If you have heard about the AB-5 bills that are currently being considered in some states, then you probably have at least some understanding of the difference between hiring contractors vs. employees.
Both contract and full-time status have their pros and cons – for both employers and employees. So, the question is: should you hire employees or contractors?
Full-Time Employees: the Pros and Cons
Full-time employment is the hiring with which most people are probably most familiar. There are distinct advantages and disadvantages to doing things this way, though.
For example, it’s a well-known fact that labor is the biggest cost of doing business in most cases. And hiring full-time employees won’t exactly ease that pain.
But will the cost outweigh the benefit for your business? Let’s take a look at some of the pros and cons of hiring full-time employees.
Pros of Hiring Full-Time Employees
When you hire full-time employees, you control the reins. You are able to train the person, tell them what to do, and even tell them how to do it.
You can also require employees to sign a non-compete clause (NCC), which means the employee agrees that they are not legally allowed to work for a direct competitor. Sometimes, these clauses can even prohibit employees from working for competitors for a certain period of time even after they have left your organization.
If you terminate an employee, there are not many regulations on your ability to do so without paying a severance package. After all, full-time employment is usually considered “employment at will,” meaning either party can terminate employment at any time.
When you have full-time employees, you can often pay them less if you look at the job from a per-hour perspective. Many contractors are highly-skilled workers who bring a lot of value – and they expect to be compensated accordingly.
Another benefit of full-time employees is having employees with whom you have a long-term working relationship (and vice versa). This not only means not having to constantly re-train people – it also means getting to know “your people” and their strengths and weaknesses.
However, there are cons to hiring employees, too.
Cons of Hiring Full-Time Employees
The cons of hiring employees mostly come down to laws and regulations. There is definitely more “red tape” that comes with this type of hiring.
For example, you’ll have to pay 50% of the FICA tax for all of your employees in addition to payroll tax. There is also federal unemployment (FUTA), worker’s compensation, and state and local taxes.
If you operate in the corporate world, you may have to pay into employees’ retirement plans. While not technically required by law, it is necessary for safe harbor status. Plus, many employees expect this nowadays. It may put you at a competitive disadvantage if you don’t offer it.
And if you terminate an employee, you may have to pay out a contract. That is because the employee may be entitled to severance pay or other protections as a result.
Independent Contractors: the Pros and Cons
Independent contractors have become a particularly popular hiring model in recent years, particularly due to the “gig economy.” However, despite this rise in popularity, independent contractors are not always ideal.
Pros of Hiring Contractors
The pros for hiring independent contractors very much overlap with the concerns that the AB-5 bills are trying to address. That is to say that the reporting and tax responsibilities you bear when you hire independent contractors are much less than those for employees.
And while contractors often bill at a nauseatingly high hourly rate, they can still be cheaper than full-time employees since they don’t get the benefits that employees get.
Because contractors usually have highly specialized skills, you can hire exactly the right person for the job. That also means you may not have to train the person much when they arrive.
Are there cons to hiring contractors? Like everything else in life, yes, there are cons as well.
Cons of Hiring Contractors
Currently, there are not a huge number of cons for hiring contractors, though that could change in the near future.
The main disadvantage with contractors is that you have less discretion in how they get their work done. You don’t necessarily control their training and you certainly cannot “micromanage” them.
You can assign responsibilities to contractors, but your oversight more or less ends there. Contractors may also work for others, set their own schedules, and may determine how best to get the job done.
How Much Control Do You Need?
Much of the decision to hire employees vs. contractors comes down to how much control you need over your business operations.
Do you need to keep a tight leash on your operations? Or is it only the end-result with which you are concerned? The former commands the attention of full-time employees, while the latter may call for contractors.
In addition, contractors can be cheaper – although, as mentioned, that may be changing as labor laws are re-written.
Types of Work
Typically, whether you hire contractors or full-time employees will depend on the type of work as well as the duration. If the work is inherently temporary, such as working on a project with a definite end-date, then contractors make sense.
However, roles that require help in a more ongoing capacity with no definite end-date require full-time employees. Companies like Uber have broken from this reasoning in classifying their employees as independent contractors, but we could see that change in the near future.
Hiring Contractors vs. Employees: What’s Right For Your Business?
There is clearly not a one-size-fits-all answer to whether you should hire contractors vs. employees. There are a number of things you will need to consider, including your budget and the type of work your business does.
But this decision is a very important one. Having a successful business depends on hiring the right people. Be sure you consider all of the above and conduct a thorough analysis of your operations before making a decision.