Employees VS independent contractors: what is the best fit for your business goals?
Before we get into the cases where a company may prefer employees to contractors and vice versa, let’s first clarify; who is an employee, and who is a contractor. At some level, the two may appear to be similar since a company can opt for either an employee or a contractor to perform the same duties; however, the two are entirely different entities from certain perspectives.
Key Differences Between Employees and Contractors
Here are some of the critical factors that set apart employees and contractors.
- An employee is a long-term worker hired on either a full-time or a part-time basis and is answerable to the employer company. A contractor (also known as an independent contractor) is a self-employed laborer hired by a company on a contract basis to complete a specified task or series of tasks, usually within a given period.
- Several enforceable employment and labor laws cover employees, both federal and state. Labor and employment laws do not cover an independent contractor. By law, employees have a right to certain benefits that should be provided by the employer such as insurance, housing, commute, and welfare depending on the state and job. Contractors have no right to any benefits.
- An employee earns hourly, daily or monthly rates paid in wages or salaries. And reports all money paid for taxation in a W-2 form after every tax year. A contractor can be paid in periodic rates, at the beginning of the contract, or after completion and fulfillment of allocated task or contract. The contractor is at liberty to dictate payment schedules to the employer or is open to a mutual agreement with the employer regarding the same. A contractor reports earnings beyond 600 dollars on form 1099 every end of the calendar year.
- An employee must adhere to a rigid work schedule stipulated by the employer in the job description. While a contractor, unless indicated in the contract statement, does not need to work on an employer’s schedule. The contractor only needs to focus on completion of the assigned task within the specified period. Employees are directly under the control of their employer; though, within legal reason. Employees must follow company rules and uphold its image. A contractor cannot be controlled by the employer and has little or no investment in the employer’s company image, mission or other jobs.
Both employee and contractor can be hired depending on merit and they both contribute to the company’s labor force. Depending on the company’s business needs in some instances it is better to hire contractors and in others the more permanent employees.
When to Hire Contractors?
The whole idea of contract workers is based around the premise that it is wasteful in both resources and time to hire employees for short-term or temporal one-off tasks. Short-term assignments are those that only take a short period to complete and mostly come around only once. Hiring short-term employees means setting up the entire infrastructure to accommodate fully entitled employees for only a short time.
This may work in local market. However, things may differ if you are hiring independent contractors overseas. Regardless of the duration of an assignment, penalties for employee misclassification are huge in some countries. This is without mentioning expatriate personnel that needs to be involved in short-term overseas projects. A foreigner needs to be officially employed in the host country so he is eligible to work there.
The choice between an employee and a contractor should be based on different factors when you are hiring locally and abroad.
These are mostly simple tasks requiring little or no supervision. An excellent contractor will have good work ethics and require little if any supervisor.
Contractors specialized in professional tasks requiring expertise, such as IT consultancy and security, come in handy in performing them on a contract arrangement. This saves on employee training and learning time.
Another case when hiring contractors may be advisable is work outside the central focus of business. Tasks that are not related to the primary objective or company mission emerge. Such duties are best assigned to hired contractors rather than employees.
When to Hire Employees
Employees are a more permanent solution to a company’s labor needs. Despite being more demanding than contractors, they are more reliable and easier to monitor and supervise. They also grow alongside the company and are deeply invested in its success, giving them an incentive to be productive.
Top Reasons for Converting FREELANCERS into FULL-TIME EMPLOYEES
Employees are mostly hired for performing:
- Long-term tasks
Long-term tasks are the primary reason why there is a need for employees. Long-term tasks involve the core operations of a company or business. Tasks such as marketing, service, sales and production management are invaluable business operations. For such jobs, what is needed is a consistent and reliable workforce for everyday availability, which can only be achieved by hiring employees on a more permanent basis. Hiring contractors, in the long run, can prove to be expensive and have inconsistent results for lengthy tasks.
- Talent retention, reinforcing companies’ talent pipelines
If a company has a long-term project and has a highly-skilled candidate, as a rule, it is willing to retain him. Employee status is more suitable than Contractor in this case. The company can provide an employee with all the benefits and equipment to motivate him, build a long-term relationship. Moreover, after the project termination the company has an official right to move the talent/an employee to another project within the company.
- Work requiring close supervision and administrative collaboration
Crucial company operations require a close administrative handle. Such tasks need workers who can work closely with their superiors. Employees can easily be monitored closely, and their progress can be observed at regular intervals.
- Recursive tasks
If a company has repetitive tasks that are separated by reasonable intervals, it may be economical to hire employees who will perform consistently every time.
The bottom line is, there are tasks only suitable for employees and others for contractors. In modern business models, it is increasingly becoming difficult to distinguish between the two. Most companies inevitably have to work with both contractors and employees; with contractors continually taking over workforces, in most cases easing access to valuable professional labor.
Remember in the States; the IRS considers every worker an employee unless they can be proven to be a contractor.
It is critical for an employer to correctly determine whether the individuals providing services are employees or independent contractors. To help employers evaluate whether a worker is an employee or an independent contractor, the IRS 20-Factor Test has been developed.
How You Avoid Misclassification Risks With Acumen International
Contractors are relatively less cumbersome and cheaper to hire compared to employees. Contractors have less social and resource demands. However, not all tasks can be assigned to contractors. It’s important for businesses to adapt to the rising trend of increasing contract workers in the labor force. Results from a recent study show that over 40% of the workforce in America is likely to be self-employed independent contractors by 2020.