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What’s the difference between a contractor and an employee?

Know the distinctions between a contractor and an employee.
August 1, 2022
Oyster Team
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As a company owner, hiring manager, or HR professional, it’s critical to understand the difference between a contractor and an employee. Knowing the distinctions between their responsibilities, scope of work, and payment ensures you’ll be able to make informed decisions about your business’s needs and avoid issues with the IRS and other tax agencies. Some of the differences are subtle, but there’s no denying the importance of being clear about the type of worker you’re hiring.

What’s the difference between independent contractors and permanent employees?

There are four main differences between a contractor and an employee:

  • Benefits: Employers don’t typically provide contractors with holiday or sick pay benefits, but they have the option to do so. Employees, on the other hand, usually receive a comprehensive benefits package including paid time off and health insurance. 
  • Expenses: Contactors often charge more for their services because they’re responsible for providing their own equipment. A contractor with the same skills as an employee will probably charge more than an employee’s hourly wage, but that expense is usually offset by the fact that contractors are hired on an as-needed basis. 
  • Risk: There are many benefits of hiring contractors—including specialized help and flexibility regarding scope and schedule—but there’s also more risk. Misclassification between employees and contractors is the biggest risk because it can affect both the worker’s and company’s tax obligations. 
  • Exclusivity: It’s common for a contractor to work for multiple companies at the same time because they’re leveraging specific skills or expertise. Conversely, employees are 100% committed to your business and receive training on in-house procedures and preferences in addition to industry best practices.

These four differences can help you decide if you should hire a contractor or an employee.

Is it better to hire contractors or employees?

There’s no right or wrong answer to this question, as it depends on your company’s needs and circumstances. It’s commonplace for companies to hire both contractors and employees, since in many cases a hybrid approach affords you access to the best of both worlds. Answering the following questions will help you identify the most suitable hiring choice.

1. Is the person’s work an integral part of your company?

If so, it’s more likely that the person will be classified as an employee. They may have a range of duties that pertain to their role and will be trained and supervised to ensure the work is done to the company’s standard. An independent contractor provides a service to your company, but the scope is much narrower and focused on a single project. They also have a greater level of autonomy when working.

2. Does the work require a special skill set?

If the worker provides a special or unique skill set, it’s often easier to classify them as an independent contractor. If the necessary skills can or should be taught in-house, the worker is more likely to be classified as an employee because they’ll need access to company resources, like equipment and education programs.

3. What level of control do you want to have?

A worker is classified as a contractor if they can decide when they work, where they work, and how they work. If you’re okay with this, it’s possible to hire the person as a contractor. If the project requires more training and oversight, or if it needs to be done in a specific sequence and timeframe, then you should plan to hire an employee.

4. Are you okay with the worker having more than one client?

An employee will work for your company and your company alone. A contractor can work for several clients at once. You may or may not be comfortable with this depending on the sensitivity of information the contractor will have access to and your agreement on who owns the output. 

Other questions to answer

The questions above are often enough to help employers decide what type of worker relationship works best for their needs, but it’s worth looking at the bigger picture. Here are a few additional questions that will help balance your current and future needs:

  • What is the true overall cost of hiring a contractor? An employee?
  • Are you okay with the idea of someone working as a contractor before transitioning into the role of employee?
  • Do you have a contractor contract, complete with a non-compete agreement?

The answers to these questions will vary based on the project and your company’s needs over time. It’s best to identify areas where you can be flexible. 

Converting contractors to employees with Oyster

Just because you hire someone as a contractor doesn’t mean they have to remain in this role indefinitely. There may come a point when you want to convert a contractor into an employee

Hiring a contractor is a fast, efficient, and affordable way to scale your team in a hurry. It also allows you to scale down, as necessary. However, if a contractor is operating like an employee, you’re at risk of legal and financial implications. 

At Oyster, our 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. 

With our system as a guide, you can ensure that everyone contributing to your company is in the role that suits their needs and yours.

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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