Contractor vs Employee: The Critical Decision for UK Gym Owners

UK employment law recognises three distinct employment statuses, each with different rights, obligations, and tax treatments. Understanding these categories is essential before making any hiring decisions.

Employee Status

Employees have the most extensive rights under UK law, including protection from unfair dismissal (after 2 years' service), statutory sick pay, maternity and paternity pay, minimum notice periods, and pension auto-enrolment. The gym pays employer's National Insurance at 15% on earnings above £5,000 annually (2026 threshold), operates PAYE tax deduction, and must provide written contracts within 2 months. This is the most expensive option but gives you the greatest control.

Worker Status

Workers occupy a middle ground with some employment rights but not full employee protections. They're entitled to the National Living Wage (£12.71/hour for 21+ from April 2026), holiday pay (5.6 weeks annually), and protection against discrimination, but don't have unfair dismissal rights or statutory redundancy pay. This status is relatively uncommon in gym settings and doesn't provide IR35 protection if they operate through a limited company.

Self-Employed Contractor Status

Genuinely self-employed contractors have minimal employment rights, are responsible for their own tax and National Insurance through Self Assessment, don't receive holiday pay or sick pay, and can work for multiple clients simultaneously. For the gym, there's no employer NI liability, no PAYE administration, and no employment tribunal risk. However, IR35 rules mean that simply calling someone a contractor doesn't make them one – the actual working relationship determines their true status.

HMRC doesn't rely on what you call the relationship in a contract. Instead, they assess the actual working arrangements using six established tests. All factors are considered together – you can't satisfy one test and ignore others.

1. Control Test

Who controls what work is done, when it's done, where it's performed, and how it's carried out? Employees work under the gym's control. If you dictate which classes they teach, require them to follow your curriculum exactly, set their schedule, and mandate teaching methods, this indicates employment. Contractors have autonomy over how they deliver their service – they might follow your general safety standards but determine their own teaching approach.

2. Substitution Test

Can the instructor send a substitute to teach their class? Employees must provide personal service and cannot send someone else. If the instructor could genuinely send another qualified person (at their own expense) without needing your approval, this suggests self-employment. However, the right must be real and unfettered – merely writing it into a contract isn't enough if it's never exercised or if you'd always refuse.

3. Mutuality of Obligation

Must you offer work, and must they accept? Employees have an ongoing obligation to accept work when offered. If you guarantee a certain number of classes and they're expected to teach them, this indicates employment. Contractors can refuse work without penalty and you're not obligated to provide any.

4. Integration Test

Is the instructor part of your organisation or in business for themselves? Employees are integrated into the business – they use your email domain, wear your branded kit, appear on your website as 'staff', and are managed like internal team members. Contractors operate independently, have their own business identity, work for multiple clients, and market themselves separately.

5. Financial Risk Test

Does the instructor risk their own money? Employees receive fixed pay regardless of business performance. Contractors might invest in their own equipment, bear the cost of mistakes, or have variable income based on how many clients they secure. However, simply invoicing through a limited company doesn't create genuine financial risk if you guarantee payment for fixed hours.

6. Equipment Test

Who provides the tools and equipment? If you provide everything – the mats, the gym space, the booking system, the marketing, the students – this suggests employment. Contractors typically provide significant equipment themselves. For BJJ instructors, this test is weaker because the gym naturally owns the mats and space, but consider whether they provide their own insurance, marketing materials, or administrative systems.

IR35 legislation, officially called the off-payroll working rules, exists to prevent 'disguised employment' – situations where someone works like an employee but operates through a limited company to avoid tax. Originally introduced in 2000, the rules shifted dramatically in April 2021 when responsibility for determining IR35 status moved from contractors to medium and large businesses.

Who Is Responsible for IR35 Determination?

From April 2026, the threshold for "small company" exemption increases, meaning companies with turnover under £15 million, balance sheet under £7.5 million, and fewer than 50 employees are exempt from off-payroll rules. Most BJJ gyms fall into this category, meaning contractors working with you remain responsible for determining their own IR35 status under the original 2000 regime. However, if you're a larger operation or part of a chain, you may be responsible for making Status Determination Statements (SDS).

Importantly, approximately 14,000 UK companies will transition from medium to small classification based on the updated 2026 thresholds, shifting IR35 compliance responsibility back to contractors in many cases.

What Is Deemed Employment?

If HMRC determines that your 'contractor' would have been an employee if hired directly (failing the employment status tests), they're deemed to be an employee for tax purposes. This means you should have been deducting PAYE tax and paying employer's National Insurance all along. You'll owe the back-taxes, NI contributions, interest, and potentially penalties.

How to Structure Genuine Contractor Relationships

To maintain legitimate contractor status under IR35, ensure the relationship satisfies the HMRC tests. The instructor should work for multiple gyms, have genuine autonomy over teaching methods, be able to send substitutes (even if rarely exercised), invoice for services provided rather than hours worked, use their own public liability insurance, and operate under their own business identity. They should not have fixed contracted hours, be integrated into your team structure, or be restricted from working for competitors.

Consequences of Getting It Wrong

If HMRC investigates and determines misclassification, you face back-payment of PAYE tax and employer's National Insurance (15% on earnings above £5,000 annually), interest on unpaid amounts (potentially going back 6 years), financial penalties up to 100% of the tax owed for deliberate misclassification, and potential criminal prosecution for knowing and wilful fraud. The instructor may also bring employment tribunal claims for holiday pay, unfair dismissal, or other employment rights if they believe they were actually an employee.

The contractor model can work well for part-time, irregular teaching arrangements where the instructor genuinely operates their own business. However, it must be structured correctly to withstand HMRC scrutiny.

Advantages for Gym Owners

You avoid employer's National Insurance contributions (saving 15% on earnings above £5,000 annually), eliminate PAYE administration and payroll costs, avoid pension auto-enrolment obligations (saving 3% employer contribution), don't provide holiday pay (saving 12.07% of earnings), have no liability for statutory sick pay, maternity pay, or other benefits, and face no employment tribunal risk for unfair dismissal. You also gain flexibility to scale up or down without formal redundancy processes.

Disadvantages for Gym Owners

You have less control over the instructor's schedule and teaching methods, face IR35 investigation risk if the relationship looks like disguised employment, cannot prevent them from working for competitor gyms, may experience less loyalty and higher turnover, and have no recourse if they suddenly stop teaching. Additionally, you cannot mandate attendance at training sessions or team meetings without strengthening the employment case.

Cost Comparison Example

Consider an instructor teaching 8 classes per week at £40 per class (£320/week, £16,640/year):

• As Contractor: Total cost: £16,640 (no additional costs)
• As Employee: Employer NI: £1,746/year (15% on earnings above £5,000), Holiday pay: £2,009/year (12.07% accrual), Pension contribution: £312/year (3% on qualifying earnings £6,240-£16,640), Total cost: £20,707/year

The contractor model saves approximately £4,067 annually (24% saving) on this example. However, these savings evaporate if HMRC determines the relationship was actually employment and demands back-payment plus penalties.

When Contractor Status Works

Contractor status is appropriate when the instructor teaches 1-4 irregular classes per week with no fixed schedule, works for multiple gyms or has other significant income sources, has complete flexibility over whether to teach (can decline classes without penalty), has genuine autonomy over curriculum and teaching methods within broad safety guidelines, operates through their own limited company or as a sole trader with multiple clients, provides their own public liability insurance, and markets themselves independently as a BJJ instructor for hire.

How to Structure Properly

Use a contractor services agreement (not an employment contract) that specifies services to be provided rather than hours to be worked, includes a genuine right of substitution with a named list of pre-approved qualified substitutes, confirms they work for other clients, states payment per class or project (not hourly), clarifies they provide their own insurance and equipment where applicable, and includes no notice period (either party can terminate immediately or with short commercial notice). Ensure the instructor invoices you using their business name, pays their own tax via Self Assessment, doesn't receive any employment benefits, and isn't integrated into your team structure or branding.

Red Flags That Indicate Employment

Warning signs include fixed regular schedule (e.g., "every Tuesday and Thursday 6-8pm"), requirement to seek permission for time off, obligation to attend staff meetings or training, exclusive arrangement (cannot work for other gyms), use of your email address or branding as if they're staff, guaranteed minimum hours or retainer payment, detailed control over teaching methods, progression, and curriculum, integration into your website as 'our team' or 'our coaches', and lack of genuine other clients or business activity.

The employee model is necessary when the working relationship naturally falls into an employment arrangement, regardless of what you'd prefer for cost reasons. Attempting to force a contractor label onto an employment relationship creates significant legal and financial risk.

Advantages for Gym Owners

You gain full control over the instructor's schedule, teaching methods, and availability, can require attendance at training sessions and meetings without creating tax issues, benefit from greater loyalty and integration into your gym culture, can include restrictive covenants preventing them from immediately joining competitors, and have clear disciplinary and performance management processes. Employees are also generally perceived as more professional and committed by members.

Disadvantages for Gym Owners

You incur significant additional costs beyond gross salary (typically 24-30% more), must operate PAYE and submit Real Time Information to HMRC, face potential employment tribunal claims for unfair dismissal, must follow statutory procedures for discipline and dismissal, cannot easily reduce hours without formal consultation or redundancy process, and must provide statutory sick pay, maternity/paternity pay, and pension contributions.

Total Employment Costs Breakdown

For an instructor earning £25,000 gross annual salary:

• Gross Salary: £25,000
• Employer's National Insurance: £3,000/year (15% on earnings above £5,000 threshold = 15% × £20,000)
• Holiday Pay: £3,018/year (12.07% of gross for 5.6 weeks statutory entitlement)
• Pension Contribution: £562/year (3% employer contribution on qualifying earnings £6,240-£25,000 = 3% × £18,760)
• Total Annual Cost: £31,580
• Additional Cost Above Salary: £6,580 (26.3%)

This doesn't include potential costs for statutory sick pay (£123.25/week from day one from April 2026), maternity/paternity pay (£194.32/week for up to 39 weeks), Employer's Liability Insurance (£150-£400/year), or administrative time for payroll, HR, and compliance.

When Employee Status Required

You must use employee status when the instructor teaches 5+ regular classes per week on a fixed schedule, has set hours with little flexibility, works exclusively or primarily for your gym, has no genuine other business income, is integrated into your team and branding, follows your curriculum and teaching methods without autonomy, cannot send substitutes, must attend team meetings and training sessions, uses your equipment and systems exclusively, or has worked in the same arrangement for over 2 years (long-term relationships often indicate employment).

Legal Obligations Summary

As an employer, you must conduct right to work checks before the first day (penalties up to £20,000 per illegal worker), obtain Enhanced DBS check for anyone teaching under-18s (£49.50 government fee), provide written statement of terms within 2 months (best practice: before start date), operate PAYE and submit RTI to HMRC, pay employer's National Insurance at 15%, auto-enrol into pension if earning £10,000+ annually (3% minimum employer contribution), provide 5.6 weeks paid holiday annually, pay at least National Living Wage (£12.71/hour for 21+ from April 2026), maintain Employer's Liability Insurance with minimum £5 million cover, allow statutory sick pay from day one (£123.25/week or 80% of earnings, whichever is lower, from April 2026), and follow Acas Code of Practice for discipline and dismissal.

Use this framework to determine which status is appropriate for your situation. Remember, the actual working relationship matters more than what you want or what the instructor prefers.

Use Contractor Status When:

• The instructor teaches 1-3 classes per week with irregular or flexible scheduling
• They have complete discretion over whether to accept each teaching slot (no obligation to teach)
• They demonstrably work for multiple gyms or have other significant business income
• The arrangement is short-term, trial-based, or occasional (e.g., guest seminars, cover classes)
• They operate through a limited company or as a sole trader with other clients
• You don't control their teaching methods, only broad safety and quality standards
• They can genuinely send a qualified substitute (even if rarely exercised)
• They provide their own insurance, invoicing, and business infrastructure
• They're not integrated into your team branding, website, or internal communications

Use Employee Status When:

• The instructor teaches 5+ classes per week on a regular, fixed schedule
• You require specific availability and they must seek permission for time off
• They have management, administrative, or supervisory responsibilities beyond teaching
• They work only or primarily for your gym with no other significant income
• You control curriculum, teaching methods, progression systems, and class structure
• The relationship is long-term and committed (indefinite ongoing arrangement)
• You provide all equipment, systems, students, and business infrastructure
• They're integrated into your team as 'staff' on your website, social media, and marketing
• They cannot send substitutes and must provide personal service
• You require attendance at staff meetings, training sessions, or team events

Many gym owner situations don't fit neatly into contractor or employee categories. Here's how to handle common grey areas.

Part-Time Instructor: 3-4 Regular Weekly Classes

This is the classic grey area. If the classes are fixed (e.g., every Monday and Wednesday 6-8pm) and the instructor is expected to teach them indefinitely, this leans towards employment despite being part-time. If the instructor genuinely has flexibility to decline weeks, works for other gyms, and has autonomy over methods, contractor status may work. Consider offering zero-hours employment contract instead – they get employment rights but you're not guaranteeing hours.

Former Employee Transitioning to Self-Employed

An instructor who was previously your employee wants to continue teaching the same classes but as a contractor for 'tax efficiency'. This is high risk. HMRC will look at whether the relationship has genuinely changed. Unless they're now working for multiple gyms, have genuine autonomy, and the working arrangements have substantially changed, this will likely be deemed disguised employment.

Hiring Instructor from Another Gym Who's Self-Employed

Just because they were legitimately self-employed at their previous gym doesn't mean they will be with you. Assess your working relationship independently using the HMRC tests. If you're offering them fixed regular classes with little flexibility, you may be creating an employment relationship even if they invoice through their limited company.

Instructor Wants Contractor Status But Situation Suggests Employment

What the instructor wants is irrelevant for tax purposes. If the working relationship meets the employment tests, they're an employee for PAYE and NI purposes regardless of their preference. You cannot agree your way out of employment law. Explain the legal position and either restructure to genuine contractor arrangement or proceed with employment. Document your reasoning using the CEST tool.

Working relationships evolve, and sometimes you need to change an instructor's status. Handle this correctly to avoid legal and tax issues.

When to Transition Contractor to Employee

Consider transitioning when the instructor's hours have increased significantly (now 5+ classes per week), they've been working regularly for you for over 12 months and the relationship feels permanent, you want to impose more control over schedule or teaching methods, they've stopped working for other clients and you're their sole income, or you're concerned the arrangement no longer meets contractor tests and want to regularise it.

Legal Process for Status Change

First, use the HMRC CEST tool to confirm the current status is questionable. Then, have an honest conversation with the instructor explaining the compliance concerns – frame it as protecting both parties from HMRC challenges. If transitioning to employment, conduct right to work checks and DBS if not done previously, provide written employment contract with all statutory terms, set up PAYE and auto-enrolment, and clarify the start date of employment (this matters for continuous service rights). If transitioning from employee to contractor, ensure the relationship genuinely changes – different schedule, multiple clients, genuine autonomy. Simply changing paperwork isn't enough.

Tax and NI Implications

When moving contractor to employee, you must start operating PAYE and paying employer's NI from the transition date. Accrued holiday pay should be calculated from transition date, not backdated. If HMRC later challenges the original contractor classification, they may demand back-payment, but voluntarily transitioning demonstrates good faith and reduces penalty risk.

When moving employee to contractor, ensure you've paid all holiday pay owed, issued a P45 for tax purposes, and genuinely changed the working relationship. If the relationship doesn't truly change, HMRC will view this as disguised employment regardless of new paperwork.

Communication and Documentation

Document everything. Save the CEST tool result, write a letter or email explaining the status change and the reasons, update all contracts and agreements, inform HMRC of the change (starting or stopping employment via RTI), and keep records of how the working relationship has changed in practice, not just on paper.

Even with careful classification, HMRC may investigate. Here's how to protect yourself and what to do if they come calling.

Proper Contracts and Agreements

Use a genuine contractor services agreement for contractors (not an employment contract renamed). It should specify services/outcomes, not hours; include unfettered substitution rights with named substitutes; confirm no obligation to offer or accept work; state payment per class/service, not hourly; clarify contractor provides own insurance; and include no employee benefits or rights. For employees, use a comprehensive employment contract covering all statutory terms, including job title, salary, hours, holiday entitlement, sick pay, notice period, pension, and disciplinary procedures.

Documentation of Genuine Contractor Relationship

If using contractors, maintain evidence: invoices showing they invoice you (not payslips), proof they work for other clients (could be testimonials, invoices to other gyms if they're willing to share, or their business website showing other clients), records of substitution rights being exercised (even occasionally), evidence of autonomy (e.g., they designed their own curriculum or chose teaching methods), and their business insurance certificate and company registration if applicable.

Regular Status Reviews

Review employment status annually for all instructors, especially if working relationships have evolved. Re-run the CEST tool if circumstances change (e.g., hours increase, other clients reduce, more control imposed). Document each review with date, factors considered, and conclusion. This demonstrates you're taking compliance seriously.

Legal Advice When Uncertain

For marginal cases where CEST returns "unable to determine" or you're unsure, get professional advice from an employment solicitor or specialist tax adviser. Budget £300-£600 for a professional opinion. This is far cheaper than penalties. Consider an insurance-backed tax investigation service (around £100-£200/year) for peace of mind.

What to Do If HMRC Investigates

If HMRC opens an employment status investigation, don't panic, but do take it seriously. Respond to all correspondence within deadlines, provide requested documentation promptly, engage a specialist tax adviser or employment solicitor immediately, be honest about the working relationship (lying worsens penalties), and consider voluntary disclosure and regularisation if you genuinely misclassified. HMRC can look back 6 years for unpaid tax, but demonstrating good faith and cooperation reduces penalties significantly.

Learn from others' mistakes. These are the most common errors gym owners make and the consequences.

Mistake 1: Calling Them Contractor But Treating as Employee

You have a 'contractor services agreement' but the instructor works fixed hours, must seek permission for time off, follows your exact curriculum, attends mandatory staff meetings, and is marketed as part of your team. The contract is irrelevant – HMRC assesses the real relationship. Consequence: Deemed employment with back-tax, NI, and penalties.

Mistake 2: Contractor Agreement But Fixed Regular Schedule

The instructor teaches the same 6 classes every week, same time, same days, indefinitely. This creates mutuality of obligation regardless of what the contract says. Consequence: Fails HMRC control and mutuality tests, likely deemed employment.

Mistake 3: Only Income Source But Claiming Self-Employed

The instructor invoices through their limited company but works 30 hours/week for you and has no other clients. They're economically dependent on you like an employee. Consequence: Classic IR35 disguised employment scenario. You'll owe employer NI on all payments.

Penalties and Enforcement

If HMRC determines misclassification, you face back-payment of PAYE tax (though this is technically the employee's liability, you must pay it and can attempt recovery from them), employer's National Insurance at 15% on all earnings above £5,000 per year (fully your liability, cannot recover), interest on unpaid amounts (calculated from when payments should have been made, potentially going back 6 years), and financial penalties ranging from 0% (if you took reasonable care and made an honest mistake) to 30% (careless error without reasonable excuse) to 100% (deliberate and concealed fraud).

For serious cases involving knowing and wilful fraud, HMRC can pursue criminal prosecution leading to unlimited fines or imprisonment. The gym owner named and shamed publicly in HMRC's deliberate defaulters list, and the contractor may bring employment tribunal claims for unpaid holiday pay, unfair dismissal, unlawful deduction of wages, and other employment rights (separate from HMRC enforcement).

Case Examples

The fitness industry has faced increasing scrutiny. HMRC has specifically targeted gym chains that classify instructors and personal trainers as self-employed when they work fixed shifts, must ask for time off, and have no other clients. In one widely-reported fitness sector case, instructors were required to deliver set regular hours, had to ask permission for time off, and work their PT business around a gym-set rota. HMRC deemed these to be employees, resulting in thousands of pounds in back-tax and NI per instructor.

The principle is clear: if you control when, where, and how someone works, and they're obliged to work for you, they're likely an employee regardless of the paperwork.

Use these practical tools to implement compliant employment status decisions.

Contractor Agreement Key Terms

Your contractor services agreement should include: clear services description (e.g., "provide BJJ instruction services at classes requested"), not hours or schedule; unfettered substitution clause ("Contractor may provide a qualified substitute at their own expense without prior approval, from the following pre-approved list..."); no mutuality of obligation ("The Gym is not obliged to offer work, and the Contractor is not obliged to accept work offered"); payment terms ("£X per class taught, invoiced monthly" not hourly rate); contractor responsibilities ("Contractor maintains own public liability insurance, pays own tax via Self Assessment, operates own business"); and termination clause ("Either party may terminate immediately or on [short notice] without cause").

Employee Contract Key Terms

Your employment contract must include: employer and employee names; job title ("BJJ Instructor"); start date and continuous employment date; place of work; salary ("£X per hour" or annual salary), payment frequency; hours of work ("X hours per week, scheduled as follows..."); holiday entitlement ("5.6 weeks [28 days] per year, pro-rated for part-time"); sick pay terms ("Statutory Sick Pay only" or company scheme); pension ("Auto-enrolled into [pension scheme] if eligible"); notice period ("Minimum 1 week increasing with service"); and disciplinary and grievance procedures (reference to staff handbook or attached policy).

Decision Checklist

Use this checklist for each instructor:

1. How many regular weekly classes? (1-3 suggests contractor, 5+ suggests employee)
2. Is the schedule fixed or flexible? (Fixed suggests employee)
3. Must they seek permission for time off? (Yes suggests employee)
4. Do they work for other gyms/clients? (No suggests employee)
5. Can they send a substitute? (No suggests employee)
6. Do you control teaching methods? (Detailed control suggests employee)
7. Are they integrated into your team/branding? (Yes suggests employee)
8. Is this a long-term indefinite arrangement? (Yes suggests employee)
9. Do you provide all equipment and systems? (Yes suggests employee)
10. Are they economically dependent on you? (Yes suggests employee)

If most answers point to employee, classify as employee. Don't force contractor status to save costs.

HMRC CEST Tool Walkthrough

Access the tool at gov.uk/guidance/check-employment-status-for-tax. The tool asks about personal service (can they send substitute?), control (who decides what, how, when, where?), financial risk (do they risk their own money?), whether they're 'part and parcel' of the organisation, and basis of payment (per hour/day vs per project). Answer each question based on the actual working relationship, not the contract. Be honest – lying on CEST doesn't protect you if HMRC investigates. Save the result and date for your records. If the result says "employed for tax purposes", use PAYE and pay employer's NI. If it says "self-employed", contractor status is acceptable. If "unable to determine", seek professional advice.