One of the most important decisions that a company can make is whether to hire independent contractors or full-time employees (or a combination of both) to perform vital tasks for the business. Executives have to weigh a myriad of factors in order to make the best choice. These factors may include making tough decisions between long-term cost savings vs high ROI, flexibility vs continuity, and pre-existing expertise vs application-specific training.
The following information will discuss some key differences between using independent contractors (or, ICs) vs employees, as well as common benefits associated with each approach.
Key Differences Between Contractors and Employees
While there are several components that distinguish the hiring of ICs from that of full-time employees, most of these factors can be sorted into one of three major categories:
Employers have the maximum amount of control over their workers' behavior when those workers are company employees. For example, employers generally regulate the following elements for their employees:
Hours of work, on a weekly basis or by means of a regular set schedule
Acceptable tools or equipment for use on the job (e.g. which software programs office workers should use, or which replacement parts maintenance workers should install)
Specific tasks to be performed
In contrast, ICs often have the freedom to set their own hours, use their preferred tools or pieces of equipment, and prioritize their daily tasks without a lot of feedback from their employer.
Employers often pay their employees lower wages than they do contractors. However, employees generally enjoy benefits that contractors do not, such as paid time off, health insurance coverage, and the right to receive worker's compensation if they are laid off.
Moreover, employers often define the terms of an employee's tenure with regards to:
Whether the worker is paid by the hour or on a salary basis
Whether the worker can be employed by other companies at the same time
Whether the worker participates in company profits or losses
On the other hand, employers have less financial control over ICs, and often pay them at significantly higher levels.
Services Rendered and Compensation Received
Finally, there are two big factors that often determine, for tax purposes, whether a worker is a contractor or an employee. These are:
1. The nature of the work
If it is a core activity for the company, then the worker is likely an employee.
2. The nature of compensation
If a worker is entitled to benefits, such as those discussed above, then he or she would typically be considered an employee.
Benefits of Hiring Contractors
There are three major benefits that come from utilizing contractors to perform necessary work. These include:
1. Financial savings
While it is true that employers generally pay ICs more on a per-hour basis than they do employees, the additional payroll expenses surrounding a full-time employee (such as taxes and compensation insurance) can quickly add up to high costs. In fact, these expenses can increase payroll costs by some 20-30%. With contractors, employers can pay a set rate and avoid worrying about these other factors.
2. Enhanced staffing flexibility
Hiring ICs is an extremely scalable staffing solution. If an employer's workload fluctuates between "peak season" and slow times, then bringing on contractors to temporarily spread out the increased load makes a lot of sense. Moreover, employers may find that IC specialists yield more efficient returns than employees that have to be trained and acclimated to the work environment in order to produce results.
3. Reduced legal liability
Employees have many explicit and implied rights under state and federal law, which means that disgruntled employees potentially have a wide range of opportunities to bring legal claims against their company. In contrast, ICs are not legally entitled to the same benefits as employees. For instance, employers are not required to pay contractors 1.5 times their base pay for overtime.
Benefits of Hiring Employees
As with independent contractors, there are many advantages that come from investing in full-time employees. These advantages could include:
In many cases, companies want to ensure that their workers are performing specific tasks in a specific order, with specific tools. As a basic example, think of a company that has enacted the policy to share financial spreadsheets via Google Sheets instead of Microsoft Excel. It is much easier to regulate the behavior of employees in this regard than ICs.
Contractors generally come and go with a high turnover rate and low continuity. On the other hand, many companies may decide to invest in hiring employees if a high level of continuity is crucial for key activities. For instance, a manufacturing firm that has highly customized maintenance needs will likely want to keep the same technicians on as regular employees in order to avoid preventable downtime.
While many ICs have a level of experience and expertise in a given field, it is typically easier to train employees to perform specialized tasks. Moreover, employees that have become proficient at their work will usually be more productive than new ICs that require training in the particulars of an application.
As the above information shows, there are unique advantages to hiring contractors as well as employees. Both approaches work, but the better option depends on the specific needs of the business. Whether you hire contractors or employees, you need to select the right people for the job, and give them the resources they need to successfully perform their work. If you do, then your business will reap many benefits as a result.
The information provided by Dev Counsel ("we", "us", or "our") on https://www.devcounsel.com (the "Site") cannot and does not contain legal advice. All information on the Site is provided in good faith, however we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability or completeness of any information on the Site. The legal information is provided for general informational and educational purposes only and is not a substitute for professional advice. Accordingly, before taking any actions based upon such information, we encourage you to consult with the appropriate professionals. We do not provide any kind of legal advice. THE USE OR RELIANCE OF ANY INFORMATION CONTAINED ON THE SITE IS SOLELY AT YOUR OWN RISK.