Should I Hire an Independent Contractor or an Employee?

(Article by David Klein - www.clicktime.com)

At first glance, hiring an independent contractor or an employee may seem similar, but there are enormous disparities between the two. The law has very different specifications for employees and contractors, and organizations bear different short- and long-term costs depending on what type of worker is hired.

Let's take a look at the pros and cons of hiring a full-time employee (FTE) or a contractor.

Contractor vs. Employee Costs

The costs of hiring an independent contractor versus a full-time employee are often grossly misunderstood. That’s because there’s quite a bit to consider. Recruiting, onboarding, training, overhead, equipment, insurance, healthcare, taxes, and other variables factor into the costs of hiring an FTE or a contractor.

Because of all the confusion around hiring costs and benefits, we recommend using a hiring calculator to try to estimate the true costs of a contractor or employee.

Pros of Hiring a Contractor:

  • Hiring independent contractors saves on some of the costs that are typically associated with full-time employees. According to the U.S. Department of Labor, benefits alone can account for more than 30% of total employee compensation. This year, employers spend an average of $10.70 per hour per employee on benefits!
    • Benefits Private Industry State and Local Gov
    Paid leave 6.9 7.2
    Supplemental pay 3.6 0.8
    Insurance 8.1 12.0
    Retirement and savings 3.8 10.6
    Legally required 7.9 5.8
  • If you have an underperforming employee, it may be challenging to let that person go. Many businesses hold on to low-performing employees, as they work through the training and legal processes of termination. These poor performers can affect the larger group and reduce productivity by as much as 30%! If a contractor is performing poorly, it's often much easier to part ways from a legal, cultural, and team morale perspective.
  • Additionally, hiring a contractor offers budget flexibility throughout the year, allowing you to bring on contract help only when you really need it. This can be especially helpful for agencies or other professional service organizations who have varying client workload by month or even week.

Cons of Hiring a Contractor:

  • It may be more difficult to manage, train, and supervise contractors. These independent workers often have greater autonomy than FTEs. An independent contractor also does not have the same obligations to management and may not make decisions that support the long-term best interests or vision of the company.
  • Sometimes the hiring organization sets the pay for an independent contractor position, and other times, the contractor does. Because independent contractors charge different fees, controlling costs can be a challenge, especially if you are passing these costs on to your clients.
  • Unless you spend additional funds, you may not own the copyright of works created by an independent contractor. This is especially true for design or other labor-intensive work that may require future revisions or updates. In contrast, if an employee creates similar work, you typically own the IP and have full control over any assets.

Capacity to Hire

Does your business need to expand its capacity? Does it need to do that all year long, or just for the short term?

Contractor Pros:

  • Hiring independent contractors allows your team the flexibility to ramp up when your business is strong, and scale back when things cool down.
  • Hiring contract employees means you can carve out a specific number of hours for a particular project or task, which when correctly managed, can keep costs down.
  • You may need highly specialized skill sets that aren't readily available in your current workforce. Independent contractors can provide expertise and offer strategic counsel to your full-time employees or complement your team during a specific project.

Contractor Cons:

  • Sometimes it can be hard to rely on independent contractors to deliver exactly what you need when you need it, due to their availability.
  • If you request work with short turnaround, contractors may charge a rush fee that can significantly add to the cost of your project.
  • Certain employees may not appreciate working with contractors, and clear policies must be set in place to ensure that both FTEs and contractors are in a safe and friendly work environment.

The Liability

Regardless of what type of employee you ask to join your team, there are risks associated with the process.

Contractor Pros:

  • Working with independent contractors exonerates your business from many of the liabilities that can come with hiring FTEs, such as on-the-job injuries. This is why some higher risk industries require that contractors carry their own liability insurance.

Cons:

  • Classifying independent contractors is a tricky job and can vary by state. If it’s determined that your independent contractor is actually an employee, you could be hit with some hefty penalties and back payments. (Not to mention what might happen if the contractor is injured on the job, and they turn out to be an employee.) If you're unsure if your employee is truly independent, the IRS has put together a handy guide that should help you better understand employment status. (We also recommend that you speak with a lawyer or HR representative who can help confirm you are operating your business the right way.)
  • As an employer, you could be held liable for your employees’ injuries or misconduct while on the job. This can also reflect negatively on your brand and impact future sales, investments, etc.

Onboarding Employees vs. Contractors

According to our friends at the Society for Human Resource Management, onboarding is "the process by which new hires get adjusted to the social and performance aspects of their jobs quickly and smoothly, and learn the attitudes, knowledge, skills, and behaviors required to function effectively within an organization." Onboarding is a tremendously important part building employee engagement and ensuring that new team members are as successful as they can be.

Contractor Pros:

  • Independent contractors usually require a much less involved onboarding process. They rarely need to same level of education around company history, culture, and vision. This can save the team time and money, as contractors should be be able to get started on their projects relatively quickly.

Contractor Cons:

  • Because contractors often receive very limited onboarding, they may unintentionally make decisions or take actions that do not align with the company's vision, values, or interests.
  • If you’re used to having things done a certain way, it may be difficult to ensure independent contractors are following your process. They may be flexible enough to adopt some of your procedures, but it's possible you’ll be adopting theirs. So in this case, it's possible that you’re the one who may need onboarding. (Which is not ideal!)

The Culture

Is the project offsite or onsite? This makes a big difference in how company culture factors in.

Contractor Pros:

  • While you want your company values to align with your contractor, if for some reason they don't, it's much easier to end this relationship than it is with a full-time employee.

Contractor Cons:

  • Even if you and your contractor stay in touch on a regular basis, it can sometimes feel like there’s a greater disconnect than an employee relationship. Luckily with apps like Slack, offsite contract employees can feel like part of a team — but it's not always the same. For example, it can be awkward to host team building or other events and invite your local employees but not your contractors.

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