Employee vs Contractor

Employee vs Contractor: What is Right For Your Business

Next Story

How to Develop a Strategy for Improving Customer Experience

Are you thinking about increasing your company’s staffing, trying to decide whether to hire an employee, or enlist the services of a contractor?  It isn’t always an easy decision to make, and there are quite a few factors to take into consideration that will have impacts in both the near and long-term.  There is no one right answer to the use of an employee vs. contractor. It all comes down to what is right for your business.

Employee vs. Contractor – What’s the Difference?

An employee is an individual that your company hires that works directly for you.  Typically, employees are paid an hourly wage or salary along with benefits. With employees, you are responsible for employer taxes, workers’ compensation, unemployment insurance, and any other government-mandated activities.  A contractor is a business your company enters into an agreement to provide a desired set of services. Contracting services may be hourly (time and materials), fixed capacity, or deliverable-based. Contracting companies may offer you the service of a team of resources, or they may represent an individual (independent contractor).  The individual works for the contracting company (not for you directly), and therefore the contractor is responsible for employment taxes and government-mandated insurances. The key differentiator between these two arrangements is: with an employee, you are engaging with individuals, and with a contractor, you are engaging with a business.

Government Regulations

Before digging into the business considerations of employee vs. contractor staffing, it is important to note that many government regulations apply to both staffing models.  These regulations vary by locale, and it is essential that you understand what regulations apply to your specific situation before making a staffing decision. Examples of government employment regulations that impact the hiring decision and/or cost of staffing include restrictions on the hiring of previous employees as contractors (for a period of time); time limitations on how long a contractor can be working for you before they are legally considered an employee; and withholding taxes required for both employees and certain classes of contractors.  Other regulations impact what happens if you need to release the resource in the future: at-will employment laws, notification periods for layoffs, and the Consolidated Omnibus Budget Reconciliation Act (COBRA) insurance are some examples.  This is complicated legal territory, so it is highly advised that you seek the guidance of a qualified human resources professional and/or the advice of an employment attorney to understand your specific situation before proceeding.

How Long will you Need the Resource?

The first question to ask yourself before determining if an employee vs. contractor is right for your business is: “How long will I need this resource?”  Typically, if you are going to need the resource engaged for a long time, it is better to hire them as an employee. If your need is temporary, a contractor may be better.  Government regulations and company policies may limit the amount of time that a contractor may be engaged (typically 10-18 months) with a cool-off period before they can work with you again.  If you have a multi-year project that needs continuous engagement, a contractor might not be the best choice. (Note, there are some contracting techniques such as deliverable-based contracts that may enable you to bypass certain types of time limits.) Likewise, if you are only going to need the resource for a few months, it may be advantageous to engage a contractor to expedite recruitment and onboarding timelines.

How Much Capacity do you Need?

Engaging with contractors can be a great tool to drive resource scalability.  Do you need to bring on a team of 10, 50, or 100 people to execute a project or perform a specific task?  Contracting companies can give you access to a pool of resources that have been pre-vetted for skills and other qualifications, making it easier and faster for you to onboard and get the project going.  In many industries and disciplines, low unemployment rates mean that there aren’t many candidates available on the job market. Even if you wanted to hire a group of workers, you might not be able to find enough qualified individuals to meet your staffing needs.  Contractors can give you access to staffing capacity that isn’t available on the open job market.

Specialty vs. Generic Skills

Another key consideration when considering an employee vs. contractor is the types of skills you are looking for. Also, are you going to need the skills for a short-term or ongoing?  For example, if you are in the IT industry, you may need the services of a Sr. level technical engineer with deep experience in integrating customer relationship management (CRM) platforms with E-Commerce systems to staff your system implementation project.  While this person’s specialty skills are essential for the project (and well worth the cost premium you will pay to acquire them), you may not need the specialty skills and experience once the system is operational. This is a situation where it may make more sense to engage a contractor to provide specialized resources for the project.

In contrast, perhaps your company is looking to address their big data challenges, and you are looking to hire a Data Scientist to lead the effort.  While data science skills may seem like a specialty, they are generic in that they can be applied to a wide variety of other activities once the initial project is complete.  If you are looking for a resource with generic skills that will be engaged for a long time, hiring them as an employee might be the right choice.

Speed of Onboarding

How quickly you need the resource engaged and ready to get to work can also be a factor when deciding on an employee vs contractor.  Hiring employees can be a long process – advertising a position, collecting resumes, conducting interviews, employment screening, 2-4 weeks for the candidate to give notice to their current employer that they are leaving, relocation, company onboarding processes. Hiring an employee can easily take a few months.  Engaging a contract resource is often much faster because the contracting company has already done the hiring activities. Contractor engagement can be as simple as securing budget funding, selecting a contracting company, negotiating a contract, and issuing a purchase order. Some companies maintain lists of “approved vendors” that simplify the process even further.  In many cases, a contract resource can be engaged and onboarded in a few weeks vs. a few months to onboard an employee.

Overhead Costs of Employment

The cost of leveraging an employee vs contractor is negligible.  If you are hiring employees, you have the salary you pay the person, and additional overhead costs of employer taxes and insurance, benefits, training, workspace, and equipment – these are tangible.  You also have the overhead costs of managing the employee, HR functions, and productivity overhead (things like company meetings, staff meetings, etc.). With contractors, you pay a premium to the contracting company (it is not uncommon for you to pay the company twice the amount that the individual receives).  This covers the individual’s compensation, overhead costs of employment (the same ones you pay), and profits for the contracting company. While the bill rate for a contractor is a lot higher than the salary you would pay an employee, the total cost factoring in employment overhead is typically comparable. The contracting company makes its profits from developing economies of scale through efficient staff management practices.

Future Staffing Reductions

Contractors also go by the term “contingent staffing.”  One of the key reasons companies hire contractors is to have the flexibility to downsize their staffing without laying off employees. Employee layoffs have a few challenges – they harm company morale, they can be perceived by the market as your company having financial problems, and they often take many months to fully implement (due to notification periods, severance packages, etc.)  In contrast, most contracts are written to enable your company to terminate the contract with a pre-determined notification period (typically 30 days). Contract staffing can be onboarded and offboarded much faster than employees. Termination of contracting engagements also doesn’t typically have a negative morale impact or perceptions of external stakeholders. In essence, contractors are expected to be temporary, and releasing them is just a normal part of doing business.

Deciding whether to hire employees or engage contractors is a complicated decision.  There are many factors to consider, and no “one size fits all” answer that works for all companies.  Most companies find that staffing that includes a blend of contract and employee resource is ideal because it provides the long-term stability of employment while leveraging flexible and scalable staffing options of contractors to support the variability of project demands.

Summary:

Employee vs Contractor

Are you thinking about increasing your company’s staffing, trying to decide whether to hire an employee, or enlist the services of a contractor? An employee is an individual that your company hires that works directly for you. Typically, employees are paid an hourly wage or salary along with benefits. With employees, you are responsible for employer taxes, workers’ compensation, unemployment insurance, and any other government-mandated activities. A contractor is a business your company enters into an agreement to provide a desired set of services. Contracting services may be hourly (time and materials), fixed capacity, or deliverable-based. Before digging into the business considerations of employee vs. contractor staffing, it is important to note that many government regulations apply to both staffing models. These regulations vary by locale, and it is essential that you understand what regulations apply to your specific situation before making a staffing decision.Typically, if you are going to need the resource engaged for a long time, it is better to hire them as an employee. If your need is temporary, a contractor may be better. A key consideration when considering an employee vs. contractor is the types of skills you are looking for. Also, are you going to need the skills for a short-term or ongoing? How quickly you need the resource engaged and ready to get to work can also be a factor when deciding on an employee vs contractor. The cost of leveraging an employee vs contractor is negligible. If you are hiring employees, you have the salary you pay the person, and additional overhead costs of employer taxes and insurance, benefits, training, workspace, and equipment – these are tangible. You also have the overhead costs of managing the employee, HR functions, and productivity overhead (things like company meetings, staff meetings, etc.). With contractors, you pay a premium to the contracting company (it is not uncommon for you to pay the company twice the amount that the individual receives).

The following two tabs change content below.
mm

William Goddard

William Goddard is the founder and Chief Motivator at IT Chronicles. His passion for anything remotely associated with IT and the value it delivers to the business through people and technology is almost like a sickness. He gets it! And wants the world to understand the value of being a technology focused business in a technological world.