The Business Owner's Dilemma: Contractor or Employee – Who to Hire?

Modern businesses with big-time aspirations should utilize all opportunities to facilitate their pipeline processes, improve the quality of their products or services, satisfy the clientele, and outstrip rivals in the niche. All these shop floor aspects depend critically on the efficient use of the workforce a company relies on. And the level of its performance and productivity are directly related to the recruitment model harnessed by an enterprise. That is why solving a contractor employee dilemma is vital for organizations today. 

Contractor vs. Employee: Defining the Concepts

Before analyzing the pros and cons of hiring either type of specialist, let's get down to the basics and find out the difference between an employee and an independent contractor. 

An employee is an individual hired, managed, and supervised by an employer and working under an employment agreement between 30 and 40 hours a week (depending on the jurisdiction and requirements of an organization). Typically, they perform their duties according to a fixed schedule (either full-time or part-time), during which they complete the tasks the management sets for them and receive a specific wage or salary. As a rule, organizations hire employees with a view to long-term business relationships.

An independent global or domestic contractor is a self-employed person or company providing products or – more frequently – services to an organization (conventionally on a short-term or per-project basis). While hiring them, employers sign a specific independent contractor agreement that stipulates the nature of the job to be done, the working schedule, the delivery deadline, and the compensation the contractor will get for completing the task. 

The differences between employees and contractors can be understood better if we zoom in on various aspects of their relationships and interaction with the employer. 

Contractors vs. Employees: A Head-to-Head Comparison

As vetted professionals in the HR and recruitment sphere, we at CleverFleet believe that juxtaposing employees and contractors can be performed alongside the following parameters:

1. Business involvement 

Employees work for one employer only, while contractors may have several projects running for multiple client companies.

2. Hiring and onboarding 

For employees, it is quite an extended process when an applicant faces a series of interviews, undergoes various tests, meets the team, learns the responsibilities, and has some initial training. Contractors skip many stages of this procedure (especially the onboarding and training routine) but often have to submit a proposal where they give reasons why hiring them is beneficial for the employer.

3. Control and supervision 

Whatever an employee does is determined and controlled by the employer, who accepts the risks of a failed project but owns everything employees create. Contractors manage all details themselves and resolve all issues and risks related to completing the task at their discretion. The only thing that the employer reserves is the outcome of the cooperation. The question of intellectual property rights is treated differently by different countries that may acknowledge or negate the contractor’s ownership in such matters.

4. Work schedule and location 

Unlike employees whose working hours and location are conditioned by the organization’s policy, contractors are free to determine their schedule. All they have to do is to meet the deadline. As for the location, they usually work in remote mode. 

5. Tools and equipment 

Office space, equipment, software, furniture, stationery, and other things employees use are provided by the company they work for. Contractors have their own "toolbox," which they leverage to get the job done. 

6. Payment 

Employees are placed on the employer's payroll and receive a salary according to the contract they signed upon enlisting. Contractors receive specifically defined payments (mostly hourly or for a particular project). Sometimes, they have to invoice the client to get paid.

7. Benefits 

Each country has its labor laws that describe benefits employees are entitled to (minimum wage, health insurance, regular paid leave, parental leave, paid overtime, social security, retirement contributions, etc.). Contractors must take care of such boons themselves since no law guarantees these perks. Yet, employers may provide contractors with the same benefits as employees or even offer additional bonuses if they are interested in enlisting top talent with exclusive expertise.

8. Taxes and tax forms 

These differ in various jurisdictions, but they aren't the same for employees and contractors in any case. For instance, in the USA, employees fill out Form W-4, and employers fill out Form W-3 when a new person is hired. Contractors complete another document (Form W-9) to be covered by tax legislation. Besides, contractors use Form 10099-NEC or Form 1099-MISC when filing their own taxes to the IRS. 

Being aware of these peculiarities, employers should determine what type of business relationships suit their particular use case better. 

It is wise to hire employees if:

• You need a full-time workforce for long-term commitment;

• You want to attract high-profile mavens with perks and benefits;

• You want total ownership of intellectual property rights;

• You require exclusive data security enabled by the in-house equipment.

A contractor is a sensible option if:

• You are a novice in business;

• You have a short-term assignment to be fulfilled;

• Your workload tends to fluctuate;

• You want to avoid complicated onboarding procedures and additional equipment, workstation, office space, etc. costs;

• You want to save on statutory contributions and benefits.

Yet, no matter what cost-effectiveness, prudence, or expediency considerations you may have while deciding on the type of personnel to hire, there are certain situations when you face Hobson’s choice.

Bottlenecks and Pitfalls of Hiring Independent Contractors

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Being well-versed in all nuances and intricacies of the IT job market (and beyond), we realize that the option of recruiting contractors is unavailable in some use cases. 

1. Sensitive or classified work

Government agencies, defense companies, and other bodies dealing with classified information aren’t allowed to hire contractors for any positions. Because of security concerns, some roles and jobs they have are restricted to personnel with an employee status only.

2. Highly regulated industries

Stringent professional standards and regulations adopted in some industries (finance, banking, healthcare, and law, to name a few) don’t allow contractors to be employed for certain roles. Organizations operating in these domains must comply with industry-specific code and ethical guidelines. 

But even if the law doesn’t forbid hiring contractors, you may find the process and results rather intricate and bewildering. Here are the two major nuisances companies employing contractors encounter. 

3. Permanent establishment risks

These may come into play if you hire contractors abroad and are related to corporate tax liability. By the book, taxes are paid in the country the employer hails from. However, when your staff is located and works in another jurisdiction with its local laws and tax regulations, they are supposed to comply with them. Such a dubious legal status may lead to hefty fines or trigger litigation, both of which have an adverse impact on the employer’s business reputation.

4. Misclassification accidents

Sometimes, an organization considers their workers to be independent contractors while, in fact, they qualify for employees. Such mistakes (whether intentional or accidental) happen in the business world now and then, causing tremendous uproar and often resulting in huge penalties incurred by companies. Misclassification lawsuits may come either from the personnel or from relevant agencies established by national governments that check the employee/contractor status.

• In the UK, HM Revenue and Customs is responsible for tax legislation that presupposes assessing employment status. Moreover, it enforces the Off-Pay Working (IR-35) rules to prevent worker misclassification.

• In Germany, all issues pertaining to worker rights are overseen by the Federal Ministry of Labor and Social Affairs (BMAS).

• In France, the Ministry of Labor (Ministère du Travail) is responsible for enforcing labor laws, policies, and regulations.

• In Canada, the CRA (Canada Revenue Agency) administers tax laws that cover misclassification issues on a national scale. Plus, each province has its own labor board in place to enforce employment standards.

• The United States, as the biggest economy in the world, has several agencies responsible for overseeing and enforcing employee classification regulations. The chief of them are the Department of Labor (DOL), which defines classifications, and the Internal Revenue Service (IRS), whose Wage and Hour Division (WHD) enforces these laws in relation to tax obligations.

Besides, Labor Departments across all states are in charge of enforcing state-specific labor laws, whereas the National Labor Relations Board (NLRB) deals with laws about collective bargaining rights and ensures the protection of workers who are engaged in concerted activities.

Given the diverse nature of legislation frameworks in this field, determining the worker status is quite tricky. The IRS applies three criteria to tell an employee from a contractor (financial control, behavioral control, and type of relationships), but the ground isn't very safe anyway. 

The only way to forestall possible legal trouble and hire high-end contractors to do an important job for you is to enlist the services of a seasoned recruiting agency. By contacting CleverFleet, you will make the most of cooperating with independent contractors via ensuring the personnel you hire dovetail with your requirements and national statutory norms and have the necessary qualifications for the task.

Drawing a Bottomline

While recruiting personnel, contemporary businesses face the dilemma of going for employees or independent contractors. These categories of workers differ in several aspects, including the type of relationships between the parties, behavioral control over the shop floor processes, financial compensation, benefits, and more. 

The ultimate choice of the workforce type is conditioned by the nature of the enterprise, the organization’s business plan, development vision, spending policy, and other factors. To make the optimal decision, you should also pay attention to permanent establishment risks, the correct classification of the staff, and industry-related limitations and regulations. By enlisting the help of vetted mavens in the field of HR and recruitment, you will avoid existing pitfalls and obtain first-rate specialists who are the best fit for your company.