The different types of employment: a business owner’s guide

Once you’ve navigated the initial challenges of how to start a business — such as coming up with a business name, identifying your target market, and figuring out how to pay yourself as a business owner — you might turn your attention to hiring. 

Perhaps you need some additional support with a big client project, or an extra pair of hands to help you manage busy periods in your brick-and-mortar store. 

No matter what type of business you run or what skills you’re hiring for, you must first get to grips with the different types of employment. This ensures that you:

• Hire in a way that aligns with your business needs and goals

• Are able to grow sustainably and manage the costs associated with hiring

• Hire in a way that’s legally compliant and mutually beneficial for both you and your employees 

There are three different types of employment status in the UK, and many different types of employment contracts within those three categories. Keep reading to learn what they are, how they differ, and what they mean for you as an employer. 

What does ‘employment status’ mean and why does it matter?

A person’s employment status defines, in legal terms, what type of arrangement they have with a company or employer.

This determines the types of employer benefits, rights, and protections they’re entitled to — and, as a business owner, what responsibilities you have towards the people who work for you. 

Whether you’re looking for short-term support to get one of your small business ideas off the ground, or looking to hire permanent employees as you explore business growth strategies, it’s essential that you understand the different types of employment contracts. 

Why? Because choosing the right type of employment for your business is crucial for ensuring smooth operations management, making the most of your small business budget, and creating a positive workplace culture. 

It also plays into the legal requirements for starting a small business, making sure that you’re operating in compliance with HR and employment laws and treating your employees fairly.

The 3 types of employment status in the UK

In the UK, there are three main types of employment status: employee, worker, and self-employed. 

1. Employees

Employees are hired with a clearly-defined contract of employment. They have the most rights and protections of all the employment types, and are guaranteed regular and consistent work. 

Those with ‘employee’ status are generally required to work a set number of hours per week under the supervision of their employer or an assigned manager. When hiring employees, you are responsible for providing all the tools and materials they need to do their job. You’ll also need to get to grips with how to do a payroll. 

This is the most committed type of employment, both for the employee and the employer. Employees tend to be hired under the premise that they’ll stay with the business long-term — and, in turn, they’re entitled to a certain degree of job security and benefits. 

What rights and protections are employees entitled to?

• National Minimum Wage

• Paid holiday / annual leave (in line with the statutory minimum)

• Protection against unlawful discrimination 

• Statutory sick pay

• Statutory maternity, paternity, adoption, and shared parental pay and leave

• Minimum notice periods if their contract is being terminated

• Protection against unfair dismissal

• The right to request flexible working

• Time off for emergencies

• Statutory redundancy pay 

2. Workers

People with ‘worker’ status have a more casual arrangement than those in the ‘employee’ category. They’re entitled to some employment rights and benefits, but not to the same extent as employees. 

Like employees, workers are still hired by the company; they’re not carrying out their work on a freelance basis where the company would be classed as a client. However, they tend to be hired on a more flexible contract. 

As such, workers aren’t guaranteed regular shifts or a certain number of hours. Rather, their work is carried out on a more ad-hoc basis depending on the company’s needs. If you’re exploring business opportunities in the hospitality industry — such as running a café or restaurant, for example — you might hire workers through an agency to help you cover busy periods.

What rights and protections are workers entitled to?

• National Minimum Wage

• Paid holiday (in line with the statutory minimum)

• A limit of 48 working hours on average per week (workers can opt out of this right if they wish to work more)

• Protection against unlawful discrimination

In addition to those basic protections, workers may be entitled to statutory sick pay and statutory maternity, paternity, adoption, and shared parental pay. They’re not typically entitled to a minimum notice period, time off for emergencies, redundancy pay, or protection against unfair dismissal. 

3. Self-employed

The third category, self-employed, describes those who run their own business or work for themselves. They have more control over when and how they carry out their work, and they’re responsible for sending invoices and paying their own National Insurance and tax.

The relationship between an employer and a self-employed worker doesn’t extend beyond the scope of the contract they’ve agreed upon. There’s no guarantee of further work once the project is complete, and employers aren’t required to grant self-employed workers any benefits such as holiday or sick pay. 

Note that it’s possible to be both employed and self-employed at the same time. If someone works a 9-5 job during the day, for example, and then spends the evenings and weekends working on various side hustle ideas, they would fall into both categories.

What rights and protections are self-employed people entitled to?

Those with self-employed status aren’t entitled to the same rights and protections as workers and employees. They are entitled to general protection of their health and safety, protection of their rights against discrimination, and any additional terms set out in the contract they’ve agreed with the client. 

Within those three main employment statuses, there are many different types of employment contracts and arrangements to consider. Let’s explore them now.

9 different types of employment contracts to consider for your small business

1. Full-time employees

Full-time employees work a standard and consistent number of hours per week — usually between 35 and 40 hours. They’re entitled to all the rights and protections that come with ‘employee’ status, such as paid annual leave, sick pay, pension contributions, and protection against unfair dismissal. 

When to hire full-time employees:

Full-time employees provide consistency and continuity. If you need someone (or several people) to learn the ropes of your business and help you maintain day-to-day operations, consider hiring employees on a full-time basis. 

With full-time staff, you’ll reap the long-term benefits of training employees — and having a stable and consistent team will also prove crucial if you’re thinking about how to improve the customer experience and foster customer loyalty. 

2. Part-time employees

Perhaps you want the consistency and continuity of a regular staff base but don’t require full-time support. In that case, consider hiring employees on a part-time basis. 

Part-time employees have all the same legal protections and employment rights as full-time employees, but they work fewer hours — typically no more than 30 hours per week. Benefits such as holiday pay and sick leave are calculated on a pro-rata basis depending on how many hours the employee works. 

When to hire part-time employees: 

If your workload and cash flow are consistent enough that you need (and can afford) regular in-house staff but you don’t quite require full-time support, you might choose to hire part-time employees.

If you’re looking at how to run a business in retail, hospitality, or the beauty industry, for example, you might notice that you have consistently busy periods — such as the lunch-hour rush or Saturday afternoons. Part-time employees can help you cover those peak hours without stretching your small business finances unnecessarily to pay for full-time staff. 

3. Fixed-term employees

Within the ‘employee’ category, you can also employ people on a fixed-term basis.

Fixed-term employees are usually hired to work on a particular project or to cover a specific time period. Fixed-term contracts have a clear start and end date, with no guarantee of continued employment beyond that period.

Note that fixed-term employees have all the same benefits and protections as permanent employees for the duration of their contract — including holiday pay, sick leave, and protection against unfair dismissal. 

When to hire fixed-term employees:

This is one of the more flexible types of employment contracts, allowing you to get full-time support for a specific period without committing to a permanent or long-term hire. 

Perhaps your business venture involves exploring creative ways to make money and you’re running a small design studio or some kind of project-based service. You might hire a fixed-term employee for three months to help you with a big project, then return to regular staff numbers once the project is complete.

4. Apprenticeships 

If you want to train and mentor entry-level professionals while gaining additional support for your business, consider hiring an apprentice. 

An apprenticeship combines work with formal training and study, allowing newcomers to the workforce to gain valuable on-the-job experience and earn money while obtaining a qualification. 

Apprentices typically work at least 30 hours a week, which may include time spent at college or an external training facility. They fall under the ‘employee’ category, so they’re entitled to all employee benefits such as National Minimum Wage, sick leave, and holiday pay. 

When to hire an apprentice: 

Apprenticeships are most common in the trade industry. If you run a hairdressing or beauty salon, for example, an apprenticeship is a great way to train someone up for long-term, permanent employment. 

Note that, if you do hire an apprentice, you must be prepared to provide structured and practical training, to implement effective performance management techniques, and act as both a mentor and a coach — not just an employer. 

5. Internships

While apprentices train, study, and work simultaneously over a longer period of time, interns tend to join a company temporarily on a short-term basis — either during or after completing their studies.

Internships can be mutually beneficial for employers and interns alike. Interns get the opportunity to gain real-world experience in their field of interest, and to learn valuable soft skills such as teamwork, communication, what is good customer service, and how to deal with difficult clients. 

As an employer, you can benefit from temporary additional support while mentoring — and also learning from — early-career professionals.

It’s important to bear in mind that the employment status of interns is not so clear-cut. If you hire an internship as a worker, they’ll be entitled to the National Minimum Wage and other benefits within the worker category. However, many internships are classed as work experience or voluntary placements, meaning that you’re not obliged to offer any kind of remuneration or paid annual leave. 

When to hire an intern: 

If you need short-term support and are willing to train and mentor an entry-level professional, an internship could be one of the most suitable types of employment contracts to consider. Equally, if you’re thinking about how to scale a business but aren’t sure about hiring permanent staff, an internship can be a great way to test the waters. 

6. Seasonal workers 

Maybe you don’t need a fully staffed team at all times, but require extra support to manage seasonal peaks. If you run a hospitality business in a popular tourist destination, for example, you might need more hands on deck for the summer season. 

Seasonal workers can be hired to help you manage periods of high demand without committing to permanent employees year-round. As workers, they are entitled to some rights and benefits such as National Minimum Wage, holiday pay, and rest breaks, but not to the full scope of benefits that comes with being an employee. 

When to hire seasonal workers:

If you run a business that experiences seasonal peaks and troughs, you can scale your staff up and down accordingly by hiring seasonal workers. This may prove more cost-effective than hiring permanent employees, and allows you to enlist skilled workers without needing to provide extensive training.

7. Agency workers

Agency workers aren’t employed directly by your company; they work for a staffing agency who acts as their employer and places them with different companies as and when required.

In terms of employment status, agency workers are classed as workers, not employees. As part of their contract with the agency, they are entitled to the National Minimum Wage, paid holiday, rest breaks, and protection against discrimination.

However, if an agency worker is placed in the same role within the same company for longer than 12 weeks, they gain additional rights and benefits — such as the right to receive the same rate of pay as direct employees of the company. 

When to hire agency workers:

If you’ve got permanent employees on leave for a longer period of time, agency workers can provide quick and flexible cover without the admin of hiring an in-house replacement. You might have a receptionist on parental leave, for example, and hire an agency worker to cover for them. 

8. Zero-hours contract and casual workers

If you require support on an irregular, ad-hoc basis, you might consider a zero-hours contract arrangement. 

Zero-hours contract workers, or casual workers, aren’t guaranteed a certain number of hours; you can call them as and when you need them. You’re under no obligation to give them work, and they are under no obligation to accept the work offered to them.

Zero-hours workers are legally entitled to the National Minimum Wage and to statutory annual leave (just like anybody else with ‘worker’ status). 

When to hire zero-hours contract and casual workers:

If your business needs fluctuate, or if you have certain jobs that only need doing on an ad-hoc basis, zero-hours contracts can work well. You might hire a casual cleaner to come in every so often, for example, or work with zero-hours catering staff for special events. 

9. Freelancers, consultants, and independent contractors 

You can hire freelancers, consultants, and independent contractors to work on a specific project. Such workers are either self-employed or employed by another company, so you’re not required to grant them any employee benefits. 

When working with freelancers, you’ll need to agree on the terms, conditions, and scope of the project — including the rate of pay. Before work begins, it’s important to determine what kind of budget you’re working with; this is an essential part of cash flow management, and for making sure that both parties are aligned. 

When to hire freelancers, consultants, or independent contractors: 

Consider working with freelancers, consultants, or independent contractors when you require certain skills or expertise that you don’t have in-house, and when you’ve got a clearly-defined project that you need support with. 

You might work with a freelancer to devise a marketing strategy for your small business, for example, or hire a business coach to show you how to create a USP for your business and figure out the best pricing strategies.

How to determine the most suitable types of employment for your small business

Hiring has a major impact on your business. It affects your day-to-day efficiency, your company’s financial health, and your workplace culture. It’s essential that you choose the types of employment contracts that make most sense for your company and help you achieve your short- and long-term goals. 

Here are some key factors to consider:

What is the nature of your business and what are your main requirements? 

Think about how your business currently operates and how your workload varies, if at all. 

If your requirements are relatively stable and predictable year-round, you might lean towards full-time or part-time employees who can provide consistent and ongoing support. 

If you experience seasonal highs and lows or unpredictable fluctuations, you’ll probably want a more flexible arrangement such as seasonal workers or independent contractors. 

What is your budget? 

Weigh up all the costs associated with the different types of employment. 

Consider expenses such as employee wages or project fees, any training and equipment costs (e.g. employee laptops if you’re focusing on online business ideas that rely on a remote workforce), agency or recruitment fees, as well as any additional benefits you’re legally required to provide. 

This will help you to determine what types of employment contracts make most sense for your budget while meeting your business needs. 

What are your plans for future growth and development?

Consider how your hiring choices might impact your business in the long-term. 

If you don’t have any immediate plans for growth, or want to remain flexible, you may choose to work solely with independent contractors for the time being.

If you plan to steadily grow your business, you might prefer to build a team of skilled, knowledgeable workers who can help with long-term goals such as improving customer retention or consistently leveraging social media for your small business. In that case, it’s worth investing in permanent, in-house employees.

Key takeaways and next steps

It doesn’t matter what kind of business you run: a brick-and-mortar shop, a busy café, or an up-and-coming creative agency. If you’re thinking about hiring additional staff or outsourcing certain tasks, you must first determine the most suitable types of employment for your business. 

This ensures that you’re able to operate efficiently, grow sustainably, and fulfil your legal obligations as an employer. 

Next steps

Once you’ve decided what types of employment agreements make sense for your business, consider the following next steps:

1. Come up with a plan for how to hire employees for your organisation. Think about whether you’ll work with a recruitment agency, advertise on local job boards, or tap into your network to find suitable candidates.

2. Make sure you have the necessary systems and processes in place. Understand all the legal requirements and implications of hiring, consider the administrative aspects of how to pay your employees, and what kind of onboarding and training you’ll provide.

3. Think about how you can make the most of your working relationship with new hires or contractors. Consider how to create a positive working environment, how to motivate employees, and how to foster employee retention (especially if you’re hiring in-house staff). 

And remember: hiring should be a mutually rewarding experience. Whether you’re working with employees, freelancers, or casual workers, focus on building positive relationships that foster productivity, encourage learning and feedback on both sides, and ultimately drive your business to success.