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The Pros and Cons of Hiring Employees Vs. Independent Contractors

What all business owners must consider before deciding which to hire

The Pros and Cons of Hiring Employees Vs. Independent Contractors

As your small business grows, you’ve concluded it’s all too much to handle by yourself – right? Or, you already have employees and are ready to expand your team so you can scale your business to the next level.

Now you need to explore the pluses and minuses of each type of helper and determine which is the best fit for you.

In this article, I share some of the pros and cons of hiring employees and independent contractors to help you make the ideal choice for your business.

In the US, the Internal Revenue Service (IRS) has very strict guidelines you need to familiarize yourself with as a precursor to making any hiring decision.

In addition to the IRS, there are a number of other state and federal agencies that will audit your business if it looks to them as if you might have misclassified employees as independent contractors.

First, let’s explore some of the pros and cons between employees and contractors:

Pros and Cons of Hiring Employees

Pros:

  1. You have significantly more management control over what, how & when the work gets done.
  2. Employees generally feel more part of the team and will go above & beyond to do a great job.
  3. Turnover is lower when employees enjoy more job security – so teamwork, quality, efficiency and customer service tends to be higher.
  4. Employees complete an application for employment, certifying all the information is accurate and giving you permission to conduct background checks and drug tests.
  5. If they get hurt on the job, they are covered by your workers’ compensation insurance so you avoid expensive medical and compensation costs.
  6. All the work performed is the property of the business owner, even creative work subject to copyrights and patents.
  7. It’s easier to put together a recruiting process to weed out potential bad hires so you can hire the best employees that fit well with the culture you are creating.
  8. You can delegate tasks to them so you can focus on doing what you are best at and enjoy the most.
  9. They are your own brand ambassadors and serve as your best marketers.

Cons:

  1. You need to provide employees with a space, equipment and supplies to conduct their work.
  2. You need an employee handbook so they understand your company rules, benefits and procedures. You can also use it to manage your team.
  3. If business slows down periodically, you are still paying for the person to come to work even when there isn’t enough to do to make it worth the cost.
  4. Employees can file legal claims against you for a variety of reasons such as employment discrimination, unfair pay practices and wrongful termination.
  5. If you decide to layoff an employee due to a lack of work, you’ve lost the training investment you’ve already made and will need to incur recruiting and training costs to hire a replacement if they aren’t available or interested when work picks up again.
  6. Firing team members can have a negative impact on employee morale of remaining staff if they think you were unfair or if they now must carry the extra workload.
  7. You are responsible for collecting taxes from the employees’ paycheck and paying your share of their Social Security and Medicare taxes.
  8. You must track all hours worked and pay time and one-half for employees who qualify for overtime pay. Federal law requires overtime pay after 40 hours per week but check with your state/province on any overtime pay that’s also calculated after 8 hours per day.
  9. In most states/provinces, you must pay unemployment and workers’ compensation insurance.
  10. Over time, employees will expect to receive pay increases along with some benefits like vacation and paid time off for personal business / sick pay.

Pros and Cons of Hiring Independent Contractors. A.k.a. Consultants, Freelancers & Virtual Assistants

The IRS defines an independent contractor as an individual who the business owner and/or their designee has the right to control or direct only the result of the work and not what will be done or how it will be done.

An example of this would be a copywriter that has her own business and works with multiple business owners to write their marketing materials.

Or those that provide services such as bookkeeping, human resources, safety administration, computer support or project management on an as-needed basis.

Pros:

  1. Typically, IC’s enjoy a higher rate of pay than employees since there are no additional costs.
  2. Most IC’s are experts in their field and can quickly get up-to-speed on your needs, so it’s more efficient to hire them if their expertise is not needed full-time.
  3. Depending on the language in your IC agreement, it’s easy to let an IC go once a project is finished or you no longer need or want their services.
  4. IC’s stay up on the latest technology, regulations and licensing requirements and bear any costs to do so.
  5. By creating a Scope of Work agreement, both you and the contractor agree on the working relationship details.

Cons:

  1. You have less control over the work of an IC because although they work on due dates, they independently determine how best to get the work done.
  2. They tend to work remotely so face-time is limited and it’s a little harder to develop a relationship like you do when with employees you see every day.
  3. When an IC finishes an assignment, they might not be available the next time you need them. Or if it is a rush job, they might charge higher prices to move to the front of the line.
  4. If an IC is injured on the job, they can sue you for damages because they are not covered under your workers’ compensation insurance plan.
  5. Federal governing agencies watch small businesses very closely. It is to the government’s benefit when an employer collects taxes from employees and pays the company portion of the required taxes because those taxes support the government’s operating budget. Otherwise, IC’s often under-report their earnings and fail to pay both the employee and employer taxes.
  6. If they work exclusively for you full time, there’s a good chance they are an “employee” rather than an IC – and you are legally required to treat them accordingly.
  7. They are less likely to serve as a brand ambassador for you – it’s their brand they will promote – not yours.

There is a place for both employees and independent contractors in running small businesses. It really depends on what you need and how much control you want.

Mistakes in mis-classifying employees as independent contractors is very expensive, subjecting you to fines and back pay for current and past employees. If an audit determines that you knew, or should have known, that you were paying employees as independent contractors, in addition to stiff penalties you will have to go back for 3 years and correct the mistakes.

If you are unsure if you are needing to classify your workers as employees or independent contractors, contact an HR professional to give you the advice you need.

About the Author, Katherine Hartvickson

Kathryn Wilking

Katherine Hartvickson is the founder and president of Hartvickson & Associates, Inc. dba Quantum Ascendance. She is an experienced business consultant and success coach. Since leaving the corporate world in 2009, her clients include business owners and other seriously committed professionals and entrepreneurs who want to gain the confidence and skills to break through the barriers of success and achieve their ideal life.

What separates her service from others is her experience in leading large teams and developing top performers in corporate environments and because of this, clients achieve individual & financial rewards and the recognition they earned without sacrificing their personal life. If you are interested in knowing more, she can be reached at www.QuantumAscendance.com.


Red Flags to Avoid When Outsourcing Your Business Needs

Red Flags to Avoid When Outsourcing your Business Needs. 11 Tips on Hiring the Perfect Dream Team Instead Of Wasting Time, Energy and Money on Duds

11 Tips on Hiring the Perfect Dream Team Instead Of Wasting Time, Energy and Money on Duds

While many entrepreneurs start their business handling everything themselves to get their business going, there comes a point in their business growth when it makes sense to outsource.  Whereas other entrepreneurs decide to get their business off the ground by outsourcing the help they need right away.

My first hire was a programmer and it was the best decision I ever made – by bringing him onto the team, it expanded my offerings to our clients in a big way. It also relieved me of the pressure of having to keep learning more advanced programming in the ever-evolving web development industry.

Having someone on my team who’s expertise was in programming made much better sense and I never stopped there where I now have experts in many fields on my team.

Hiring new team members can take many forms. You can hire someone as an employee, a contractor or a freelancer. Any of these options are a great way to get the help you need without having to hire full time help.

But when you are hiring new people, especially if they are strangers on the Internet, you do need to be careful.

Be careful when hiring new people for your team. Here's some tipsClick To Tweet

Below are some tips to avoid the hidden dangers of hiring new team members to be aware of:

  1. Handling of sensitive data. If you are sharing information such as logins, passwords, and bank information with a new member, not only do you need to be careful in how you share that sensitive information but also in what they do with it.

    For example, don’t Skype any kind of sensitive data, it’s not secure.  Even email can be tricky. And require they shred or dispose of that data properly to ensure it doesn’t get compromised on their end.

  2. Have them sign a non-disclose agreement. If you are sharing intellectual property with your team members, it’s important to get a signed agreement that states they agree not to disclose certain information outside of the team circle.

    You’d hate to think that your virtual assistant would take your new $5000 program and leak it to your competitor or worse yet, rebrand it and sell themselves.

  3. Get references. It’s important to speak to someone who has experience working with them to find out their work habits, ability to communicate, focus to detail, and turn-around times.

    In my experience, it takes a certain personality type to be able to work independently and reliably in a virtual team atmosphere. Not everyone can work efficiently outside of an office space.

  4. Hire someone who is in alignment with your company values. This is especially true if you are looking for an assistant who will be representing your company with the public or your clients.

    For instance if you are hiring someone to do social media for you or as a customer service liaison, they are acting as the voice of your company.  You want to be sure they conduct themselves in a professional manner that reflects your own values.

    Over the years I have witnessed how terribly bad this can go for clients who have hired assistants who have not represented their company very well.

  5. Avoid payment hassles. If you hire a freelancer from a website and they want you to pay them on the side, that’s a huge red flag that puts their integrity in question.

    Also make sure if you hire someone from another country that you can pay them through a safe method such as Pay Pal.  Also be clear on the exchange rate differences between countries and ensure you’re clear which currency you have to pay them in.

  6. Research this person. It’s always a safe practice to do some research on your candidate. Do a Google search and check them out on Social Media. You may uncover some shady dealings or inappropriate behaviours that would make the person a bad hire.
  7. Cheaper is not always better. In fact hiring someone more experienced at a higher rate will often result in higher quality work in a faster time. Think about this hire as a business investment, not a means to get cheap work done or your business could suffer.
  8. Review their portfolio. If the position warrants it, ask for writing or design samples to show the quality of their work. It’s important to know they have the work experience and skills they claim to have. Never assume what they’ve written on their bio or in their resume is 100% accurate.
  9. Try a test project first. Find a small way to first see how the process of working with this person goes. Having a good working relationship with someone is just as important as having someone with the skills to do the job.
  10. Set deadlines. When you work with someone virtually, you are at the mercy of their schedule (unless they are an employee). If they have a deadline on another project or a busy workload, your project may come last.

    Make sure the freelancer you work with communicates well on when you can expect completed work.

  11. Check for understanding. Before a resource gets too many hours into a project you want to make sure they have a good grasp on what you want.

    Checking on progress from time to time to review that their work is on target can save headaches, upset, and unnecessary fees for redoing work down the road.

By following these guidelines, you can then say “Bye Bye Cheap Freelancers, Hello Dream Team!” because that’s what you end up building – a dream team who is with you in the long-term that will help grow your business.

At evision Media, we are a full suite boutique agency that provides many different web and marketing services for our clients all under one roof.  Our experienced team can provide you the brand, website, and digital marketing support you need without having to find a new person for each of the areas you need help in.

Are you thinking of expanding your team so you don’t have to do it all yourself any longer? Or do you have any further insights to share on what to be aware of when hiring? Share in the comments section below!

To your success,

About the Author, Susan Friesen

10 Critical Questions You Must Ask to Get Maximum ResultsSusan Friesen is the founder of eVision Media, a boutique web development and Digital Marketing firm of over 15 years that specializes in designing, building and marketing professional, unique websites for entrepreneurs, businesses and organizations.

Visit www.ultimatewebsiteguide.ca and grab your FREE "Ultimate Guide to Improving Your Website's Profitability - 10 Critical Questions You Must Ask to Get Maximum Results".