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Employee or Contractor: Which Do You Need?

When looking to hire people for your business, you need ask some important questions. One key question:

Do I need an employee or would hiring an independent contractor make more sense?

It’s a smart question. Many companies today rely on contractors instead of employees. As a result, it’s important that business leaders understand the federal rules for classifying workers as employees versus independent contractors. But beyond the compliance concerns, here are three key factors to consider when deciding to hire an employee or contractor:

1. Do you need and want someone who works solely for you?

When you hire employees – especially full-time employees – they typically work only for you. They may come to your offices or facility every day and work alongside your other employees. Even if they work remotely, they may be expected to attend regular meetings and be communicating and checking in with you and other staff throughout the day.

Because of this more-intense relationship, an employee will typically be more ingrained in your company’s culture and engaged. Numerous studies, including the Gallup State of the American Workplace Report, have shown that highly engaged workers lead to more loyal customers and higher revenues. When you hire the right people and train them well, your employees will be your best brand ambassadors.

Independent contractors, on the other hand, are technically self-employed. While they may work exclusively for you for a certain period of time, they may have other clients or be actively seeking them. They may have their own company name, work remotely and use their own email address. One benefit to hiring a contractor is they are often highly experienced in whatever skill or service they provide because they have built a business and brand around it.

Hiring contractors sometimes make the most sense because you want someone with specific expertise and the flexibility to enlist them as you need – whether on a project basis or a fluctuating schedule. If you’re looking for someone who becomes a true ambassador of your brand over many years, though, an employee may be the better choice.

2. How much can you afford to spend?

Money is often a big factor in this decision. While hiring an employee may be preferred, it’s usually the more expensive option.

A contractor will typically cost more on an hourly basis. However, there are many other typical costs associated with hiring an employee, including office space and equipment, payroll taxes, and employee benefits. These are costs you are not responsible for when you engage a contractor.

According to the Employer Costs for Employee Compensation - September 2018 report from the Bureau of Labor and Statistics wages and salaries accounted for 68.3% of an employee’s costs, while benefit costs accounted for the remaining 31.7%. Moreover, you will probably spend far less money training a contractor than you would an employee.

3. How much control do you need over how (and when) the person works?

How your employees do their job – and when they do it – is up to you as their employer. While some employers allow and appreciate autonomy, the fact remains that if an employee is not amenable to following an employer’s instruction, they will not be employed for long. You may provide your employees with the precise training and direction you feel they need to get the job done right. You could also provide continuous learning and professional development for your employees, which can foster employee engagement and satisfaction.

Under the federal rules, contractors are generally supposed to use their own equipment and can determine for themselves how and when they do their work. You typically have less control over their schedule beyond setting project deadlines. If your project requires special training beyond learning company-specific processes, hiring a contractor may not be the best option. In fact, one of the ways the IRS determines employment status is by the type and degree of instruction provided.

Making the right choice

Choosing to engage a contractor versus hiring an employee may come down to simple legalities, but when you really can go either way, here are some key questions to ask yourself:

  • Am I in growth mode and at a stage where I need very highly engaged workers who are devoted to working just for me?
  • Is the role I am trying to fill just bridging a short-term skills gap, or is this role essential to the long-term success of my business?
  • Does the position I’m trying to fill require a certain license, specialized skill set, or a quick turnaround?

Answering these types of questions will guide you to making the right decision for your business.

 

This post originally appeared on the SAP Concur Business Exchange.

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