Using Contractors Instead of Employees
Employers are frequently filling jobs and finding the right person for each job is essential whether that person be an employee or a contractor. There are various advantages to hiring independent contractors (ICs). However, before you make the decision on how you plan on staffing a specific job, you should know some advantages of each to help with the decision-making process.
According to the Small Business Administration (SBA), employees and independent contractors are not the same, and it is essential that you learn and understand the difference. Understanding the distinction between the two will help you decide how you are going to hire and how you plan on withholding various taxes and avoiding costly legal consequences for doing it incorrectly.
Advantages of Contractors
Money Saving Potential
Although many employers pay more per hour for ICs over employees for the same work, hiring ICs can end up as the most cost-efficient option for the employer. There are some expenses that come with hiring an employee, which you would not necessarily incur for ICs including employer-provided benefits, contributions and payments on your employees' behalf, office space, and equipment.
Employers have greater leeway when working with ICs when it comes to hiring workers and letting them go. This is particularly beneficial for employers who have fluctuating workloads. The employer can hire an IC for a specific project or task and know that once the job is finished, the expense will not continue.
With this type of flexibility, you would not have to face expense, trauma, or potential legal issues that can come with layoffs and firings. Since independent contractors typically come with specialized expertise for the specific job, they may be more productive right from the starting gate, which eliminates the cost and time of training.
Reduced Exposure to Lawsuits
Under federal and state law, employees are protected by a wide range of rights. This puts employers at risk of having a variety of legal claims brought against them by an employee who feels their rights were violated. Independent contractors are not protected by most of these laws because they are independent businesspeople.
Some of the rights that ICs are not protected by (but employees are) include:
- The right to be paid at least minimum wage and overtime (if qualified) of a rate of one-and-a-half times what they normally earn per hour
- Employment discrimination protection based on color, gender, national origin, religion and so forth. (ICs do receive race discrimination protection)
- Union rights and having the ability to form one
- The right to miss work due to bonding with a child or caring for an ill family member
- The right to sue employers for wrongful termination (ICs often have recourse for improper termination of their IC contract, depending on the contract language)
Advantages of Employees
Certain businesses like restaurants and retail stores do not have the option of working with contractors; at least not for their primary employees like waiters, cooks and floor salespeople. Most if not all businesses deal with confidential information that they would not want leaked outside of the company.
Employees can bring talent to the table inside the organization and, therefore, could take on higher level roles like management and such. Employees typically do a variety of different jobs which makes them better suited for growing with your company.
Ways to Decide Which is the Best Choice
You should keep a small budget to be able to hire independent contractors when needed. Some indications that an IC would be best for your task or project include:
- There are no employees available to work on the project
- You are uncertain of the demand
- Specialized skills are required to get the job done which the company and employees lack
Keep in mind consequences can occur for misclassifying workers. Companies are often guilty of misclassifying independent contractors, which can translate into billions of unpaid tax dollars. The IRS is now cracking down on this. If your company is found to have misclassified workers, this could result in interest, stiff penalties and back payroll taxes. According to the IRS, “In general, someone who performs services for you is your employee if you can control what will be done and how it will be done.”
It is fine to scale a business by utilizing independent contractors when needed. Typically your customers will not care as long as they know that your company still has responsibility for the quality of the work being done. Because of this, it is a good idea that if you are going to build up a network of contractors, make sure they are trustworthy and that you follow all legal regulations.