Before we get into the factors that determine which type of worker is best for your business, we first need to classify when a worker is considered an independent contractor and when a worker is regarded as an employee. In other words, we need to answer the question: what is the difference between employee and contractor? It might seem simple at first glance, but if we scratch the surface, we will notice that there are several legal guidelines you must follow to determine whether you should classify them as employees or as independent contractors.
An employee is a permanent and dedicated member of your company and must be treated under the federal, state labor, and wage laws. In contrast, the independent contractor operates under a separate business name from your company and performs job functions for you temporarily. The stricter guidelines are further elaborated by the United States Internal Service Revenue (IRS). The website essentially asks the following questions, and if the answer is favorable to the first three questions, then the worker is likely considered an employee:
1. Does the person work on company premises?
2. Is the person using their own tools?
3. Is the person in control of their own schedule for completing work?
4. How is the person being compensated?
Being an Independent contractor versus Being an Employee
The independent contractor vs. employee or the employee vs. independent contractor debate has been one of the most complicated workplace fields. The truth is, there is no universally better choice. Choosing between contractor vs. employee is on a case-to-case basis. It depends mainly on the individual’s skills and interests, the employer’s benefits and privileges, and several other factors.
What are the pros of hiring an employee?
When you hire an employee, you have the advantage of being able to completely control and direct that person’s work during work time. You also get to train the person in the way you want them trained, and you can also require that person to work only for you. In other words, you are the only company they work for.
The commitment to hire an employee can also result in having an individual with stronger loyalty and dedication than an independent contractor. Loyalty and dedication in a worker can advance your company in terms of productivity, and eventually, revenue. Loyal employees will also be ready to take on additional roles to help your company grow. You and your employees share a common vision.
Employees can also take on multiple roles. This is especially true in small organizations whose employees will often perform a variety of roles. This provides your company more versatility because your employees improve their skillset and become more flexible. Your company now has a more diverse workforce because of it, and this is a win-win.
Workflow is also improved because now, coordinating projects is much easier, given that there is a steady stream of business. Relative to the complexity and challenge of juggling multiple freelancers to meet project deadlines, hiring a dedicated employee is the better choice in this aspect.
Employees are also immersed in and perpetuate your company culture. This means that they are more engaged and motivated to work hard and adhere to your company’s goals and long-term success plans.
An independent contractor is likely to only care about getting the project done and get paid after, but a long-term employee is motivated to exceed expectations and put in extra effort to do this. Your company’s benefits will reap when you hire an employee usually comes in a few years and not immediately.
What are the cons of hiring an independent contractor?
Let us say you have instead chosen to hire an independent contractor over an employee. There could be cons to this decision. First, you do not have control. Part of why they are “independent contractors” is because they can choose the control over the work performed. Contractors may have additional projects and may have less commitment than an employee.
There are also no fixed rates as this is heavily affected by the project and the overall market demand. When you hire an employee, the pay rates are usually set until the next review date. Again, you have far less control over an independent contractor than a dedicated employee in factors like this.
A misclassification penalty could also be charged in the situation that you mistakenly classify an employee as an independent contractor. You will be liable for employment tax, interest, and a penalty, so there is an added responsibility and caution to keep current with the legalities.
Hiring employees rather than independent contractors is equivalent to investing in workers who will work for you long-term. Yes, there will be a rough start. You will have to spend money on training them and developing their skill sets, but there is a reason you will want them trained – so you can share a shared vision for your company.
This choice is surely best for employers who want consistent, long-term team members who are invested in building company culture and achieving your mission, adhering to your rules, and targeting your goals.
Are you interested in hiring remotely? Rivermate offers full legal compliance and runs global payroll anywhere in the world. Start growing your team and building your business with us. In Rivermate, your success is also our success.
Frequently Asked Questions
1. What are contractors?
You might ask, “What is a contractor job?” By definition, a contractor can be a person or an organization that agrees and undertakes to conduct work for another organization as specified under the terms and regulations of the contract. A contractor worker is an independent entity that does not work exclusively for one person or business. They are subject to different employment laws and tax dynamics compared to employees.
2. What are the benefits of independent contractors?
Being an independent contractor gives you much more independence and freedom than being an employee. Independent contractors do not have an absolute commitment to any organization. That is, they can work for any company for so long that they can manage their duties and responsibilities. Among the significant contractor benefits are:
- Greater independence.
- Greater perceived level of job security.
- Less commuting.
- Fewer meetings.
- Reduced office politics.
- More flexible schedule.
- More income.
- Better work and life balance.
3. Is it better to be an employee or an independent contractor?
Below is a more detailed comparison between both the independent contractor and the employee’s benefits and disadvantages.
- Control. The company has absolute control over the employee on how, when, and where work should be performed. The company is also responsible for providing the tools and materials so the employee can complete the task.
- Exclusivity. Employees work exclusively for the company.
- Training and Supervision. The company shoulders the expenses, so the employees are trained. This is considered as an investment by the company to improve the performance of their workforce.
- Compensation. A salary or an hourly wage is paid to the employee.
- Benefits. Employees are eligible to receive employment privileges like health insurance, transportation allowances, sick leaves, and pensions.
- Control. The independent contractor controls himself/herself on how they should complete the assigned task before the set deadline.
- Exclusivity. Independent contractors can sell their services to as many companies as they like for as long as they can perform their duties aptly.
- Training and Supervision. The company does not have the responsibility to train independent contractors. It is the independent contractor’s job to improve himself/herself in their craft.
- Compensation. Independent contractors are paid a contract fee depending on the agreed-upon amount in the contract.
- Benefits. Independent contractors are not offered the same benefits as employees are.
4. Why might an employer prefer to hire an individual as an independent contractor rather than as an employee?
Hiring independent contractors over employees is a bold choice made by an employer. Not only is the employer hiring someone who does not have a guaranteed commitment toward the company, but the employer is also passing on the opportunity of having a loyal member of the company who shares the same goals as them. Although the employee or contractor may perform the same tasks and deliver the same results, there should be a firm reason why an employer prefers hiring an independent contractor. Among these reasons are:
- Reduction of labor costs. Add-on costs are spent only on employees and not on independent contractors.
- Reduction of supplies and office cost. Companies are not responsible for the equipment, supplies, and offices of independent contractors.
- Reduction of liability. Employers are also not necessarily responsible for injuries that independent contractors may sustain while performing their company’s responsibilities.
5. What are the advantages of being an independent contractor?
- More control. Because the employer does not have absolute control over your schedule, you can perform your assigned tasks at any time you want for as long as you deliver them on or before the set deadline.
- Commitment is not necessary. Independent contractors can sell their services to as many companies as they like for as long as they can perform their duties aptly.
- Flexible schedule. Independent contractors do not have to show up in the office at 8 in the morning just to perform their tasks. They can have flexible schedules and work on the project during the time they are the most comfortable.
6. What is the difference between the employer and the employee?
Generally, what you need to remember when asked the difference between employee vs. employer is that the employer is the one doing the hiring while the employee is the one being hired.
7. What are the benefits of hiring employees?
The benefits of hiring an employee go beyond just added loyalty and commitment to the company. When hiring an employee, you have the advantage of controlling and directing that person’s work during work time. You are also given the opportunity to mentor and train that person in the way you think will best help them improve their performance. Other benefits in employee hiring include:
- Employees can take on multiple roles.
- Improved workflow.
- Better when considering the long-term goals of the company.
8. What is a contract employee?
A contract employee is an individual who is retained by a particular organization for an agreed-upon duration for a predetermined price. This is somehow similar to working as a contractor as the company does not have the responsibility of providing traditional employee benefits like transportation allowance and social security.