Hiring an independent contractor is an attractive option for employers looking for specific skills to round out their team, whether it’s for a short-term project or an ongoing commitment that doesn’t require a full-time employee. But the process isn’t as simple as it may seem at first. There are important distinctions between hiring a contractor and an employee that can impact your business. What do you need to account for when deciding how to fill a role on your team?
Risks to consider when hiring independent contractors
1. Misclassification
“Independent contractor” and “employee” are more than just job titles—they’re important worker classifications that come with different rights and responsibilities, both on the worker’s side and the employer’s. Improperly managing these distinctions is known as worker misclassification, which puts you at risk for various fines, penalties, and tax sanctions.
As of 2021, the Internal Revenue Service (IRS) defines an employee as “anyone who performs services, if the business can control what will be done and how it will be done.” By contrast, they define independent contractors as “people in an independent trade, business or profession in which they offer their services to the public.”
The key difference? Businesses have the right to control the details of how their employees work—and must train and compensate them accordingly—but independent contractors have more latitude and assume responsibility for their own training, equipment, benefits, and tax calculations.
There’s never a good time to take a risk with how you classify your workers. If you have any reason to believe a contractor should be classified as an employee, you’re probably right.
2. Permanent establishment
How and where your contractors work and the level of authority they have over their output may create a taxable presence for you. And when that happens, you may soon realize that you have employees on your team, not contractors.
Also, note that tax laws vary between countries. It’s imperative to understand the laws and tax regulations that govern your workers based on where they live. Without the right platform, this will become more difficult as you continue to hire contractors across the globe.
3. Data protection
Without clear stipulations over intellectual property ownership, contractor engagements can dilute your position in the market and undermine data and privacy protections. A lack of clarity in these areas could result in a contractor taking sensitive data with them at the end of their contract. These are challenges few employers can afford.
You have more control over data privacy and protection with an employee. For example, employees are often required to use company-issued hardware while contractors are not. This difference in equipment can leave critical data vulnerable.
4. Attrition
There’s no better feeling than developing a strong relationship with a high-performing contractor. You gain access to all the skills and knowledge they bring to your business without the overhead of an in-house employee.
However, there’s a high risk of attrition with contractors because they operate as their own small business. By comparison, employees tend to be loyal to the company for the duration of their tenure. Not only do you have to worry about high-performing contractors choosing not to sign on for future projects or renew an ongoing contract, but they could also take their services to a competitor.
5. Disengagement
Most contractors enjoy this work arrangement, as it provides them with scheduling flexibility and the opportunity to work with multiple clients. However, they may still feel disadvantaged when it comes to benefits, pay, training, equipment, and perks. Since they’re not locked into a relationship with any one company, they can change their mind about working with you and look for relationships that are better aligned with their needs and interests.
Hiring contractors may seem like a simple way to scale your team quickly and efficiently, but there are various financial, legal, and operational risks involved. It’s important to take a balanced view of both sides of this option to be confident in your decision.
Avoid these risks by using Oyster to convert contractors to full time employees
On the plus side, there’s help available: Oyster’s contractor conversion solution can help you assess your risks in different countries, weigh the costs and benefits of both employment models, and compliantly transition contractors to full-time employment. Our contractor vs. full-time employee analyzer will also allow you to confidently assess workers for misclassification risks.
You’ll never again have questions or concerns about whether you’ve made the right decision.
If you’re ready to start hiring with Oyster, sign up for a free account today. You’ll gain immediate access to Oyster Academy, along with distributed HR tools and the ability to hire and pay your first two contractors.
About Oyster
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.
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