Contractors vs Permanent Employees – Who Should I Hire?

Attracting the best talent within a competitive job market is vital to the growth and success of any business.  But as recent employment trends continue to indicate more and more professionals are turning to a freelance/contractor career path, hiring managers will need to look more closely at the benefits of recruiting freelance contractors over permanent employees. Below are 6 reasons to consider hiring a contractor if you ever find yourself asking the question ‘Should I hire a contractor or permanent employee?’

1)      Expanding Your Available Talent Pool

Numbers show that a greater number of seasoned professionals decide to take the freelance route every year, so it’s likely that some of the best talent you’re looking to hire may not be interested in working permanently at all.  Recruiting contractors can be a very quick solution to finding specific skill sets that are needed for key projects or business initiatives.

2)      Your Talent is Not Limited by Location

While hiring permanent staff normally limits your search to a small number of professionals in the area who can work on site (unless you are can offer permanent telecommute positions), the freelance pool of talent enables you to employ contractors from anywhere in the world, based on their skillset.  A number of technology platforms have emerged specialising in helping companies find and engage with contractors; a trend that has helped add competition to the freelance market, and make accessing contractors even more affordable.

3)      Specialist Talent

Permanent workers are expected to stick with the business for the long run, improve and advance within their initial role and use the experience to progress to a higher level position. This relationship enables them to develop a wide variety of skills, not specialize, which works well in situations where the definition of a role can change quickly. Freelancers, on the other hand, tend to be specialists within their field and they’re better at well-defined roles.

4)      Commitment & Adaptability

While permanent staff are normally in tune with brand values, the big picture and long-term plans, freelancers devote all their energy to the project at hand. Permanent employees are therefore normally better at planning and assessing risks, while freelancers are more comfortable executing projects and strategies. Still, contractors care about getting the job done right, as their feedback could directly impact winning repeat work and further building their reputation amongst their peers, which means they often go the extra mile without additional incentives.

Some argue that permanent staff may be better at working in a team, because they know the company and other employees better, although freelancers by their nature are normally used to quickly adapting to new work environments. Many companies hire freelancers for long-term work, enjoying both the flexibility of the relationship and a stable commitment.

5)      Speed & Quality of Work

Because most contractors are experienced, they normally need less training than a permanent employee who’s just starting. Companies can therefore save time (and money) by delegating urgent and immediate work to freelancers instead of hiring and training someone new. It’s always good to have core staff overseeing contractors, as they have more experience with the exact procedures and practices within a company, but freelancers bring in new, fresh ideas and improvements.

6)      Costs

Obviously an all important aspect when considering permanent employees or contractors is the cost, and you may well be surprised at how the cost of hiring freelancers can compare favourably with permanent counterparts.

With a freelancer you know exactly what the cost will be. With permanent members of staff you need to factor in a lot of hidden or extra costs. Holiday and other benefits, bonuses, employer tax obligations, pensions and the list can go on when you look at how you hopefully invest in your permanent staff to include training and development.

There can be costs to consider when managing and hiring freelancers.  Initially finding the right contractor as well as keeping track of the amount of work they do, can either be expensive when recruitment agencies are involved, or complicated, when companies are tasked with organising pay and timesheets by themselves.  This is where it’s especially important to look at technologies that streamline these aspects of the recruitment process, so that you can still take advantage of the benefits of using contractors whilst minimising costs.

In conclusion, while there are certain jobs that are best done by permanent staff, there is an increasing amount of work that could be delegated to freelance professionals who can help companies stay on budget, improve business practices and bring in fresh ideas to any business. Indeed in the future it’s very likely that more firms will turn to a hybrid workforce management model, utilising a small core of permanent employees supplemented by freelance contractors.

Being willing to work as a contractor or a full-time employee opens many more job and career opportunities for you. The difference in these types of positions is not only the absence or presence of a contract, but also the legal and tax implications. Understanding the difference between contract work and an employment contract will help you make the right decisions concerning your career choices.

Contractor

A contractor, also called an independent contractor, often erroneously referred to as a contract employee, is someone who works for a business on a project or finite basis. For example, an employer might hire a graphic designer to work on a project-by-project basis, rather than bringing the designer on to work at the office. The contract can be for a one-time project or an agreement that allows the business to hire the designer frequently without writing a new contract each time.

Employee

An employee works full- or part-time for a business and is subject to federal and state employment laws, including those that cover pay, benefits, termination procedures and taxes. Typically, an employee won’t be allowed to work for a competitor of the employer.

Work Situations

Contractors have more freedom in the way they work by law. If an employer puts too many restrictions on or instructions as to how the contractor works, the worker might become classified as an employee under IRS code. For example, businesses that use contractors aren’t allowed to make the contractor work on site, use the employer’s equipment, perform work in an exact manner and set the contractor’s hours. An employee must adhere to more stringent employer rules, performing work how, where and when the employer states, within the limits of the law.

Contracts

Contractors often work on a handshake, or a verbal commitment after an initial contract is signed. Contractors should always try to get a work agreement in writing, at least in the form of an email. Contractors often ask for a deposit before they begin work, with final payment due when the project is finished. Employees usually sign a contract when they start work. Employees get raises or their benefits change, but an employer might or might not rewrite a contract. Employees are eligible for company benefits, such as health insurance, while contractors are not.

Tax Implications

Because many employers use contract workers to reduce or avoid taxes, the IRS has set standards to restrain businesses from abusing this classification. If an employer treats a contractor in substantially the same manner as an employee, including setting work hours, supplying equipment and work space, and mandating how the work is to be done, a contractor might be able to successfully sue for employee benefits and back taxes.

Employers pay workers compensation and federal and state unemployment tax for employees, who are eligible for unemployment payments if they lose their job. Contractors are not able to collect unemployment benefits. Independent contractors can itemize and deduct business expenses such as mileage, home office, Internet, phone, computer equipment, meals and entertainment and other work-related expenses.

Different Employee and Employer Relationships

For simplicity, let's separate the employee and employer "relationship" into four parts: the hiring process, the work, the compensation and the duration.

The Hiring Process

The relationship between employee and employer begins at the hiring process, and there are two different ways to approach this step. An employee can either contact prospective employers directly or have a third party, such as an employment agency or consultancy service, broker the employment terms on his or her behalf.

It's important to understand that this relationship applies only to the hiring process- those who choose to have an agency find employment for them may be working for the agency throughout the duration of their employment, may be working for the agency for only a designated portion of time then continue to work as a direct employee, or may completely part ways with the agency at the conclusion of the hiring process and work directly with the host company right from the beginning.

These options depend on the agency, the terms of the individual employment contract, and the wishes of the company.

Work

After the hiring process is completed, it is of course time to go to work. There are basically three different variations of how this relationship may exist.

An employee may be engaged in either a traditional "direct" relationship with his or her employer, work as a consultant on behalf of a third party, or work as an independent consultant. While behind the scenes these distinctions are very important to the company or companies involved, the employee isn't usually impacted by this aspect of the relationship. Direct employees and consultants often work side by side on projects, sometimes unaware of for whom other employees are really working.

Compensation

While direct employees and independent consultants generally receive their checks directly from the host companies for which they work, consultants working through a third party usually receive their checks from that outside agency, who in turn bills the company for the services of its employees.

Direct employees are paid through the company's payroll system and applicable payroll taxes are deducted. Independent consultants are paid either in this way or as 1099 consultants, depending on the classification of the specific position, the wishes of the employee and employer, and applicable state and federal laws.

Consultants working for a third party agency may be paid in either fashion, again depending on the specific position and the individual agencies. 

Duration

Regardless of how an employee is paid or for whom he or she really works, an employee can enter into several different types of work agreements. The traditional "permanent" work status is generally reserved for direct employees. Employers are legally obligated to grant certain benefits to permanent employees, so they generally try to limit the number of employees they have on their payrolls with this status as to increase their flexibility and decrease costs.

Consultants, whether independent or working through a third party, may operate under several different types of contracts. Some contracts are set by date and either expire or must be extended after a certain amount of months have gone by.

Similar contracts are set by project and expire when the work is completed, no matter how long it takes. Other contracts are "open ended" and continue indefinitely, maintaining the same relationship between employer and employee.

Some employees who work through third party agencies or services agree to special terms that allow the consultants to be paid a fixed amount regardless of the project or company. This typically reduces overall wages somewhat but increases income stability. They may also be paid in between assignments, placing the burden of finding new work for the consultant onto the agency. Other consultants working through agencies may choose to operate "contract to contract," giving themselves the opportunity to shop among and switch agencies when and if they chose.

Exploring the Advantages and Disadvantages

Taking into account people's different likes, attitudes and skills, the "perfect job" is a myth. Much the same, there is no perfect combination of relationships between employers and employees of those listed above; the ideal mix depends on each employee and his or her abilities, preferences and circumstances. Here are some points to consider when choosing the working relationship right for you:

• Consultants generally earn higher wages. In return for this advantage, however, comes the likelihood of less favorable non-wage benefits, like medical coverage or retirement savings plans. Each contract obviously varies, so be sure to check with the HR department of either the host company or the agency if applicable (if they are the organization offering the benefits) to learn more. While these non-wage benefits are critical to some employees, others gladly exchange these options for higher wages.
• Consultants generally learn more new skills. Consultants are often called upon to complete work that is either too complicated or specialized for companies to complete themselves, or that is critical and needs to be finished quickly. Either way, the consultant is often in a great position to gain hot new skills more rapidly than direct employees may be. Permanent employees, however, may be more likely to truly become experts in a single area within a company. This expertise leads to greater job satisfaction for some employees, and may increase an employee's status and importance within a company, an important distinction when job cuts arrive.
• Some consultants do not have payroll taxes deducted from their paychecks.  In fact, a disadvantage of this payment method is the increased work and burden placed upon the individual to track, withhold and pay all of his or her applicable taxes. Federal income tax, social security tax, federal unemployment insurance tax, plus state and local tax liabilities where applicable all have to be tracked and paid by the consultant. The failure to responsibly save earnings to pay these taxes can leave consultants in a financial crisis when tax day nears.
• Consultants are highly in demand during times of economic expansion. Consultants are often needed to work in areas where growth is occurring and where existing talent is short. This works in the favor of the consultant, as they frequently seem to be "in the right place at the right time." When the economy slows, however, or even when an individual company's performance slows, consultants may be the first employees to feel the pinch. Historically, during these times, troubled companies retrench and focus on their more basic needs. Permanent employees' futures may be more secure in these instances.
• Consultants have the opportunity to work with many different types of organizations in many different capacities. These experiences can accelerate career advancement and offer greater flexibility for future employment down the road. Permanent employment with a single company, however, also has its advantages. These employees may develop a fondness and commitment to their employer that is unknown to the highly mobile consultant. This employee commitment and loyalty is, for some, the most important aspect of their careers.