As a small business owner, there will be occasions when you’ll need to choose between hiring a full time employee or an independent contractor. Whether you are setting up your business or in need of someone to handle a specific job or project, understanding the differences will allow you to hire the right type of workers to help ensure your success, now and in the future.
More Workers are Choosing Independence
More and more people are working as independent consultants or contractors. This trend has been driven simultaneously by the loss of full-time opportunities as a result of the recession and advances in technology that facilitate flexibility and mobility. According to a study conducted by the software company Intuit, 40 percent of the U.S. workforce is expected to be independent contractors by 2020.
Many small businesses rely on independent contractors for their staffing needs, but there are a number of reasons workers and owners may prefer the benefits of full-time employment. Here are some of the key issues, advantages, and disadvantages that factor into your decision.
Key Issues to Consider When Hiring
Cost
The cost of a full-time employee doesn’t end with his or her annual salary. Even though most employers pay contractors more per hour than they would pay employees to do the same work, you can expect to save 20 to 30 percent annually with a contractor. This is because you eliminate the payroll costs associated with benefits such as health insurance, Workers’ Compensation, a 401k plan, Medicare and Social Security taxes, as well as paid time off. If your contractor is remote, you also reduce the need for office space and lower your office supply and equipment costs.
Independent contractors bring considerable expertise to the job, and they are usually productive immediately, eliminating the time and cost of training. If there is a long lead-time to get a new contractor up and running, investing in an employee might be a better option.
Cash Flow
For many business owners, a key consideration in any hiring decision is how the worker is paid. Employees get paid on a regular schedule, and you need to be able to pay them in full and on time. One of the benefits of working with Summit Financial Resources is that we offer a variety of asset-based lending options for small business owners who need access to working capital to smooth out their cash flow and cover payroll, even when business is slow.
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Since contractors generally invoice their clients monthly or when a job is completed, you may have as much as 60 to 90 days to pay them and you may be able to schedule the payment to sync with your cash flow.
Risk Reduction
Employees have an array of rights under state and federal laws, which means there are a variety of legal claims they can potentially bring against employers for violating those rights. They may also be able to sue their employers for wrongful termination. Independent contractors are not protected by many of these laws. For instance, they cannot collect Unemployment Insurance.
Contractors may also be easier to terminate and replace. However, your right to fire them depends on your written agreement. If you violate the agreement, you could be liable for breach of contract. Because contractors are also not covered by Workers’ Compensation, if they are injured on the job they might be able to sue you and recover damages.
Keep in mind that many financing firms shy away from lending to businesses that employ a large percentage of contractors. The risk of conflicts and pay disputes is potentially far greater with contractors than with employees.
Accessibility and Quality
While it’s no longer true that the best and the brightest only want to be employed full time, the majority of job seekers are looking for steady work. This means your potential employees will come from a larger and more diverse talent pool, giving you an advantage when it comes to choosing the best person for the job.
However, today’s rapidly growing contract workforce includes experts to meet virtually any need, from sales staff and IT pros to marketers and CPAs. While staff members’ performance may have peaks and valleys, contractors typically strive to do their best work because their livelihood depends on repeat customers and referrals.
Staffing Flexibility vs Staff Control
Working with contractors allows greater hiring flexibility, which is especially advantageous for employers with fluctuating workloads. You can hire a contractor for a specific project without the expense and potential legal trouble that can accompany firings and layoffs. The downside to using contractors only as needed for short-term projects is that workers are constantly coming and going, and the quality of work you get may be uneven.
Unlike employees, independent contractors typically decide when and how to do the job at hand. You need to make sure they’re available on your schedule and have a backup plan if they’re not. Contractors also may work offsite and outside of normal business hours when you’re not able to monitor their progress. If the project or position requires oversight, you may be better off hiring an employee.
Remember that the amount of control you have over a worker defines whether they can legally be classified as a contractor or employee. If you interfere too much in a contractor’s work, you risk making them look like an employee, for whom the IRS says you should be paying payroll taxes, Workers’ Compensation, and more.
Commitment
While a contractor wants to keep you as a client, your company’s individual success is not their priority. A full-time employee is likely to feel a greater commitment to your organization, appreciate the benefits you provide, and be more motivated to add to the bottom line. This doesn’t mean a contractor isn’t capable of the same kind of effort and commitment; it just means they have fewer incentives.
Relationship Building
Assuming your employees work in the same location on a daily basis, you can build a cohesive workplace in which everyone is working towards a common goal: making your company successful. Contractors who deal in one specific area of the business or only come to your facility occasionally won’t have the opportunity to interact and build relationships with your team.
Contractors also may not be a wise choice if you’re looking to develop new business. In-house employees are aware of everything that’s going on in the company and see the big picture. They can leverage that knowledge to build relationships with clients and contribute to the long-term growth of your business.
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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.