Blog

Is it better to hire an employee or a contractor?

The right talent is essential to any company's success.
August 2, 2022
Oyster Team
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Finding the right talent is essential to any business’s success. While there are many elements of talent acquisition, one of the first factors to consider is whether you should hire traditional employees or contractors. Here’s what you should know when making this important hiring decision.  

What’s the difference between contractors and employees?

Any time a company has an opening, it’s worth asking whether it’s better to hire an employee or a contractor. But before you can answer that question, you must know the key differences between these two working arrangements.

In the U.S., the Internal Revenue Service uses a right-to-control test to differentiate contractors from employees. This assessment considers several financial and behavioral factors, as well as the relationship between the worker and their organization. For example, contractors should have independent control over how they perform their work. With employees, the employer controls how the work is performed.

Financial control factors may include tools, such as laptops and other equipment. For instance, contractors typically use their own supplies to provide work, whereas companies must provide employees with the tools needed to fulfill their roles.

Economic and financial risks should also be considered when determining whether to hire an employee or contractor. Workers who take on financial risks and bear responsibilities for loss or profit are contractors. For traditional employees, the company bears the financial risk.

Pros and cons of hiring contractors

Pros

1. Staffing flexibility

If you have a project that requires specific skills, but you don’t have the need for a full-time employee outside that project, hiring an independent contractor can be the perfect solution. Similarly, if you only need these skills occasionally, it might make sense to find a contractor who can complete work as needed.

2. Financial savings

You’ll only need to pay contractors for the work they provide, whereas employees receive an annual salary or hourly rate. Plus, employers aren’t responsible for contractors’ benefits, such as paid time off, health and disability insurance, or retirement planning options. You also won’t have to worry about income tax, Social Security, or Medicare for these workers.

3. Skilled work without extra training

Contractors possess specific talents. These skilled workers generally require very little training on the projects for which they’re hired. While you may still need to provide some background information about the project’s scope and the company’s overall strategy, you can typically expect independent contractors to provide quality work sooner than employees who may need additional training.

Cons

1. Less control over how work is done

Contractors have more freedom than employees, which means you’ll have limited control over their workflow. It’s therefore critically important to maintain clear communication about expectations and deadlines.

2. Less reliability

Since contractors have no obligation to maintain a specific work schedule, they may not always have the availability to complete work by the time you need it done. This could result in projects becoming delayed or drawn out.

3. No long-term commitment

As their name suggests, contractors typically sign a contract with employers. Within its terms, there may be requirements for providing services for a set duration, such as until a project is completed. It’s common for contractors to move on after their requirements have been fulfilled. This means you could lose out on great talent—unless you convert your best contractors to full- or part-time employees.

Pros and cons of hiring employees

Pros

1. Reliability

Employees are required to maintain a set schedule, so you can trust them to be around for work consistently. You can also assign them a range of projects or responsibilities as long as these tasks fall within their job description.

2. Company loyalty

Employees generally expect to maintain a long-term relationship with their employers. This can reduce turnover, which would otherwise use up significant resources, such as time and money spent on recruiting and training.

3. More control over work

Employees require more oversight from management, meaning the organization gets more say about how work is completed. A greater level of control over work helps ensure projects are completed according to precise expectations.

Cons

1. Increased liability

Employers are responsible for their employees’ work, as well as any injuries that could occur while they’re performing their duties. This increased liability comes with added financial risk.  

2. Greater financial investment

For employees, employers are responsible for income taxes, Social Security, Medicare, and workers’ compensation insurance. To be competitive in attracting the best talent, you’ll also want to offer a compensation package that includes other incentives, such as health insurance and paid time off. These expenses can add up, but top-notch talent is worth the investment.

3. More training

Employees generally require more onboarding than contractors. You’ll need to familiarize them with the company’s mission, strategy, and policies, as well as expectations for their role. Because they typically have more responsibilities than contractors, onboarding employees may require more time (and money).

How to convert contractors to employees

Finding talent is tough. It’s made slightly easier by opening employment up to a global pool, but even then, finding the right people for your team can be hard. If you have a contractor who is the perfect fit, you might want to think about persuading them to join your team as an employee. Oyster can help!

If you’re facing challenges while finding the best contractors to fill your project-based or occasional talent needs, we can help there, too. Find out more about how we can help you access talented contractors across the globe here.

About the Author

Oyster is a global employment platform designed to enable visionary HR leaders to find, hire, pay, manage, develop, and take care of a thriving distributed workforce.

About the Author

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