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As contractor numbers surge, "employers could face costly tribunal claims"

ended 18. August 2025

LEGAL and HR experts have warned that the growing number of businesses turning to contractors to sidestep increased National Insurance bills could be at risk of “costly tribunal claims”.

Last week, jobs data showed an ongoing drop in the number of payrolled staff, and job market experts have said one key driver of this trend is businesses increasingly turning to contractors rather than hiring full-time.

Kate Underwood, Managing Director at Southampton-based Kate Underwood HR and Training, said: “Don’t get me wrong, contractors can be a great way to grow your business. But if they look like a duck and quack like a duck, the tax office might say they are a duck. With IR35 and the new Employment Rights Bill, that could mean holiday pay, sick pay, pensions and a surprise bill from HMRC.”

Ian Jones, Director and Principal Solicitor at Birmingham-based Spencer Shaw Solicitors, warned a bill could be accompanied by a costly tribunal claim if businesses get employment status wrong: "It's really important for business owners to understand employment status and the factors that determine whether a role is employed, self-employed or a worker. Several factors affect this status, including bargaining power, how much freedom or control the individual has, and the freedom to work for other people.

"To ensure the role is genuinely self-employed, employers may need to accept some changes to the role and less control over the individuals doing the work. If workers don't genuinely fit the definition of self-employment, employers could face costly tribunal claims and be ordered to compensate for the rights the individual was denied. This could be far more costly overall.

“Outsourcing could also bring the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) into play. This can be complex and leave employers — and the entities to whom employees are transferred — at risk of litigation.”

Samuel Mather-Holgate, Independent Financial Adviser at Swindon-based Mather and Murray Financial, also sounded a note of caution: “If you’re outsourcing a role to a contractor, but HMRC deem the job to be very similar to that of an employee, they could force you to payroll them, and any benefits of using a contractor would be lost. They are pretty hot on this since IR35 was introduced, so businesses should beware.

"That said, where you’ve got a specific job, and you can be flexible with hours and where they work from, using a contractor can be a much more agile solution than bringing on a member of staff and committing to an ongoing wage.”

Meanwhile, Underwood said that while contractors can save you money, they can often be less engaged: “Sometimes, contractors can be less engaged and less invested, meaning that “quick fix” can cause more problems than it solves. So yes, use them but use them in the right way.”

4 responses from the Newspage community

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Kate Underwood
Founder & Chief People Strategist at Kate Underwood HR and Training
Don’t get me wrong, contractors can be a great way to grow your business. But if they look like a duck and quack like a duck, the tax office might say they are a duck. With IR35 and the new Employment Rights Bill, that could mean holiday pay, sick pay, pensions and a surprise bill from HMRC. But sometimes contractors can be less engaged and less invested, meaning that “quick fix” can cause more problems than it solves. So yes, use them but use them in the right way.
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Ian Jones
Director and Principal Solicitor at Spencer Shaw Solicitors
It's really important for business owners to understand employment status and the factors that determine whether a role is employed, self-employed or a worker. Several factors affect this status, including bargaining power, how much freedom or control the individual has, and the freedom to work for other people. To ensure the role is genuinely self-employed, employers may need to accept some changes to the role and less control over the individuals doing the work. If workers don't genuinely fit the definition of self-employment, employers could face costly tribunal claims and be ordered to compensate for the rights the individual was denied. This could be far more costly overall. Outsourcing could also bring the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) into play. This can be complex and leave employers — and the entities to whom employees are transferred — at risk of litigation.
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Samuel Mather-Holgate
Managing Director & IFA at Mather and Murray Financial
If you’re outsourcing a role to a contractor, but HMRC deem the job to be very similar to that of an employee, they could force you to payroll them, and any benefits of using a contractor would be lost. They are pretty hot on this since IR35 was introduced, so businesses should beware. That said, where you’ve got a specific job, and you can be flexible with hours and where they work from, using a contractor can be a much more sound solution than bringing on member of staff and committing to an ongoing wage.
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Scott Gallacher
Director at Rowley Turton
With the current economic uncertainty it's not surprising that employers are looking to use contractors as opposed to taking on permanent employees. It's generally quicker and easier to hire, and fire, contractors than permanent staff, especially as more and more firms are requiring their staff to give three months notice, making poaching staff from those firms a longer process. When used correctly, contractors can make a business much more dynamic and flexible, and better able to serve the needs of their customers.