One of the most challenging aspects of running a small business is knowing when to hire and what kind of help you need. Managing workload, capacity, and labor expenses effectively is a difficult balancing act. So when it’s time to add to your team, you may be wondering if you should be hiring independent contractors or employees.
As a small business owner running a tight ship, chances are you do not have the need, desire, or means to hire an extended team of traditional employees. A popular alternative is to hire independent contractors instead, as a cost-effective and smart solution to meet your needs as they arise.
But when making staffing decisions, it is imperative that you are careful to make the best choice for your business and that you avoid serious consequences of misclassifying employees as contractors.
Advantages and Disadvantages of Hiring Independent Contracts vs. Employees
The biggest advantage of hiring independent contractors is that it allows you to add to your workforce only if and when you need support. This means you have less overhead because independent contractors are not subject to payroll taxes nor are they covered by a wide range of employment regulations that can add significant expenses to your bottom line.
But hiring a contractor is not always the best choice when growing a business, because you will not have as much control over their schedule or the manner in which that person works. Independent contractors generally have other clients to serve, so you will be competing for their time and loyalty.
With contractors, you will also be subject to continually renegotiating your contract agreements and payment rates to maintain your relationship. Plus, a contractor could be in the process of growing their own business and subcontract the work you are hiring them to do.
So while there are definite advantages to hiring contractors vs. employees, ultimately, you have limited control and predictability. If your vision is to build a cohesive workplace culture with a team that grows with you and shares your common goals, hiring independent contractors might not be the best choice.
Also, keep in mind that while many people choose self-employment for the flexibility, some are using contract gigs as a stop-gap until they can find a more permanent job. If you value your workers’ contributions and you know they are seeking stable employment, establishing an employment relationship with all of the benefits and protections it entails could be the best solution.
But, most importantly, you should be aware that you don’t actually have the power to determine whether a worker is an employee or an independent contractor. Just because you have them sign an independent contractor agreement, doesn’t dictate their true status. It’s a matter of following the rules and structuring the work arrangement according to the law.
What is the difference between an employee and an independent contractor?
Many small business owners make the common mistake of thinking an employee and a contractor is essentially the same thing. But it is important to know the difference because there are severe consequences and stiff penalties for hiring a contractor that should be classified as an employee.
An employee generally works at a specific time set by the employer and often at a particular place, but allowing flexibility is not automatic grounds for considering the person a contractor.
In most cases, an employee works for only one company, or your company is their primary source of income. And they are usually paid a consistent hourly wage or salary.
An employee’s work, or the manner in which they do it, is in a large degree controlled by the employer. The tools and resources they use to accomplish work-related tasks are supplied by the employer, and they may receive training by the employer.
One of the most important distinctions between an employee and an independent contractor is that an employee does work that is an integral part of your business.
An independent contractor can work whenever and often wherever they want. You typically can’t require specific office hours, but you can require they attend calls or meetings at particular times and set deadlines for assignments.
As a rule of thumb, contractors work for multiple companies and you can not require nor should you assume that you are their only client.
An independent contractor also controls their own method of work or how they perform a task. They’re generally responsible for their own training, and they use their own tools and resources to get the job done.
Finally, an independent contractor is usually paid by the project, on a flat-fee basis, or an agreed-upon hourly basis.
Why is the distinction between an independent contractor vs. employee unclear?
The reason many small business owners find this topic to be confusing is that employment rules are not exactly black and white and they are regulated by various federal and state guidelines.
It can be a controversial topic, as some assert that companies take advantage of contractors to skirt the law; and while this does happen, hiring contractors can also be an effective strategy for not only maintaining one viable business but also supporting the individual contractors’ businesses that run on providing contracted services.
The IRS and the Fair Labor Standards Act (FLSA) have slightly different definitions of what constitutes an independent contractor vs. employee. The overall gist is the same, but it is important to familiarize yourself with the requirements of both governing factors.
- Get the U.S. Department of Labor FLSA guidelines on the Misclassification of Employees as Independent Contractors here.
- Get the IRS rules on how to determine if a worker is an Independent Contractor or employee here.
Overall, no single factor is most important in determining independent contractor vs employee status. But the greater your dependence on them to run the core functions of your company and the greater dependence they have on you for income, the more likely the courts will consider them an employee.
As a small business owner, it’s crucial to get the guidance you need to protect yourself against the stiff penalties and legal action that can come from miscategorizing a worker.
To get help with staffing strategically for your small business, schedule a strategy session with Niki Ramirez, MBA, PHR, SHRM-CP, THRP, Founder & Managing Partner, HR Answers, LLC.