Consultancy agreement versus employment contract: which one you need

Businesses ask which document to use as if it were a choice, and it partly is: a business can decide to employ someone or to engage them as a consultant, and each has consequences. What it cannot do is decide the label and ignore the facts, because the law classifies the relationship by how it works, and a consultant who is managed like an employee is one. This page explains the categories, the facts that decide them, the tax and the rights on each side, and how to choose. I draft consultancy and contractor agreements for a fixed fee of £595, delivered in five working days; employment contracts are a separate service.

Who this is for

Business owners and managers in England and Wales deciding how to engage a new person, and individuals offered a consultancy agreement or an employment contract who want to understand the difference.

How to decide between a consultancy agreement and an employment contract

The three categories and the rights that follow

English law recognises employees, workers and the self-employed, defined in section 230 of the Employment Rights Act 1996: an employee works under a contract of employment and has the full set of rights (unfair dismissal, redundancy, statutory notice, maternity and paternity rights, written particulars); a worker undertakes to perform work personally for someone who is not their client and has a narrower set (the minimum wage under the National Minimum Wage Act 1998, paid holiday under the Working Time Regulations 1998, protection from discrimination under the Equality Act 2010, auto-enrolment under the Pensions Act 2008); the self-employed are in business on their own account and have the rights their contract gives them. A consultancy agreement describes the third; a tribunal decides which the person was.

The facts that decide the category

The category turns on personal service (must the individual do the work themselves, or may they send a substitute), control (does the business decide what is done, how, when and where), mutuality of obligation (must the business offer work and the individual accept it), integration (is the person part of the organisation, with its email, its line management and its procedures), financial risk and the opportunity to profit, and the individual's own business (equipment, several clients, their own insurance and tax); no single factor decides, and the courts look at the whole picture against which the contract's label is tested.

The tax consequences for each side

An employee is paid through PAYE with employer's national insurance and auto-enrolment contributions on top of salary; a self-employed individual accounts for their own income tax and national insurance and invoices without VAT until registered; a consultant working through a limited company is paid gross unless the off-payroll working rules in Chapter 10 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003 apply, under which a medium or large client determines status and the fee-payer deducts where the engagement is inside, while a small client leaves the assessment with the consultant's company. Getting the category wrong costs the business the tax it should have deducted, with interest and penalties, which is why the determination is checked with HMRC's tool.

What a consultancy agreement gives the business and what it does not

A consultancy agreement gives the business a defined service for a defined fee, the flexibility to end on short notice without unfair dismissal, no employer's national insurance, holiday or pension cost, and an assignment of IP that it would otherwise not have; it does not give the business control over how the person works, exclusivity of their time, a disciplinary process, or the certainty that the person is self-employed, and it cannot give those things without becoming an employment contract in substance. A business that wants a person at its desk, on its hours, under its management, wants an employee.

What an employment contract gives and costs

An employment contract gives the business control, exclusivity, integration and the right to manage performance through its procedures, at the cost of PAYE and employer's contributions, holiday, sick pay, pension, the statutory rights in the Employment Rights Act 1996 and the written statement of particulars that section 1 of that Act requires from the first day, and the obligations on termination that follow; the IP the employee creates in the course of employment belongs to the business under section 11 of the Copyright, Designs and Patents Act 1988 without an assignment. For a role that is in substance a job, the employment contract is cheaper than the dispute that follows the wrong label.

Choosing on the facts rather than on the label

The question is how the business intends the person to work: for a project with an end, delivered by someone who runs their own business and will do it their way, a consultancy agreement describes the engagement and should be used; for a continuing role under the business's management, an employment contract describes it and should be used, with a fixed term where the need is temporary; for casual work where the business does not control how the person works but wants them personally, the person is likely a worker and the agreement should say so rather than call them self-employed. The document follows the decision; it does not make it, and status is checked case by case with HMRC's Check Employment Status for Tax tool.

What it costs

Consultancy or contractor agreement, £595. Drafted for your business. Five working days.

Template set for repeat use, £895. One master agreement plus a short-form schedule you can reuse for every engagement. Five working days.

Buying online forms the engagement on payment. The scope is what the consultancy and contractor agreements page describes, you accept the Terms of Service at checkout, and I email you within four working hours to get started. If you would rather ask something first, email me.

What you get

• A clear, express assignment of intellectual property to your business
• Confidentiality provisions that protect your business information
• Restrictive covenants drafted at a scope a court will uphold
• Clear treatment of status, so the arrangement is not accidentally something else
• Payment, deliverables and termination provisions that match how you work
• A reusable structure, so the next engagement costs you nothing

What is not included

• Employment status determinations and off-payroll working assessments, which need your accountant
• Tax advice
• Disputes with a contractor you have already engaged
• Immigration and right to work compliance

Questions I am often asked

We want someone three days a week for the foreseeable future. Consultant or employee?

If you will manage how they work, give them your systems and expect them personally, that is a part-time employee and the employment contract is the honest document. If they will deliver defined services their own way for several clients, a consultancy agreement fits.

Is it cheaper to engage a consultant?

In employer's contributions and benefits, yes, if the person is self-employed in fact. If they are in fact an employee or a worker, the back tax, holiday pay and claims cost more than the saving.

Can we start someone as a consultant and employ them later?

They can, and businesses do, with the move documented properly. The risk is the period in which the person was called a consultant and worked as an employee; the page on converting a contractor to an employee covers it.

Related guidance and services

• Consultancy and contractor agreements, £595, the service this page describes
• Employment contracts and handbooks, £595
• Contract review, £495
• Using CEST and drafting for self-employed status
• Converting a contractor to an employee

This page is general guidance for businesses in England and Wales, not advice on your own circumstances. Last reviewed: October 2026. Email geoffrey@caesar.co.uk.