Independent contractors, also known as freelance contractors or consultants, bring lots of expertise and energy to a small business, especially when the enterprise is getting off the ground. They are also a good option when a company is trying to save money on personnel.
But at some point, if a business owner wants to elevate his or her business to the next level, transitioning from freelance contractors to full-time employees may be the right move.
Here are some important factors to consider when determining whether to hire a full-time employee or an independent contractor.
Full-time employees and independent contractors may work side by side at the same company—sometimes performing similar work—but in the eyes of the Internal Revenue Service there are distinct legal differences between employees and contractors. Employers who classify the two incorrectly can face costly legal ramifications.
Independent contractors typically operate their own businesses (sometimes with their own employees), have more than one client, set their own work hours and rules, and submit invoices for completed work. They may work from their own offices or work on site for their clients.
On the other hand, full-time employees work under the direction and control of one employer, receive training to perform assigned duties, and work the hours the company sets.
Stability versus flexibility
Full-time employees typically make a long-term commitment to the company and thrive on the opportunity to become an important part of the team. If treated fairly, employees often feel pride in their work and are willing to go the extra mile for the company. However, it is more difficult to dismiss full-time employees because they typically can only be terminated by the employer for cause and with advance notice.
Business owners have more flexibility in hiring and firing independent consultants. Employers have the option of not working with particular consultants on other projects if they aren’t satisfied with a contract worker’s performance. Independent contractors have multiple clients, which means they may not be available when an employer beckons. Because they are more easily dismissed, however, independent contractors tend to be more eager to please and will do their best to keep you as a client.
Employees generally earn a lower hourly wage than consultants do in return for job security. But there are other costs associated with full-time employees, including overtime pay, minimum wage coverage and paid vacation and sick time. Companies typically offer employee benefits to attract the best talent, including health insurance, disability insurance and retirement plans. Employers are responsible for withholding income tax, Social Security, and Medicare taxes. Full-time employees are eligible for unemployment benefits if terminated and receive worker’s compensation benefits if injured on the job.
Independent contractors may charge a higher fee than the hourly wage earned by full-time employees, but consultants do not receive employment benefits from the employer and are responsible for paying their own taxes. They aren’t eligible to receive unemployment or worker’s compensation benefits.
Independent contractors are typically more expensive because they bring skills and experience that are lacking in an organization. For example, some employers hire contractors with specialized computer skills to handle the company’s information technology needs. Some companies hire graphic designers as freelance contractors to produce brochures, annual reports, and newsletters for the organization.
In some instances, however, employers may decide it’s best to bring those contracted services in house to ensure the experts they need are always available and committed to the organization. By having its own staff specialists, a business guards itself against boom-or-bust scenarios, in which members of in-demand professions extract exorbitant payments during rush seasons with competitors vying for their services. As staff workers, specialists not only earn stable, predictable salaries, but they are also assets in long-range projects.
The hard part, though, may be to persuade an engineer with an esoteric specialty or a computer expert to give up the freedom to choose where and when he or she wants to work.