Time To Hire: Employee Or Contractor – Which Do You Need?

new employee shakes hands with employer when it is time to hire

When it is time to hire people for your business, you need to ask some important questions. It is the right time to hire? Can I afford to hire someone now? Do I need someone full-time or will part-time be sufficient?

These are all good questions. And, here is one key question we get asked on a regular basis:

Now that it is time to hire, can I bring in an independent contractor? Or do I need to hire an employee?

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.

There are a lot of rules and regulations around this decision. We’re happy to assist you in reviewing labor laws, and we also suggest that you speak with an employment attorney.

But well 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 an employee, you can limit their external work activities. You can ask them to sign a non-compete. You can safely assume that they will perform work for other companies when on your time. They may come to your office every day, or work remotely. And you can expect them to attend regular meetings, communicate often, and check in with you and other staff throughout the day.

Typically, an employee is fully engaged with your team, fits in your company’s culture, and shares your core values. Numerous studies, including the Gallup State of the American Workplace Report, show 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. And who doesn’t want that?

Independent contractors, on the other hand, are technically self-employed. While they may work exclusively for you for a period of time, they will have other clients or be actively seeking them. You will not be their only source of income. They are experts in their field and they have their own tools and equipment. Barring a bit of explanation on how your company does things, they don’t need training. This is a big benefit to hiring a contractor; they are 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 need specific expertise and the flexibility to enlist their skillset as you need it – whether on a project basis or a fluctuating schedule.

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.

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

According to the 2020 Employer Costs for Employee Compensation Report from the Bureau of Labor and Statistics, wages and salaries accounted for 68.7% of an employee’s costs, while benefit costs accounted for the remaining 31.3%.

Some of these expenses can be mitigated when hiring part-time employees, vs. full-time employees. But you’ll want to be careful when calculating potential employee expenses. There is a lot more to consider besides the price of healthcare.

3. Do you want control 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 you may appreciate independence and allow a lot of autonomy, the fact remains that if your employees don’t follow the rules, 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 might also provide continuous learning and professional development opportunities for your employees, which can foster employee satisfaction and happiness at work.

Under federal rules, contractors 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 and loyal to our cause?
  • 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?
  • Do I care that this person does similar work for my competitors?
  • Is it important to me that this person comes to regular staff meetings and directly keeps our team informed of progress?

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

Do you still have questions?

We know it can be a scary time for you as a business owner when it is time to hire. We get it. We’ve recently hired our 13th employee. So if you still have questions, we’re happy to help. Working with us is like having a business partner in your back pocket. We’re here when you need us.

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