Disclaimer: Please note that this article contains general legal information and doesn’t contain legal or tax advice, and isn’t intended to constitute legal or tax advice.
The misclassification of an individual as being self-employed when they are, in reality, employees, can have severe consequences.
The purpose of this article is to provide you with a clearer understanding of your own employment status. This is especially for cases when you’re a freelancer on paper, but are wondering if you’ve been correctly classified and what your legal status is.
Read on to discover if you’re potentially engaged in false self-employment.
Am I a Freelancer or an Employee?
In order to determine your employment status, the intention of the parties (yours as a worker and your work provider’s) and any written agreement is given due consideration. However, the real terms and conditions of your employment are crucial. It means that even while the written terms of a contract might be quite clear in saying that you’re self-employed, courts and statutory bodies may still conclude that you are, in fact, an employee. In every situation, a case-by-case analysis remains necessary.
Note that the reality of the working arrangements is key, as assessed through the use of the legal tests and factors set out in your jurisdiction and as applied to each case.
These are the typical characteristics of an employee and of a self-employed individual – please note that not all of the following factors may apply in your situation.
|Typical Characteristics of an Employee||Typical Characteristics of Self-Employment|
|Being under the control of another person who directs you as to how, when, and where the work is to be carried out. (*An employee with specialist knowledge may need little or no specific direction).||Having control over what, how, when, and where the work is done, and whether you do it personally or subcontract it.|
|Primarily supplying labor.||Being exposed to financial risk by having to bear the cost of the work carried out under the contract. Owning your own business.|
|Receiving a fixed hourly/weekly/monthly wage. (*An individual who is paid by commission, by share, or by piecework, or in some other atypical fashion can still be regarded as an employee).||Costing and agreeing on a price for the job.|
|Not being able to subcontract the work.||Being able to hire other people, on your own terms, to do the agreed-upon work.|
|Not supplying materials for the job.||Providing the equipment and machinery necessary for the job.|
|Not carrying any responsibility for investment in the company.||Bearing responsibility for the investment and management of the business.|
|Working a given number of hours per week or month.||Controlling your own working hours.|
|Receiving payments to cover travel expenses.||Profiting from good management in the scheduling and performance of engagements and tasks.|
|Being entitled to paid leave, sick pay, or extra pay for overtime.||Providing your own insurance cover (obligatory and optional).|
|Being obliged to perform work on a regular basis that the employer is obliged to offer.||Not being obliged to take on specific work offered.|
|Having tax deducted from your wage.||Being responsible for paying income taxes and obligatory contributions.|
In many jurisdictions, including the US but also EU countries, courts will look at several factors to decide whether you are an employee or self-employed. Relevant considerations include the following key factors and tests to determine employment status:
|Key Factor||Legal tests used to determine employment status||Aspects that might be relevant in assessing the level of the key factor|
|Control||The degree of control held by your work provider and the degree of independence held by you as the worker will be assessed. However, the actual degree of control will vary with the type of your work and skills – in the case of highly specialized workers they don’t have to be directed.||Whether and to what extent: |
• A notice period exists in the contract,
• The relationship is one of subordination,
• The work provider unilaterally controls the method and amount of pay, working hours, and/or what activities the worker will perform,
• The worker receives training from the work provider on how to do the job.
|Mutuality of obligation||It will be assessed whether, under the contract, the work provider must supply a reasonable amount of suitable work to the worker, who in turn must perform all such work provided. It might mean that the parties regularise the days and times that work is done, and agree that work is available on particular days and times of the week. This is a complex area and varies in specific jurisdictions.||Whether and to what extent there is an obligation on the work provider to offer work and on the worker to accept it.|
|The enterprise test||Your (as the worker) exposure to financial risk through carrying out the work, and, conversely, your ability to make a profit through your own effort, creativity, and/or entrepreneurial skills, will be assessed. As a rule, apart from liquidation, redundancy, or reduced hours situations, employees generally don’t share in the profits nor suffer the financial losses incurred by the employer’s enterprise.||Whether and to what extent:|
• The worker is in business on their own account, i.e. is exposed to financial risk,
• The worker has the ability to make a profit through their own endeavor,
• The worker is also an employer,
• The work provider supplies most of the tools and equipment for the job, and is responsible for equipment or facility repair, maintenance, and insurance costs,
• The worker is responsible for any operating expenses and/or is financially liable if they don’t fulfill the obligations of the contract,
• The work provider chooses and controls the method and/or amount of pay,
• The worker is free to make business decisions that affect their profit or loss and/or has capital invested.
|Substitution||Your right to appoint someone else as a substitute for you, if you are unable or unwilling to do all or part of the work, will be assessed. This test concerns whether you can subcontract the work or hire assistants, as well as who does the work when you are absent. Typically, if you’re self-employed you can hire other people, on your own terms, to do the agreed-upon work.||Whether and to what extent:|
• The worker has to do the work personally,
• The worker can hire helpers or assistants,
• The work provider has a say in who the worker hires,
• The substitute is controlled and/or paid by the work provider or the worker.
|Integration||Your level of integration with the organization will be assessed. Typically, a self-employed person isn’t integrated within the business and constitutes an accessory to the organization.||Whether and to what extent:|
• The worker has a recognized role or title at the place where they
work (how the company characterizes the employee in its dealings with the public),
• The worker has other employees who report to them,
• The worker uses business facilities such as offices, tools, and equipment,
• The worker participates in performance management systems, company training programs, internal promotions, etc.
It’s crucial to understand that none of the above legal tests, key factors, and aspects relevant to assessing the level of these key factors, should be individually determinative. This means that an evaluation of each of them must be taken into account and weighed up in a rounded way, as none of them is determinative only on its own.
A person who is self-employed in one job doesn’t necessarily have to be self-employed in another job. It’s also possible to be employed and self-employed at the same time in different jobs. Then the remaining question is: can you and should you?
Can I Freelance With a Full-Time Job?
Your employment contract, employer’s policies, or other agreements regarding your employment, may prohibit you from starting a business or taking on other employment. They might impact the ownership of inventions or innovations you create, or prevent you from working in a similar field while employed, or for a period of time after you quit. Understanding what you can and cannot do as an employee prior to starting your freelance business is critical, as the consequences may be critical for you, your business and career.
Keep in Mind
Doing freelance work while employed – in a way that violates the terms of your employment – can lead to serious legal issues, including contractual penalty and instant termination of your employment contract. You have to fully understand your obligations towards your employer. Find out what to look out for and how to minimize the risks of violating your obligations as an employee.
FAQ – Difference Between Freelance and Self-Employed
Employment status has implications for, in particular, social security contributions and associated social welfare benefits, tax treatment, liability with respect to the work done, as well as employment rights. There are some typical characteristics of an employee it’s worth knowing about. An employee has rights, in particular, in regards to working time, paid annual and specific leaves (in some jurisdictions maternity/parental leave), sick days, pay, minimum notice periods, and protection from unfair dismissal. As a rule, statutory employment rights are only available to employees, but not to the self-employed.
Interested in knowing how to become a freelancer? Read our how to start freelancing checklist and download a free PDF with the most crucial steps to consider when setting up your freelance business.
Ultimately, both options come with their own sets of pros and cons. As a rule, an employee is under the control of another person who directs them as to how, when, and where work is to be carried out, generally receives a fixed wage, and isn’t exposed to personal financial risk in carrying out work. On the other hand, a freelancer sets their own rates, and controls the scope of their work, but is also solely responsible for their work. Read here to find out more about the advantages and disadvantages of being a freelancer.
Generally, yes – you can be employed and self-employed at the same time in different jobs. However, there are some potential legal risks to consider prior to starting your freelance business when working full-time.
Sustaining your freelance business requires a great deal of attention, planning, and constant improvement of your business awareness. In particular, properly managing the invoice process is crucial to your freelance business liquidity. Find out how to invoice for freelance work and download a free invoice template with some annotations to help you get started.