Savvy employers must use creative strategies to meet their staffing needs. One of those strategies is to leverage a combination of contractors and employees to accomplish goals. It’s becoming more common for freelancers to work alongside in-house teams on projects as companies adapt to the shifting market demands. When you decide it’s time to hire, is a contractor vs. employee the best option?
We’ll break down the key differences between these two types of workers and cover the factors you need to consider to make the right choice for your situation.
Characteristics of an Employee
An employee is a person that an organization hires to perform a service for a regular wage. Employees can be full-time or part-time, with the typical full-time employee working 40 hours per week.
An employee is paid via paycheck and receives a W-2 tax form at the end of the year to report their wages and the income/taxes withheld from their paycheck by the employer. In addition to withholding certain payments, employers must also contribute to state and federal tax agencies, Social Security, Medicare, unemployment, and workers’ compensation funds on their employees’ behalf.
Employees are fully protected by labor laws like those governing the minimum wage. They may also be eligible for employer-sponsored benefits like health insurance and retirement.
Characteristics of a Contractor
A contractor, also called a freelancer, is a person who provides services to an organization on a contract basis without being on the company’s payroll. A contractor typically submits invoices for payment.
Contractors retain significant control over their work, defining their rates, hours, work location, and more. Employers can set expectations for a contractor’s final product but cannot dictate how the work is done.
Companies do not contribute any taxes on a contractor’s behalf. Instead, the contractor is responsible for all state, federal, and self-employment taxes and contributions to Social Security and Medicare. A contractor receives a 1099 form at tax time stating how much the company has paid them.
Key Differences Between Employees and Contractors
Though both types of workers perform duties for a company, employees and contractors vary in several significant ways. Here are the biggest differences.
Terms of employment
Employees of a company are hired indefinitely without a fixed end date. Contractors are usually employed under more specific terms, either for a predefined duration (i.e., six months) or to complete a distinct scope of work.
Employers have more control over employees’ work, with the ability to specify when, where and how duties are performed. Employees are typically required to adhere to a fixed schedule and work the hours the employer dictates. Contractors have more control and can choose their hours, work location, tools, and processes for getting their job done.
Employees are paid a fixed wage, either salary or hourly, consistent from one pay period to the next. Contractors are paid under many different compensation structures, including time-based (hourly, weekly, etc.) and project-based.
Full-time employees and some part-time ones are eligible for benefits their employer offers. This may include health insurance, retirement savings, paid time off, sick leave, stock options, tuition reimbursement, etc. Contractors are generally not eligible for any of these benefits and must cover the cost of their own insurance.
Employers withhold income taxes and FICA contributions, which include Social Security and Medicare, from employees’ paychecks. Contractors are responsible for their tax payments, including employer and employee contributions.
Onboarding and training
Employees undergo a new-hire onboarding period and may undergo training to help them become proficient in their role. Contractors receive little training and are often hired for their ability to hit the ground running with their duties.
Employees are protected by laws that govern when and how they can be hired and fired. In America, for example, laws exist to prevent discrimination in the hiring process, and unemployment payouts are available to employees who are fired or laid off. Contractors do not have such broad protections.
Pros of Hiring an Employee vs. a Contractor
When a company hires an employee, it secures that person’s skills for the long term. This facilitates longevity and helps ensure workforce stability.
With the right efforts, employees can develop loyalty to their employer and become an engaged member of the company culture. These factors contribute to higher productivity and a more profound sense of meaning than someone who’s merely performing a duty for a one-time fee.
Companies can nurture the skills and characteristics they value in employees, positioning them to become future leaders and contribute to the organization’s continued success.
Happy employees act as an extension of your employer brand. They share their satisfaction with family, friends, and acquaintances, which can help broaden your positive reputation.
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Cons of Hiring an Employee vs. Contractor
When hiring employees, you’re susceptible to the swings of the labor market. This may require you to invest more heavily in labor and salaries to attract the talent you need.
Hiring employees requires a heavier up-front investment and comes with the additional expense of providing benefits and covering the employer’s portion of their taxes.
As mentioned in the point above, hiring an employee is a big investment. If they don’t work out, you have much more skin in the game than if you hired a freelancer with little to no onboarding cost.
Pros of Hiring a Contractor vs. Employee
Low commitment level
Hiring a contractor allows you to assess the working relationship and the results before you commit to a long-term arrangement. It also comes with the potential to hire the person full-time if things work out positively.
Contractors can be hired quickly, even in as little as a day. The average employee, on the other hand, takes between 30 and 40 days to hire.
Contractors enable you to hire based on the skills you need today without heavy consideration for what your needs may look like down the road. Since employees are a long-term investment, hiring them requires more strategic planning.
When you hire a contractor to accomplish a specific task, you only pay for what you need. This is in contrast to hiring a full-time employee who will be on the payroll for 40 hours per week, whether or not their specific duties require this amount of time.
Hiring a contractor allows you to access specialized expertise, like niche skills for a technical project or big-picture consulting for specific areas of your business.
Cons of Hiring a Contractor vs. Employee
A contractor is essentially an outsider, at least when you first hire them. Since their skills are typically the primary factor in hiring them, culture may not come into play as heavily as when you hire an employee. Thus, there’s a greater risk of incompatibility. It may take a few tries to find the right person.
Some contractors work with multiple clients simultaneously, meaning you may compete with other companies for your contractors’ time and attention.
Because contractors hold a greater amount of control, you may be in more of a position to lose them to a better offer, which can put you in a tough spot. When a contractor leaves, they take their knowledge with them rather than transferring it to another member of your staff.
Contractors may be located in different locations and time zones than your full-time staff and may even speak another language. This can make it harder to collaborate across departments.
Should I Hire a Contractor or an Employee?
The best choice between hiring a contractor or an employee is situational, depending on your needs, budget, and time constraints, among other factors. Most companies don’t use just one or the other; instead, top employers meet their needs with a mix of freelance and in-house talent that’s selected based on operational requirements and organizational priorities.
Considering the nature of the work and assessing how it aligns with your current workforce’s strengths and weaknesses will help you determine the best type of worker to achieve your business goals.