HR · 8 February 2021

Is it better to hire an employee or contractor?

Is It Better To Hire An Employee Or Contractor?

If you own or manage a business, part of your juggling act is resource hiring decisions.  Choosing between employees, contractors, or a combination is context reliant with related pros and cons. 

Is it better to hire employees or independent contractors?

The first step is to understand the difference and related expectations. An employee does a job defined by you, and you control the deliverables and the process of how it must be done. 

Employees will have company benefits, including soft benefits like flexible hours. You will have the right to manage those benefits, manage the staff member, performance appraise and guide them.

Contractors do specific tasks without a permanent employment relationship, without company benefits and, whilst you specify the work deliverables, you have less control on how the work is done. You also have less knowledge of the contractor/contractors as they most probably have not gone through as thorough an interview process as employees have.

The legal definition of an employee and independent contractor can depend on where the work or the contract is located. Each definition comes with different work-related rights and entitlements as well as different responsibilities and obligations from the business. 

The following points will assist with a decision guideline: 

  • Is the work an essential or critical part of your business? If yes, then it is best to hire an employee who can be trained, mentored, groomed and developed. An employee with growth opportunities, and respect for your brand, will care far more about their performance in a key or critical role.
  • Does the role contribute substantially to net profits? If yes, this should be an employee hire, especially as the legal relationship and performance relationship is stronger.
  • Are you hiring in a special skill set? Suppose the skill set is a long term requirement of your business. In that case, it could be a full-time employee or a long term contract with a specialist firm, i.e. the social media marketing skill from a marketing specialist or structural concrete senior professor for structural monitoring of nuclear plants. If the specialised skill set is integral to the product, it would be best to make it full-time employment as a Materials Scientist at Tesla.
  • Autonomous work control. A contractor usually controls their own hours, work location, days they work and the specific end date, e.g. inhouse software project by independent contractors.
  • Tax management requirements. You have less tax management requirements for an independent contractor as they will do their own provisional and final tax submissions.  Their project costs will be added to your business costs column in your declaration.
  • Do you have sufficient work for them? Regardless of whether the work is highly specialised or general, if there is insufficient work to fill up a full day’s schedule, you can either opt for half-day employment or independent contracting. Half-day employment might suit an experienced person who wants to do their doctorate or an MBA. It is not easy to find an experienced person who wants part-time employment.
Working through these points will help highlight your business resource needs. 

Note: Incorrectly classifying a worker can lead to penalties or fines. 

Is it cheaper to hire a contractor or employee?

Some business owners see full-time employees as more costly than independent contractors.  Depending on the circumstances, this could be right or wrong. 

Contractors charge more per hour as they have to self-fund their own benefits, tax, legal liability, debt risk, loss of income insurance, and overheads. The total bill might be “cheaper”, but the hourly rate could be quadruple the staff hourly employment rate.

Full-time employees usually ensure loyalty, certainty and continuity. They will give input to process improvement, will know the business well and not need continual direction. They will often voluntarily put in extra hours for unexpected demand. In theory, they will give you the latitude to take a holiday without shutting the business over that time. For that, you will need to keep them motivated, make them feel cared for, supply training opportunities, give them a clear career path and professional development opportunity.

Contractors might cost more, have less loyalty and give you less task control. They are not solely dedicated to you forever and hence might book future work at your project end date just as you have an unexpected upsurge in work.

There are also intangible costs that cannot be quantified accurately, e.g. quality of customer experience or lack of internal knowledge growth for your business.

Having employees on your books means that you will need to do all the H.R. roles and hire an H.R. person or contract in an H.R. specialist. Small and medium-sized businesses commonly make the mistake of underrating the importance of good H.R., which can be costly. If you are going the employment route, avoid the following mistakes:

Flawed hiring process – Some “H.R. challenges” start from day one, which surprises many business owners. A poor hiring process can affect business performance and growth, profitability and the attraction of quality resources in the future.

Your hiring process requires clear and precise job descriptions; otherwise, you will attract a plethora of unsuitable applicants. If you are unclear about what the applicant should be doing, you need to solve that first before writing up a job description. If you want to hire a jack of all trades, don’t be surprised when they are at the duties that you really need them for. That is what you asked for.

Rushed interviews, no background checks, and no referral checkups will deliver substandard employees, an expensive waste of time, and infinite other business costs. An extensive 2013 study in the US put an estimated cost of $50, 000 (approx £35, 000) for every unsuitable applicant hired.  

Detailed and concise job descriptions are vital with a professional interview, checkup processes and thorough, considerate onboarding processes are the H.R. requirements.

Employee monitoring requires compliance with local, regional, and national laws. This relates to annual holidays, national holidays, paid leave, compassionate breaks, performance processes and overtime for your employees.

If this is done manually, it can be messy and inaccurate. Worse still, it can be difficult to calculate wages, including overtime, leave pay etc. A system is required that captures and allocates all breaks and overtime, et al.

Friend versus manager is a regular challenge brought about by the business owners or managers themselves. People spend a lot of time at work, and comradery is an important component of successful work culture. 

Small and medium businesses often have more informality than large corporates. This is, of course, acceptable. However, informality does not mean “a less professional relationship”.  Discussions about performance, compensation, etc., must be structured, professional and confidential.  This applies to employees OR independent contractors. Being a friend first and boss second blurs the lines for you. It can, unwittingly, cause conflict, which is the opposite of what you were setting out to achieve. 

It is advisable to keep a degree of distance from employees and contractors. This allows non-biased feedback, clear communication of expectations and the ability to lead the organisation’s direction. 

Misclassification of workers is one of the biggest mistakes a business owner or manager can make. It might be several years before the tax department identifies the error, and at the stage, it could equate to thousands of pounds in penalties plus back payment of any taxes. You must know all the differences between an employee and a contractor. The contracts should define the relationship very clearly, and contracts may have to be updated if there are regulation changes.  If you do not monitor H.R. trade journals, then you might not pick up all the changes.

Employee Training varies from physical handling of equipment in some companies, high-risk safety training in others and software training in yet another. This all takes time but to avoid problems or injuries you, or your HR professional needs to be involved. Time spent training and mentoring ultimately improves morale, productivity, loyalty, and brand quality and attracts your company’s quality talent. Don’t be mistaken in thinking that experienced employees do not require training in a new environment.  

A mentor during onboarding acts provides an appreciated safety net for new employees, giving them confidence, knowledge and increasing their ability to be successful sooner.

Antiquated employee handbooks or the complete lack of employee handbooks can make it confusing for employees and, certainly, will make it nigh impossible for them to comply with HR expectations and processes. This under-appreciated handbook is THE all-inclusive guide to your business’s policies, procedures, legal obligations, company values and brand message.

It will also share expectations from time off allotments to dress codes to cultural diversity. The handbooks are required to comply with local, regional and national laws, including health and safety and human rights.  

This handbook should be a power pack that can provide you with support and affirmation during performance appraisals, performance improvement plans, a termination or retrenchment procedure or discrimination lawsuits.  

Each employee should sign an acknowledgement form stating that they have read and fully understood the document. It is advisable to have it available online with ease of access for everyone.

Misdirected incentive structures cause more problems than good.  Incentives are not used in every company but also come in many different forms. Correct incentives can boost morale and increase productivity. Most employees respond to incentives, but they are not the only drivers. Employees who feel undervalued will not find incentives attractive as they might be too demotivated to care and be busy looking for another job.

There is no one ultimate incentive program. Some companies give top national employees golfing trips overseas, some companies give time off in lieu of good results, and some companies simply have monetised incentives.  

International studies do suggest that the incentive needs to equate to at least 10 percent of an employee’s compensation to merit any behavioural change in the employee. The incentive program also needs to be ultra-clear so that there is no debate as to whether “the goal” was achieved or not.  

Note: if some employees are being hindered from achieving the incentive goal due to poor management, the incentive scheme will lose the entire organisation’s respect.

Incentive structures can also be used to incentivise contractors. This would be a separate scheme from the employee’s program.

Now you have the full picture of what will be required of you as an employer. This looks like a daunting list and, at this point, makes independent contractors look far more attractive. \ The above items will have to be done at some stage in your business, and they should not be the sole reason that you turn to contracting.

A HR professional can handle all these items as a contractor themselves, using more time for the setup and significantly fewer hours to run the week to week or month to month requirements. 

Why do some employers prefer to hire people as independent contractors?

Having full-time employees makes a big-ticket item, like salaries, inflexible on payment terms. You pay salaries on time, every time, regardless of bad months. With a contractor, you might be able to negotiate staggered payments.

The previously mentioned tax management of employees takes time, effort and money and is alleviated by contracting.

If you need headcount pronto, a contractor solution means you can get headcount installed instantly and possibly with different levels of experience on offer from the contractor company.

The contractor company will be wholly responsible for their own training, development, professional licenses, public liability and staff replacement during sick leave or annual leave.

There could be an overall budgetary benefit if the contractor is highly experienced and gets the job done efficiently versus training up a staff member. 

Performance Improvement Plans and Disciplinary Hearings are not needed for an independent contractor. If it doesn’t work out, you can ask for an alternative contractor from the company or choose another option completely. The litigation risks are greatly diminished. 

Conclusion

Understanding the different business needs and the suitability of an independent contractor versus a full-time employee can be complex. It is often tempting to “throw” a contractor at a pressure point in your business because the thought of going through the advertising and interviewing process is daunting. Add to that background checks, phoning for references and motivational on-boarding processes, and your eyes have glazed over already.

To avoid pulling your hair out or losing money in the long run, it is advisable to get professional advice before making the hiring decision. Remember that human resource professionals can run the advertising, filtering, initial interviews, and onboarding process. If you develop a long term relationship with an H.R. services company, they can take a huge load off your shoulders.  

Give your business the best chance of success by hiring the right type and the right fit.

 

 

 

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