Guide Applies to: UK and US
Employer of record, contractor, agency worker or employee: which fits your hire?
In short: an employee works for you and you run payroll. A contractor is in business on their own account, and in the UK often works through a limited company, where IR35 may apply. An agency worker is supplied by an agency and, in the UK, gains equal treatment after 12 weeks. An employer of record (EOR) employs someone for you where you have no entity. None of these moves every risk off your books: UK law can make you responsible for PAYE where the employer has no UK presence, and in the US you stay responsible for employment taxes if a payroll provider defaults, unless it is an IRS certified professional employer organization.
Last reviewed . Covers UK and US federal rules; offshore rules depend on the country. Part of our hiring legislation hub.
We are recruiters, not lawyers, accountants or tax advisers. Nothing in this guide is legal, tax or financial advice. It is general information with a link to every source. Take professional advice for your own situation before you act. Read more
The four ways to engage someone, side by side
| Model | UK | US | Main risk to manage |
|---|---|---|---|
| Employee | You run PAYE and pay employer National Insurance. Employees have extra rights, including protection against unfair dismissal. | You withhold income tax and pay employment taxes. | Fixed cost and, in the UK from 1 January 2027, unfair dismissal rights after 6 months |
| Contractor | In business for themselves. If they work through their own limited company, the off-payroll rules (IR35) may apply. | An independent contractor under the IRS test; report payments of $2,000 or more on Form 1099-NEC. | Misclassification, with tax and employment law exposure |
| Agency worker | Contracts with an agency and works temporarily for you. Equal treatment on pay and holiday after 12 weeks. | We have not covered US staffing agency rules in this guide. | UK: umbrella PAYE liability in the chain and future guaranteed hours duties |
| Employer of record | No statutory definition found. PAYE can fall on you if the employer has no UK presence. | You stay responsible for employment taxes unless the provider is a certified PEO. | Assuming the provider carries every risk |
UK: employee, worker or self-employed
UK employment law has several status categories, including worker, employee, and self-employed and contractor, and a person may have a different status for tax. GOV.UK, employment status
- Worker. Someone with a contract or arrangement to do work personally for a reward, with a limited right to subcontract, who is not doing the work as part of their own limited company. Workers are entitled to the National Minimum Wage, paid holiday, rest breaks and protection against unlawful discrimination, among other rights. GOV.UK, worker status
- Employee. "All employees are workers", but employees have extra rights, including protection against unfair dismissal, statutory redundancy pay and the right to request flexible working. GOV.UK, employee status
- Self-employed and contractor. Someone who runs their business for themselves and takes responsibility for its success or failure. GOV.UK, self-employed and contractor status
For tax, a contractor working through their own limited company for a medium or large UK client, or a public sector client, has their status decided by that client under the off-payroll rules. See our IR35 for hirers guide. GOV.UK, understanding off-payroll working
UK: agency workers
You are an agency worker if you have a contract with an agency but work temporarily for a hirer. GOV.UK, agency workers After a 12 week qualifying period, agency workers are entitled to the same pay, holiday and working patterns as the hirer's direct employees. Acas, agency workers after 12 weeks These rights come from the Agency Workers Regulations 2010. Agency Workers Regulations 2010
- If the agency pays the worker through an umbrella company, the agency, or the end client where there is no agency, has been jointly and severally liable for unpaid PAYE since 6 April 2026. GOV.UK, umbrella PAYE rules
- Under the planned zero hours reforms, hirers will by default be responsible for guaranteed hours offers to qualifying agency workers. GOV.UK zero hours factsheet The government lists these rights for 2027, month not given. GOV.UK Employment Rights Act timeline
UK: employers of record and overseas employers
- We could find no statutory definition of "employer of record" in UK law. What the provider takes on is set by its contract with you.
- Where an employee's employer has no UK presence, section 689 of the Income Tax (Earnings and Pensions) Act 2003 can treat the UK business the employee works for as responsible for operating PAYE. HMRC PAYE81511
- Where an overseas employer with no UK presence employs a worker an agency supplies, the agency must operate PAYE, unless another party does so. GOV.UK, agency responsibilities with umbrellas
- KPMG says the April 2026 definition of umbrella company could bring employers of record and organisations that second staff to clients into the joint PAYE liability rules. KPMG commentary, December 2025
- A client that is wholly overseas, with no UK residence or permanent establishment, does not apply the off-payroll rules to UK contractors. HMRC ESM10006
US: employee or independent contractor
For federal tax, the IRS looks at behavioral control, financial control and the type of relationship, and says no one factor stands alone. IRS, contractor or employee If a business misclassifies an employee as a contractor, it can be held liable for employment taxes for that worker. IRS, worker classification 101 Wage and hour law, California and New York apply their own tests. See our US contractor classification guide.
Payments of $2,000 or more to a contractor in a tax year beginning after 2025 are reported on Form 1099-NEC. IRS Form 1099-NEC instructions
US: employers of record, PEOs and payroll providers
- The IRS says employers are ultimately responsible for the income tax withheld and both halves of social security and Medicare taxes when they outsource payroll, and remain responsible if a third party defaults, unless they use a certified professional employer organization (CPEO). IRS, outsourcing payroll
- A CPEO is generally solely liable for paying the employment taxes on wages it pays to worksite employees. IRS, CPEO customers
- The Department of Labor proposed a joint employer rule on 23 April 2026, with comments closing on 22 June 2026. It is a proposal, not a final rule. Federal Register, 23 April 2026
Offshore talent
Tax, employment and data protection rules for people working in another country are set by that country. We have not researched individual countries for this guide, so take local advice for each one before you engage anyone. See how Lavanda built a Philippines engineering team alongside its UK team.
When each model fits: our view as recruiters
This is our view from placing technology people, not legal advice.
- Employee: ongoing work that you will direct, in a country where you have an entity.
- Contractor: a defined piece of work with a known end, where the contractor controls how it is done. Check status before they start.
- Agency worker or contractor through an agency: short term cover or a project squad, where you want the agency to run onboarding and compliance.
- Employer of record: a permanent hire in a country where you have no entity, where you have read the contract for who carries PAYE, right to work and employment law risk.
Risk checklist before you choose
- Write down who directs the work, who controls how it is done, and whether the person must do it personally. These questions feature in the status tests in both countries. GOV.UK, worker status IRS, contractor or employee
- UK: if the contractor uses a limited company and you are medium or large, issue a status determination statement. GOV.UK, understanding off-payroll working
- UK: if an umbrella company is in the chain, confirm there is a UK agency contracting with you. GOV.UK, umbrella PAYE rules
- UK: if the employer has no UK presence, ask who operates PAYE. HMRC PAYE81511
- US: check whether a payroll or EOR provider is an IRS certified PEO. IRS, outsourcing payroll
- Offshore: take local legal and tax advice for each country.
How we can help
Our contract desk supplies contractors in the UK only, and contractors can see how we work on our contractors page. In London, New York and San Francisco we recruit permanent technology hires.
Sources
Every source below was fetched and read on 29 September 2026. We use primary sources first, and name any commentary. How we research these pages.
- GOV.UK: Employment statusThe status categories for employment rights, and that tax status can differ. Checked .
- GOV.UK: Employment status, workerWhat makes someone a worker and the rights workers have. Checked .
- GOV.UK: Employment status, employeeRights employees have that workers do not. Checked .
- GOV.UK: Employment status, self-employed and contractorWhat makes someone self-employed and the rights they have. Checked .
- GOV.UK: Understanding off-payroll working (IR35)When the off-payroll rules apply, who decides status, the SDS, what the deemed employer deducts and pays. Checked .
- GOV.UK: Agency workers, your rightsWho counts as an agency worker. Checked .
- Acas: Agency workers, understanding your employment rights after 12 weeksEqual pay, holiday and working patterns after 12 weeks. Checked .
- Agency Workers Regulations 2010 (SI 2010/93), legislation.gov.ukThe regulations behind agency worker equal treatment; in force from 1 October 2011. Checked .
- GOV.UK: PAYE rules for labour supply chains that include umbrella companies from 6 April 2026Who is liable (the agency contracting with the end client, or the end client), what HMRC can recover, the 6 April 2026 start. Checked .
- GOV.UK factsheet: Reforms of zero hours and similar contractsHirers responsible by default for guaranteed hours offers to qualifying agency workers. Checked .
- Department for Business and Trade: Plan to Make Work Pay and Employment Rights Act timeline update (updated 25 September 2026)Commencement dates: tribunal time limit, harassment duties, unfair dismissal, Fair Work Agency, umbrella regulation, guaranteed hours. Checked .
- HMRC PAYE Manual PAYE81511: section 689 ITEPA 2003The UK business an employee works for can be required to operate PAYE where the employer has no UK presence. Checked .
- GOV.UK: Responsibilities for employment businesses working with umbrella companiesDue diligence checks, key information documents, quarterly returns, and PAYE where an overseas employer has no UK presence. Checked .
- KPMG UK: Finance Bill, umbrellas unfurled (11 December 2025)When an end client is a relevant party, no reasonable excuse defence, and employers of record possibly in scope. Checked .
- HMRC ESM10006: meaning of medium or large sized, and wholly overseas clientsThe two of three size test, the previous £10.2 million and £5.1 million thresholds, and the wholly overseas client exclusion. Checked .
- IRS: Independent contractor (self-employed) or employee?The common law test, Form SS-8 timing, employment tax liability, Section 530 relief, Forms 8952 and 8919. Checked .
- IRS: Worker classification 101, employee or independent contractorWhat misclassification means for employment taxes. Checked .
- IRS: Instructions for Forms 1099-MISC and 1099-NECThe $2,000 threshold for tax years beginning after 2025, possible inflation adjustment from 2027, the 31 January deadline. Checked .
- IRS: Outsourcing payroll and third-party payersEmployers stay responsible for employment taxes if a third-party payer defaults, unless a CPEO applies. Checked .
- IRS: CPEO customers, what you need to knowA certified PEO is generally solely liable for employment taxes on wages it pays to worksite employees. Checked .
- Federal Register: Joint employer status under the FLSA, FMLA and MSPA (proposed rule, 23 April 2026)The joint employer proposal and its 22 June 2026 comment deadline. Checked .
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Employer of record questions
Is an employer of record the same as an umbrella company?
Not by name. But KPMG says the definition of umbrella company in the UK PAYE rules from 6 April 2026 is broad enough that some employer of record models could be caught, which would bring joint PAYE liability into the chain.
Does using an employer of record remove my UK PAYE risk?
Not always. Where the employer has no UK presence, section 689 of the Income Tax (Earnings and Pensions) Act 2003 can make the UK business the employee works for responsible for operating PAYE.
Who is liable for US employment taxes if I use a PEO or payroll provider?
The IRS says you remain responsible if a third-party payer defaults, unless the provider is a certified professional employer organization, which is generally solely liable for taxes on wages it pays to worksite employees.
What is the difference between a worker and an employee in the UK?
All employees are workers, but employees have extra rights, such as protection against unfair dismissal and statutory redundancy pay. Workers still get the National Minimum Wage, paid holiday and rest breaks.
When does an agency worker get equal treatment in the UK?
After a 12 week qualifying period, agency workers are entitled to the same pay, holiday and working patterns as the hirer's direct employees.
Can I hire an offshore contractor without local advice?
We would not. The rules are set by the country where the person works, and we have not covered individual countries in this guide.
Is this guide legal or tax advice?
No. We are recruiters, not lawyers, accountants or tax advisers. Take professional advice in each country before you choose a model.
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