The Pros and Cons of Hiring an Employee vs. a Contractor

In today's competitive business environment, more and more companies are relying on independent contractors, consultants and freelancers to meet their objectives instead of recruiting permanent employees. Contractors give companies the flexibility to adapt to fluctuations and, in turn, offers people excellent job mobility.

While employees and independent contractors can work in tandem and perform a similar caliber of work, there are crucial differences between the two, including the level of control the employer has and the laws and tax requirements of each. In this article, we take an in-depth look at the differences between hiring an employee and an independent contractor and compare the pros and cons for businesses to consider.

What is an employee?

An employee is a person who an employer hires to do a particular job. Employees are individuals who take directions from other professionals, such as managers within a firm.

Employers have a particular level of control over their employees in regards to these three factors:

• Financial: Businesses control their employee's financial aspects, such as their paycheck, bonuses, stock options and reimbursement for expenses.

• Behavioral: Employers may manage employees' behavior and direct the way they work.

• Relational: Employees get benefits, such as life insurance, medical coverage and retirement plans and have a written contract showing the employer-employee relationship.

For tax purposes, it is crucial for employers to classify employees according to the hours they work or the expected duration of the job. Employees have specific tax withholdings from their payments, including local, state and federal income taxes and other taxes such as FICA (Social Security and Medicare). Employers are also required to pay for unemployment insurance and worker's compensation.

Read more: What Is the Cost of Hiring Employees?

What is a contractor?

A contractor is a self-employed person who may work with a company as a limited liability firm, a sole proprietorship or a limited liability partnership. They typically provide their own job tools and submit invoices for payment.

Businesses do not withhold taxes for contractors. Instead, the individual is responsible for paying self-employment taxes. Labor and employment laws also do not apply to contract workers. Organizations typically hire contractors for specific assignments or projects, and their contractual relationship can be short or long-term. A contractor can work for a company but is not on their payroll. They can also do jobs for multiple businesses simultaneously.

Common examples of independent contractors include:

• Real estate agents: Real estate agents operate independently within an agency or a network that helps process the commission in exchange for leading a sale.
  

• Graphic designers and freelance writers: Freelance writers often work as contractors, writing articles and then selling them to publications at an agreed-upon rate. Freelance graphic designers might create illustrations and infographics for various special projects. Each assignment is defined by an agreement and typically paid upon completion.
  

• IT professionals: Some IT experts are contract workers. If they are running a short-term or particular project task with a completion timeline, then they are working within a contract worker role.

Read more: 15 Tips for Successfully Negotiating a Contract

Pros of hiring an independent contractor

Here are some pros of hiring contract workers over in-house employees:

Saves money

Although contract workers typically earn more than employees, hiring an employee requires extra expenses such as employee benefits, taxes and office space.

Greater flexibility

Employers have greater flexibility when hiring and dismissing contractors. Employers can hire independent contractors for a particular project, and once they finish the task, an employer can easily dismiss them in accordance with their contract.

Competitiveness

With more skilled employees looking for the flexibility that contract work allows, businesses may hire more contract workers to take advantage of a vast talent pool and stay competitive.

Reduced liability

Employers must comply with several laws designed to protect employees. These include the right to:

• A safe work environment

• A minimum wage

• Protection from employment discrimination

• Unjustified termination

• Protection from employer retaliation

Hiring an independent contractor allows the employer to set the terms of their employment relationship and greatly reduces their liability if a claim is made against them.

Enhanced efficiency

Contract workers offer specialized skills and often need minimal training to be productive. Since they often don't need to attend to other business tasks or company meetings, they can spend more of their working hours completing the manual tasks they were hired to perform.

Cons of hiring a contract worker

While hiring contract workers has many benefits, there are also some potential drawbacks:

Increased liability for on-the-job injuries

Employees' on-the-job injuries are covered by their employer's insurance. Such insurance offers injured employees compensation in return for their right to sue their employers. Unless contract workers buy their own insurance, they can sue the employer for damages if they can prove employer negligence when injured at work.

Less control over workers

Contract workers typically operate independently, deciding on their own the best way to complete tasks, what equipment they need and what the timeline will look like. If an employer wants to manage every detail about what their workers do and how they do it, it's better to categorize those workers as employees.

Temporary staff

Employers use contract workers for specific projects. Once a contract worker finishes their assignment, they can renew or move to another job. Contract workers also don't have as much loyalty to a company as in-house employees, often because they work for multiple employers. If a business has a continuing project and wants to depend on the same people, it is often better to hire those workers as employees.

Related: What Is a Federal Withholding Allowance?

Pros of hiring an employee over a contractor

Here are some important advantages to the employee-employer relationship:

Company loyalty

In-house employees can have a greater sense of loyalty to your business compared to independent contractors. When you hire and provide employees with full-time job benefits, it shows you have confidence in them and want to invest in their growth and development. As a result, they are more likely to stick with your company and support you as the business grows.

Streamlined training

While an individual independent contractor often requires less training overall compared to an individual in-house employee, you may ultimately need to invest more time if there's frequent turnover with short-term contractors.

Read more: The Importance of Training Employees: 11 Benefits.

Brand ambassadors

A great benefit of hiring an employee for your business is that they can be your brand ambassador. Unlike independent contractors who might support your business while promoting themselves, it is in an employee's best interest to help your company develop and grow.

Cons of hiring an employee vs. a contractor

Here are some potential downsides to consider of hiring employees instead of independent contractors:

Less flexibility

When you are working with independent contractors, you have greater flexibility in your business. You can hire people for just a few days or hours to assist you with a specific task. If your company changes direction, you can hire a different contract worker who has the skills you need to pursue that goal. It's not as easy to shift direction with an employee you've committed to.

Employee benefits

Although employee salaries are typically lower than the hourly pay of an independent contractor, employees require additional business expenses. With employees, you may have to pay tax and their pension, and you may also need to offer other benefits such as medical coverage.

Read more: 25 Types of Employee Benefits