Employee, worker or contractor? Picking the right contract for your first hire

English law recognises three kinds of working relationship. An employee works under a contract of employment. A worker undertakes to do work personally for you but with less mutual obligation: the casual, the zero-hours, the gig arrangement. A self-employed contractor runs their own business and you are a client of it.

The label on the document is not decisive. Courts and tribunals look at how the relationship actually runs, and three things carry most weight: control (do you decide what is done, how, when and where?), personal service (must they do it themselves, or can they send a substitute?), and mutuality of obligation (are you obliged to offer work and are they obliged to accept it?). The more of those point to you, the more the person looks like an employee.

A useful founder's shortcut: if the person will work set hours, mostly for you, using your tools, under your direction, and could not realistically send someone else in their place, write an employment contract. If they will deliver a defined piece of work on their own terms, for a fee, alongside other clients, a contractor agreement is honest.

Get it wrong in the contractor direction and three things can follow. The person can claim the rights they were denied: paid holiday (5.6 weeks a year for workers and employees), the minimum wage, and for employees, after the qualifying period, unfair dismissal protection and statutory redundancy pay. HMRC can look for the income tax and National Insurance that should have gone through payroll. And a tribunal claim is a public document, which is not how you want a seed investor to learn your company's name.

Get it wrong in the other direction, by employing someone who really wanted to run a business, and you have taken on obligations you did not need. That is the cheaper mistake, but still a mistake.

An employee is entitled to a written statement of the main terms of employment on or before the first day. The list is set by statute and includes the names of the parties, the start date, pay and when it is paid, hours (including whether they vary), holiday entitlement, sick pay, notice periods, job title or description, place of work, probation terms, any training required, and other benefits. Most of it also applies to workers.

A properly drafted employment contract covers all of that and the things the statute does not require but a startup needs: confidentiality, an assignment of intellectual property created in the job, data protection and use of company systems, outside work and conflicts, and restrictive covenants after leaving. The last of these only works if it is no wider than needed to protect a legitimate interest, so a twelve-month worldwide non-compete for a junior developer is likely to be worth nothing; a six-month non-solicit of the customers they dealt with may be worth a great deal.

Add an employee handbook for the policies the contract refers to (disciplinary, grievance, equal opportunities, data), and a staff privacy notice, which UK GDPR requires you to give them.

Casual staff still need written terms, and the terms should say honestly that there is no obligation to offer or accept work, that they are paid for hours actually worked, and that they accrue holiday on those hours. Exclusivity clauses in zero-hours contracts are unenforceable. A worker contract is a short document, but it needs to be the right short document: an employment contract with "zero hours" written on it creates the mutuality it is trying to avoid.

A good contractor agreement does two jobs. It records the commercial deal: the deliverables, the fee, the timetable, who owns the work product, what happens if it is late or wrong. And it reflects, truthfully, a relationship that is not employment: a right to substitute, control of their own method and hours, their own equipment and insurance, no entitlement to holiday or sick pay, responsibility for their own tax.

Two warnings. First, the agreement cannot make a self-employed person out of someone who is an employee in fact; if the day-to-day looks like employment, the paper will not save you. Second, if the contractor works through their own limited company and your business is medium or large under the off-payroll working rules, you must assess whether the engagement would be employment if it were direct, and if so account for tax as if it were. Small companies are outside those rules for now, but the contractor's own company is not, and the status question is the same.

For software, use the freelance developer agreement instead: it adds source code delivery, licences for third-party components and a cleaner IP assignment, which is the clause investors will read first.

• IP that never moved. Work done by an employee in the course of employment belongs to the employer by default; work done by a contractor belongs to the contractor unless assigned in writing. Every contractor agreement needs an assignment clause, and every founder who wrote code before the company existed needs a founder IP assignment.
• The "intern". An intern doing real work for a set period is a worker or employee and must be paid at least the minimum wage, whatever the job title. An internship agreement should say so.
• No written terms at all. Apart from the statutory breach, you lose the clauses that matter most: confidentiality, IP, notice. The statutory minimum notice is a week after a month's service, which is not enough time to hand over anything.

Decide the status honestly from how the work will run. Then use the contract that matches: employment contract (£39), worker contract (£39) or contractor agreement (£39), each with drafting notes that explain the choices. If the hire is senior, the equity is involved, or you are not sure which side of the line they fall, a fixed-fee review of the finished document costs less than the first week of a dispute.