As a business leader, team leader, or human resources professional, it is your job to hire new talent to meet your business needs and goals. However, when hiring new talent, you may come across two different types of talent — independent contractors and employees. Each has its own benefits and drawbacks and similarities and differences that set them apart. If you’re new to the field of hiring, then you might be a little lost as to the difference between these two workers. You might also be wondering which would best suit your business structure.
So, what's the difference between an independent contractor and an employee?
Classifying Your Workers
According to employment classification laws, when you hire a new employee, you must first classify your worker as either an independent contractor or a full- or part-time employee, or a contract vs direct hire. Improper classification can affect both you and your worker. Your worker may receive the wrong benefits and compensation, which can hurt them financially. If this happens and your worker goes on to pursue legal actions, you can face legal problems, like penalties and fines, and your reputation can suffer.
What Is an Independent Contractor?
The IRS classifies professionals who provide services to the general public, including doctors, lawyers, veterinarians, and auctioneers, as independent contractors. It’s much more nuanced than that. Contractors and subcontractors are also classified with independent contractor status.
However, while these professions are classified as such by the IRS, whether they are truly an independent contractor or not varies from case to case. Generally, independent contractors are self-employed individuals who perform work or provide services to others without an employment contract. Instead, they enter into a different type of agreement with another business or individual. An independent contract is usually drawn up between the two involved parties. It must clearly define the independent contractor’s duties, including the type and amount of work expected of them and the compensation they’ll earn.
Independent contractors are typically not required to go through hiring and onboarding processes. Unlike employees who may be bound to a single employer, independent contractors are usually free to perform work for several clients simultaneously.
Pros of an Independent Contractor
- Access to more skills: Independent contractors aren’t as obligated as regular employees to fit the mold. Since they won’t be working long-term for you, they aren’t required to fit in well with the rest of the team — though, it’s a nice bonus if they do. Independent contractors are brought in for one reason — their specific skillset. That is, independent contractors typically have a wider range of skills than your average employee and can quickly jump into the work assigned to them. Plus, unless stated in their contract, they aren’t required to be paid overtime or be given time off.
- Saving money: Although independent contractors are usually paid the same or more per hour than regular employees, you can still cut corners and reduce the cost of hiring independent contractors. With normal employees, you have to invest in training, office space, and equipment and provide them with benefits. However, independent contractors require no job site training, and because they are brought in on a short-term basis, they don’t require any office space or equipment.
- Staffing flexibility: When you work with independent contractors, you have greater flexibility to hire and let go of workers. You can also employ a contract-to-hire approach, giving you the ability to test an employee out, gauge their skill set and company fit, and choose to end their contract or bring them on full time. This helps employers who have fluctuating workloads, sometimes dwindling down, and saves you from having to pay employees to work when there’s no work.
Cons of an Independent Contractor
- Employee retention is difficult: Independent contractors exist to come and go. So, it should be no surprise that employee retention presents a new challenge when hiring independent contractors. Independent contractors are often brought in to work on a single project. If you like their work and work ethic enough, you may be disappointed when they leave. Even if you ask them to stay and offer them incentives, they’ll mostly refuse. Independent contractors like working on their own schedule and pace. So, it’s hard to convince them to give that up. Not to mention, having independent contractors frequently come and go can disrupt your workforce and inconvenience your other employees.
- Lack of pride and investment: While contractors are often proud of their work, they’re unlikely to be proud or invested in the company they’ve performed the work for. Thus, they may not show the same passion you or your other employees show for your company’s goals and values. Plus, independent contractors are less likely to be loyal to your company, meaning they can go on to do similar work for competitors once they’ve finished with your project.
- Less control over your workers: Independent contractors enjoy working unsupervised and often make their own decisions on how to perform the work. While they must complete the work that was agreed on, how they do it is often left up to them. This also means that they may sometimes cut corners.
What Is an Employee?
Unlike independent contractors, an employee usually works for a single employer during the agreed-upon hours. Typical employees work on-site, though remote-based employees can work elsewhere. Whether they’re on-site or a remote entity, employees are often provided with a salary and benefits.
While independent contractors are often hired for their skills, employees are usually hired with education and experience in mind. They also receive special training and onboarding.
Pros of an Employee
- Better employee retention: Employees have a better overall retention rate, which is helpful if your company wants to keep workers around instead of having them come and go. Employees are likelier to stick to their companies, especially when treated with respect, and are given more opportunities to grow.
- Reduced searching: Since your employees will likely stick with you for the long haul, you don’t have to worry about constantly searching for new talent to fit your needs.
- Stronger bond and company loyalty: Employees are often given more incentive to have more loyalty to your company than independent contractors. Employees are given plenty of benefits to keep them loyal, and when you put your trust in them, they return the favor by trusting and investing in you. As such, employees are more likely to support you and your company as it grows.
Cons of an Employee
- Employee benefits: Full-time employees are usually required to have benefits provided to them by their employers. These benefits can quickly rack up in terms of expenses. Not only do you have to pay them a salaried wage and provide them with benefits, but you also have to take care of their taxes, pension plans, and medical coverage.
- Less flexibility: Independent contractors are all about flexibility — you can hire them for short-term projects and then be done with them. However, employees are contracted to you, and you can’t do away with them that easily, even if there’s no work for them.
- Liability: Employees receive certain protections from federal law. If you mess up, you can end up paying fees and being penalized. For example, if you fire an employee for no reason, you may be subjected to providing them with severance pay or unemployment benefits.
Differences Between Contractors & Employees
Contractors and employees have many similarities. They’re both there to perform work for you. However, these two positions have many more differences than they do similarities. Some of the most common differences include:
Degree of Control Over Work Performed
Independent contractors often work on their own terms as long as it abides by the contract. As such, employers often have little control or say over how independent contractor gets their work done, just as long as they complete the project.
Contrarily, employers have full control over an employee’s work and how or where it is performed. Employers can decide whether employees can work on-site or remotely, the specified hours they must work, and how the overall work is performed. Often, they have supervisors and managers who oversee their employees’ workload.
Compensation & Benefits
Employees are entitled to a salary or hourly pay and certain benefits, including medical, 401ks, pension and retirement plans, and unemployment benefits.
Independent contractors, however, do not have requirements for a salary, nor are they entitled to employer-provided benefits. They are also not entitled to unemployment should their contract end. Independent contractors are only entitled to the agreed-upon hourly rate stated in the contract.
Tax withholding differs between employees and independent contractors. While independent contractors are usually required to handle their own payroll taxes, employees rely on their employer to withhold and process tax payments.
Independent contractors also have to worry about self-employment tax, whereas the employer takes care of any employment taxes on behalf of their employees.
When to Hire Contractors vs Employees
Businesses need to know when to hire an independent contractor or an employee. Since both have different working methods, different employment statuses, and are entitled to different compensation, you must select the correct type of worker to hire.
For short-term and one-off projects, an independent contractor is the better option. You won’t have to commit to a long-term relationship, nor will you have to supply them with company benefits. You also won’t have to invest in their training or future.
Consider hiring a full-time employee for roles that you want to fulfill long-term. A full-time employee will likely stick with you for the long haul and invest in your future growth as long as the investment is returned and enough incentive is given.
Hire Contractors or Employees With Revelo
If you’re struggling to know whether to hire an independent contractor or full-time tech employee, know that you don’t have to struggle alone. Revelo can help. With our talent marketplace, you can seamlessly onboard your next talent, whether it be a contractor or a full-time employee. If you’re interested in learning more about our process and how we can help, contact us today.