no other action required. 

Agency Contract Employees

Another way to fill a short-term vacancy is by bringing on a staffing agency employee. Sometimes called “temps,” agency staff are employed under their agency. Your business enters into a contract with the staffing agency rather than the individual employee. You pay the agency, including the employee’s National Insurance contributions (NICs) and Statutory Sick Pay (SSP), and in exchange, they provide qualified labour under your terms. 

Some common uses for agency staff include: 

  • Filling a short-term medical or parental leave vacancy 
  • Covering a sudden gap from an employee’s departure until the role is filled
  • Holiday staff for temporarily increased volumes 
  • Emergency coverage for unexpected employee absences 

Agency staff are typically used for less than twelve weeks. After twelve weeks, agency staff are entitled to the same benefits as your permanent staff, including pay, holiday time, breaks, and more. While the agency is responsible for covering the employee under employers’ liability insurance, you are still required to provide a safe working environment for your agency staff. 

Freelancers and Zero-Hours Contracts

Freelancers and zero-hours contracts are different in practice, although many of their uses may seem similar. A quick way to draw distinctions from one another is that freelancers are used to fill a temporary gap in competency. In contrast, zero-hours are used to fill in temporary gaps in capacity, performing low-value tasks that require lower qualifications. 

In the sections below, we’ll break down more of what distinguishes each type of worker and where they differ from one another.

Freelance and Contract Workers

Since freelancers typically deliver on a per-piece basis, minimum wage requirements do generally not apply to them. Instead, their quotes are based upon a given task, such as a per-word basis for writers, an agreed rate for a single graphic for designers, or a square-metre rate for tilers. 

Freelancers, consultants, and contractors are considered self-employed or employed by another company; they are not your employees. As such, there are fewer regulations on what you must provide them with. However, in exchange, there are restrictions on what you can require of them so long as their contract is fulfilled, including wearing a specific uniform unless it is for safety. Moreover, they can't perform administrative work on a full-time basis unless you can prove that they can easily be substituted or work for multiple clients. If not, they might be considered employees under the IR35 regulation.

Contractors and freelancers will handle their own taxes and insurance, but you are still responsible for providing a safe, harassment-free working environment. One important difference to note between these two types of workers is that freelancers will invoice their client; while zero-hour workers (who we discuss below) are on payroll.

Zero-Hours Contracts

A unique type of contract, zero-hours contracts are perfect for recurring piece work or on-call positions. These contracts are also sometimes called “casual contracts,” given their non-binding nature in most cases. 

Many employers who utilise zero-hours contracts will have several zero-hours contractors that they maintain at once to ensure that someone is available at most times. This is a very flexible type of contract and an extremely convenient way to handle on-call situations: Your contractors are on-call for you when you need them, so you don’t have to provide any specified volume or regularity of work. 

However, in exchange for this flexibility, zero-hours workers are not required to work when you ask. This is where having several options at your disposal is useful. Should one zero-hours employee not be available, you can call on someone else. 

Unlike freelance contractors, however, zero-hours workers are entitled to statutory annual leave and must be paid the national minimum wage just like your permanent employees. 

Zero-hours contracts are also known as casual contracts. Zero-hours contracts are usually for ‘piece work’ or ‘on call’ work, such as interpreters, waiters, or cooks. However, unlike regular employees, you cannot sign a zero-hours contract to an exclusivity agreement. This means that your zero-hours contract employees may be able to seek work with other employers, accept work with other employers, and have as many employers as they so desire. 

How Do I Decide What Employment Contracts I Need? 

Ultimately, the correct type of employment contract for you will depend upon your business, needs, and budget. In some cases, you may need to include multiple employment contract types to meet the different needs of your small business. 

Regardless of the type of contract, it’s essential to ensure that you have sufficient staffing to let your business flourish. 

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