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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.