Employee or Contractor: Which Is Right for Your Business?
When looking to hire somebody to help out with projects or tasks, there are a few ways employers can classify their new worker. Many situations are more suited to hiring an employee, whereas others might warrant an independent contractor (IC).
If deciding which one to choose is keeping you up at night, or if you just want to learn more about the distinctions between the two, you're in luck. This article will help you understand which classification is best for different circumstances.
What Is an Independent Contractor?
The primary difference between independent contractors and employees is that an IC has the ultimate say-so on when, where, and how their work gets completed. They usually use their own tools and often don't have a set schedule or report to a specific location. When working with an independent contractor, employers will only control the final product being delivered, not the methods used to reach the end result.
Another key factor of an IC relationship is the duration of work. Independent contractors are usually hired temporarily or on an as-needed basis. The timeframe of work could be one week, six months, or longer. However, there is no guarantee of continuous work for an independent contractor. The arrangement lasts as long as it takes to complete the task they were hired for.
The third aspect in deciding if somebody is an independent contractor is how they will be paid. Many ICs are paid a flat rate upon completion of a job or project, but they can also be hourly, daily, weekly, or monthly. Many employers tend to steer away from an hourly rate as this tends to correlate with an employee relationship.
Details about payment for services rendered, how long the work is expected to last, and what the delivered work will entail should all be spelled out clearly in an Independent Contractor Agreement or Services Work Order. Without a written document outlining the specifics of the independent contractor relationship, a court of law will lean towards the individual being considered an employee, which can have some significant consequences that we'll delve into later in the article.
What Is an Employee?
An employee is somebody that a company hires with the intention of providing continuous work. The employer manages how the employee completes their tasks, what the schedule will be, and where they will work.
Employers typically provide employees with all of the tools necessary to do their job. The company also trains employees and gives ongoing coaching and performance management. If the work an individual does is instrumental in a business's day-to-day operations, that worker should most likely be an employee.
Just as you would create an agreement for independent contractors, you should always provide employees with a written job offer upon hiring. This document outlines the start date of employment, pay rate (annually or hourly), benefit eligibility, contingencies such as drug tests or background checks, and any other agreements the employer would like to set, such as a non-compete agreement or non-disclosure agreement. These documents ensure that both parties are on the same page regarding the terms and conditions of the employment relationship.
Benefits of Hiring Independent Contractors
Hiring an independent contractor provides many benefits to employers. First and foremost, the company is not liable to pay any taxes for wages paid to an IC. The company provides the worker with an IRS 1099 tax form, but contractors are responsible for paying their own taxes for any wages of $600 or more per year.
The company is not on the hook for paying unemployment or worker's compensation. Another cost savings for employers is that they are not required by law to pay independent contractors overtime, even if the IC is paid hourly. It's obvious to see why many employers are enticed by classifying workers as contractors — it all comes down to dollar signs.
Benefits of Hiring Employees
While independent contractors tend to save the company money in multiple ways, hiring employees has its own set of advantages. Employees should be doing work that is essential to the business. Well-treated employees tend to have more company loyalty than contractors.
With employees, the company also has much more influence on how work is being done and can delegate tasks as they see fit. An employee will hopefully be with the company long-term and can grow with the organization.
Contractor or Employee: Which Is Best for Workers?
As the workforce evolves, we're seeing a significant shift to a "gig economy." More people than ever before are choosing to work as contractors for companies like Uber and Instacart or are taking freelancer jobs on platforms like Upwork and Fiverr. Let's take a moment to discuss the benefits of accepting either independent contractor work or full-time employment.
Benefits of Being an Independent Contractor
Working as a contractor allows individuals more autonomy in their daily work. They often set their own hours, do the work from anywhere in the world, and decide how they complete the assigned tasks. Although ICs are responsible for paying their own taxes, many people decide the benefits of being their own boss outweigh this obligation.
Along with this liberty comes the ability to take on more than one engagement at a time. Whereas most companies have rules around having multiple jobs, independent contractors are usually free to accept multiple projects. Contractors typically don't get benefits like health insurance, paid-time off, or retirement plans, but this can be somewhat offset by a slightly higher pay rate than full-time employees.
Benefits of Being an Employee
Even with the conveniences afforded by independent contractor work, a large portion of people still primarily look for work as full-time, permanent employees. There are many reasons for this, but stability is a major perk of being employed by a company. Employees have a relatively set amount of hours per week and know that they will be getting a steady paycheck. Full-time employees are also eligible for the benefits offered by most organizations, such as health insurance, retirement plans, and paid time off.
Along with the traditional comforts of permanent employment come a few legal protections as well. For example, employees are typically covered by worker's comp should they get hurt at work. Even if the employment relationship ends, employees are also entitled to unemployment benefits (depending on the details surrounding their termination) that can provide financial support to displaced workers.
Positions Often Filled by Contractors
Depending on an individual's priorities, they may seek out full-time employment or choose to pursue independent contractor positions. If you like the freedom to work how you see fit, then IC work may be the route for you. Below is a list of a few jobs that are often done by independent contractors.
Many companies look for freelancers to write articles, blogs, books, or other materials for their organization.
If you need building construction or repair, you seek out the help of plumbers, electricians, roofers, and other professionals. Many of these jobs are held by independent contractors who are free to take on as many contracts as they can handle at a time.
Individuals working in the beauty industry typically are independent contractors. While they may work at a specific salon, many of them have authority over when and how they work.
Real Estate Agents
Buying and selling homes is a big business, but most realtors enjoy the ability to make their own hours and use their own techniques and methods when acquiring and working with clients. Most real estate agents work with brokerages that take a percentage of their earned commissions but do not have much of a say in how each realtor conducts their work.
There are many other roles independent contractors fill — the list above is simply a few of the most common examples.
Consequences of Misclassifying Workers
We've gone over the differences between independent contractors and employees, but it's vital to understand the potential consequences of misclassifying a worker.
If you classify a worker as an independent contractor, but a court determines they qualify as an employee, your company is on the hook for all employment taxes that should have been paid. If the worker has proof that they worked over 40 hours a week on any occasion during their contract, your company is now liable for back wages. You also face hefty fines for violating the Fair Labor Standards Act.
Businesses could also get in trouble with their local workforce commission regarding unemployment insurance, as all wages paid to employees are required to be reported. If a worker previously classified as an IC is found to actually be an employee, the employer now has to report the wages paid, which can increase their unemployment tax rate.
Companies can also get into legal trouble for excluding employees from benefits and not providing FMLA where applicable. Classifying a worker as an independent contractor is attractive to employers for many reasons, but the penalties for misclassification are not worth the potential cost savings.
Choosing whether to hire an independent contractor or a full-time employee is often overlooked by businesses, but making the wrong choice can be very expensive. Use the guidelines above to decide what type of worker you need, and above all, make sure to always have a written agreement for any type of engagement.
Regardless of who you're hiring, it's a good idea to protect your company with the right legal documentation. To learn what forms you must have, read our article 13 Forms Your HR Department Needs. Consider using our free trial, which grants you access to hundreds of attorney-vetted legal forms at the click of a button.
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