Freelancer, Contractor, or Employee: What's Best for Your Agency in 2025?

The wrong hiring decision could cost your agency thousands in unnecessary taxes, cripple your ability to scale, or saddle you with fixed costs you can't sustain during quiet periods.

Finding talent is one thing but knowing what type of talent to hire is about making a strategic financial decision that directly impacts your profitability and growth potential. 

Let me show you exactly how to avoid the costly mistakes most agency owners make when scaling their team.

The Differences (And Why They Matter)

Before we dive into the pros and cons, let's get crystal clear on what we're talking about:

Freelancers are self-employed professionals who typically work on short-term projects for multiple clients. Think of your graphic designer who helps with one-off projects or your copywriter who writes blog posts when you need them.

Contractors are also self-employed but usually work on longer-term projects with more defined scopes. They often work with one client at a time for a set period. This might be a developer building your new website over 3 months or a marketing strategist helping for a 6-month campaign.

Employees are permanent members of your team, working exclusively for your business, with regular hours and a defined role in your company structure.

The choice you make impacts everything from your tax obligations to your control over the work, so let's break it down.

Freelancers: Maximum Flexibility, Minimum Commitment

When to Choose Freelancers

Freelancers work best when:

• You need specialised skills for one-off projects
• Your workload fluctuates unpredictably
• You want to test someone before bringing them on more permanently
• You're working with tight budget constraints

The Financial Upside

From a financial standpoint, freelancers can be incredibly cost-effective. You're only paying for the work you need when you need it. There's no obligation to provide:

• Holiday pay
• Sick pay
• Pension contributions
• Equipment
• Office space

This means your cash flow remains flexible, which is crucial for scaling agencies.

The Control Tradeoff

The main downside? You have limited control over when and how freelancers complete their work. They might be juggling multiple clients, which means they're not always available exactly when you need them.

I've seen agencies get frustrated when their go-to freelancer isn't available during a client emergency. It's the price you pay for flexibility.

Contractors: Specialised Expertise for Defined Periods

When to Choose Contractors

Contractors make the most sense when:

• You need dedicated expertise for a specific time period
• You have a substantial project with a clear scope
• You want more control than with freelancers
• You need someone who can integrate more closely with your team

The Compliance Consideration

Here's where things get a bit more complex. The IR35 rules come into play with contractors, particularly if your business grows beyond the small business threshold.

While small businesses generally don't have to worry about determining IR35 status (that responsibility falls on the contractor), it's worth understanding the distinction between genuine contractors and disguised employees.

In practical terms, if you're treating a contractor like an employee—setting their hours, directing how they work, and requiring them to work exclusively for you—HMRC might view them as an employee for tax purposes, which could create issues down the line.

The Cost-Control Balance

Contractors typically charge premium rates—often significantly higher than what you'd pay an employee for similar work. However, this is offset by not having to pay employer's National Insurance contributions, benefits, or office overhead costs.

For agencies with clearly defined projects, this higher rate often works out as better value compared to maintaining permanent staff during quieter periods.

Employees: Building Your Core Team

When to Choose Employees

Employees become the right choice when:

• You need consistent, ongoing work in a particular role
• Having team members fully aligned with your culture matters
• You want maximum control over work processes
• You're building capabilities that form the core of your business

The Long-Term Investment

Employees represent a bigger financial commitment. Beyond the salary, you're looking at:

• Employer's National Insurance contributions (currently 13.8%)
• Pension contributions (minimum 3% of qualifying earnings)
• Holiday pay (5.6 weeks per year)
• Sick pay
• Maternity/paternity pay
• Equipment and workspace
• Training and development

These costs can add 20-30% on top of the base salary, which is significant. But in return, you get loyalty, consistency, and team members who are fully invested in your business success.

The Culture Factor

Something that's harder to quantify, but I've seen make a massive difference with agencies I work with, is the culture impact of permanent employees. There's a different energy when people are fully committed to your business versus splitting their attention between multiple clients.

Your employees become brand ambassadors, culture carriers, and potentially future leaders within your business. That long-term value is difficult to achieve with temporary workers.

Tax and Legal Obligations

Let's talk about the practicalities that will affect your day-to-day operations:

For Freelancers and Contractors

• They handle their own taxes and National Insurance
• They provide their own equipment
• They set their own working hours and methods
• They invoice you for their work
• They don't receive employment benefits
• Limited employer liability (though be careful with health and safety legislation)

For Employees

• You must deduct PAYE tax and National Insurance
• You must provide equipment and a safe working environment
• You set the working hours, location, and methods
• You pay them through payroll on a regular schedule
• You must provide statutory benefits
• You have significant employer responsibilities and liabilities

My Advice: The Hybrid Approach

In my experience working with growing agencies, the most successful approach is usually a hybrid model:

1. Build a core team of employees who embody your values and deliver your core services
2. Maintain relationships with reliable contractors for specialised skills or project overflow
3. Use freelancers strategically for niche expertise or creative fresh perspectives

This approach gives you the stability of a core team while maintaining the flexibility to scale up or down as needed.

Simple Framework

If you're still unsure which way to go, answer these questions:

1. How consistent is the workload? If it's steady and ongoing, lean toward employees. If it's project-based or unpredictable, consider freelancers or contractors.
2. How specialised is the skill needed? For highly specialised skills used occasionally, freelancers often make more sense. For core business functions, employees are usually better.
3. What's your cash flow situation? If cash flow is tight or unpredictable, the flexibility of freelancers might be crucial. If you have stable revenue, the long-term value of employees often wins out.
4. How important is team culture? If building a strong, cohesive culture is crucial to your success, employees will contribute more to this goal.
5. What's your growth trajectory? If you're growing steadily, building a core employee base makes sense. If you're in a volatile market, maintaining flexibility with freelancers and contractors might be wiser.

Know To Hire

The right hiring approach comes down to balancing flexibility against control, and short-term costs against long-term value. There's no one-size-fits-all answer, and as your business evolves, your optimal mix will likely change too.

What I see work best for most agencies is starting with a small core of amazing employees who define your culture and capabilities, then strategically using contractors and freelancers to fill gaps and handle overflow work.

This approach gives you the best of both worlds: stability and flexibility, control and agility, culture and cost-effectiveness.

Remember that your people—whether freelancers, contractors, or employees—are ultimately your most valuable asset. Invest in the right relationships, and you'll build a business that can adapt and thrive in any market conditions.

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