First things first, allow me to be clear. Contractors and freelancers are, on the whole, a fantastic group. Speaking as someone who has looked after the needs of tens of thousands of them over the years, I can confirm that they are an excellent source of innovation, inspiration and expertise for businesses of varying sizes across Britain.

These skilled individuals, who have made the brave decision to leave traditional full-time employment and go it alone, bring a range of benefits to their clients and the wider economy.

Benefits of using contractors

Contractors solve problems, promote original thinking, enable skills gaps to be filled, and ensure time-sensitive projects are delivered on time. They liberate businesses from the limitations of their permanent workforce, and give them the chance to harness expertise they may otherwise have missed out on. There are, of course, more pragmatic reasons to enlist the services of a freelancer or contractor.

For a start, as a business you only pay a contractor for the work that they do. You can be reasonably confident that, unlike some permanent employees, they will be unlikely to call in sick or partake in clock watching. By their very nature, freelancers are – generally speaking – efficient, capable and driven to deliver. It’s in their interest to meet and ideally surpass your expectations, so that you choose to engage them again in future.

Growing demand

After a challenging few years for members of the skilled, flexible workforce, there are signs that a growing number of employers are once again utilising their services. Several recent surveys have suggested that demand for Britain’s estimated 1.4 million contractors and freelancers is growing rapidly. Indeed, one study found that demand for IT contractors – a key segment of the flexible workforce – reached a 25-month high in June and rose again in July. Further growth in demand is anticipated in the coming months as the economy continues to pick up.

Harsh realities

All of which sounds great, but contractors are human and we don’t live in a perfect world. As with all business (and indeed personal) relationships, occasionally mistakes are made and things go wrong.

So what happens in the event of a HR dispute with a contractor? Where do you as the client stand, for example, if the contractor claims their assignment was terminated prematurely and decides to pursue you for loss of earnings? What’s your position if the contractor claims he or she has been treated unfairly during their assignment?

Determining employment status

In the event of a dispute between your organisation and a contractor, freelancer or other temporary worker, the first thing you as a HR professional should do is look to ascertain the worker’s employment status as quickly as possible. This will dictate the action you should then take.

Ask yourself: is the contractor truly self-employed? Contractors who can be classed as self-employed include sole traders and those who have set up their own limited company.

Limited company contractors

Limited company contractors obviously don’t have access to their own HR department. They are classed as business entities in their own right, and operate business-to-business relationships with recruitment agencies and end clients. Any dispute between a limited company contractor and agency or client is therefore far more likely to be contract law-based than employment-law related.

For genuine limited company contractors, as opposed to ‘disguised employees’ who are the focus of IR35 legislation, the ability to take action in the face of early termination will depend on the exact wording of the contract. Often, whether the termination is unfair or not will be a matter of judgement. However, it’s worth remembering that the contractor will be conscious of the fact that premature legal action could affect his or her ability to secure assignments in future.

The employment conundrum and the rise of ‘outsourced employment’

HR professionals should bear in mind that many ‘flexible’ workers such as contractors and freelancers are, in fact, employed – either by their recruitment agency or an umbrella company. When a contractor or freelancer joins an umbrella company, also known as a professional employment organisation (PEO) or employment services provider, they become an employee of that company. This, assuming that the professional employment organisation in question operates to high standards, entitles the workers to a contract of employment and associated rights and benefits. Indeed, a reputable umbrella company or PEO will see no distinction between its head office employees and its contractor employees working in the field.

These providers, which generally have a HR department of their own, utilise their expertise in workforce management to process payment of wages, offer employee support and handle any HR disputes. A fully compliant, UK-based provider will also pay all relevant PAYE tax and National Insurance contributions (NICs). Any disputes or complaints brought by a contractor are handled by the employment services provider, rather than you as the ‘end client’ that is utilising the contractor’s skills. Because the external umbrella provider is the employer of the eyes of the law, it bears ultimate responsibility in the event of a contractor bringing a claim or raising a dispute.

Outsourcing employment to an external provider in this way enables companies to minimise their exposure to risk.

Planning ahead

I will end this post in the same way I started it; by singing the praises of the UK’s flexible workforce.

Contractors, freelancers and other flexible workers make an invaluable contribution to our economy, and in my view do not receive sufficient recognition for their skill, creativity and hard work. The vast majority are incredibly dedicated individuals. It’s simply the case that, from time to time, problems are encountered and disputes take place.

My advice to all HR professionals reading this post would be to think ahead, and plan for the possibility of a dispute before engaging a contractor or freelancer. I would strongly recommend that you establish the individual’s employment status before their assignment starts. Ask yourself: are they employed, and if so, by whom? Who bears liability and carries risk in the event of a dispute?

If you do not know the answers to these questions, you should ask yourself one more question: Why not?

Derek Kelly is managing director at Optionis; home to Parasol, the UK’s largest professional employment organisation (PEO), small business services provider ClearSky and cloud-based performance management software Silverline. Optionis has offices in Warrington, Manchester, Poole and London. For more information, please visit Derek joined Optionis in 2008 following 15 years at KPMG. Whilst at KPMG Derek specialised in employment taxes, leading KPMG’s northern and south west practices. Derek has spent his career providing no-nonsense advice to employment outsourcing specialists, employment agencies and blue chip-corporates. In his free time Derek can either be found sailing his boat “Noah’s Ark” on lake Windermere or walking his dog Minnie; but is never far from his iPad.

Derek Kelly is managing director at Parasol