Employee versus contractor: Which one to choose?
Whether running a startup or an established business, leaders must build the first and most influential network to identify significant opportunities and execute essential ideas in their support system.
Since a business’s success depends as much on the right team assembled as it does on the products, services, or technologies provided, founders and directors need to decide which employment status to adopt when choosing their team members and whether to classify them as full-time employees or as contractors.
While employees and contractors often work side-by-side to complete the business’ work, they both have different classifications, different roles, and offer different benefits. Also, they have significant financial impacts and affect the company’s growth.
Because employment status affects employment benefits, tax implications, accountability, etc. It is essential for the business’s sake to identify the differences between employees and contractors before hiring and the critical legal implications going way beyond the job title’s misclassification.
1. Differences between an employee and a contractor
Choosing whether the company’s team members are employees, individual contractors, or a mixture of both is crucial at the early stages of a company’s operations.
The employee is also known as a “worker,” a person who provides part-time or full-time services to an employer under an oral or written, express, or implied contract of employment.
The latter provides his work in return for recognized rights, such as a salary and other associated employment benefits (ex. paid holiday leave, sick pay and parental leave, etc.). Nonetheless, remunerations are compensated through a payroll system that systematically deducts contributions for Social Security, Medicare, employee benefits, and others.
In fact, despite working on a temporary, part-time, fixed-term, or flexible basis, employees are required to fulfill a minimum number of working hours. They cannot delegate their work to someone else and are required to inform and provide a written notice to their employer whenever they plan to leave the company.
On the other hand, independent Contractors, otherwise known as “self-employed” or as “consultants,” are freelancers contracted to perform and provide services and products for another entity, as registered sole traders, or through their own independent company.
Contractors are remunerated on a “per job” basis and benefit from full autonomy over when and how they work and the freedom to delegate responsibilities to others. Unlike regular employees, they are eligible to work for more than one company at a time. However, even though more flexible in the workplace, they do not receive all of the employees’ welfares: They are not eligible for paid parental, holiday, or sick leave, they bear all financial risks, and are accountable for tax and national insurance deductions on their income.
Generally speaking, to determine whether a person is an employee or an independent contractor, three factors contribute to evaluating the team members’ status and the specification of their relationship towards the company.
- The Employer’s control: Including the behavior of giving instructions on how to do work and/or evaluating performances. And the financial supply to ensure the reimbursement of expenses.
- The contractor/employer relationship: Legal contracts help determine the status and relationship of the team members towards the company. For instance, an “open-ended worker is most probably classified as an employee versus someone who is hired with a set start and end date” (Lew, 2019).
- Economic reality test: It a test that helps in determining the worker’s status by evaluating: “How integral the work is to the business, the permanency of the worker’s relationship with the company, the worker’s opportunity for profit and loss, the skills required to do the job, etc.…” (Blakely-Grey, 2017).
2. Which to choose: Employee or contractor?
From the business owner’s perspective, although employees are more expensive since tax implications resulting are more significant than for independent contractors, they create more stability and help increase the firm’s core capabilities.
However, deciding between an independent contractor and an employee pivots on the business requirements. Hence,
Businesses tend to hire an employee when:
- Work needs to be done under the employer’s supervision and control;
- Operations require stability and permanent capabilities;
- Tasks require a set number of working hours and specific tools and equipment;
- Work is essential to the business;
- It’s a long-term need or relationship;
Businesses consider hiring independent contractors whenever:
- Work is closely tied to the company’s primary business, but the business lacks the money to hire a permanent employee;
- Work isn’t central to the business and can be done by a professional who doesn’t need much supervision;
- Specialized knowledge or experience is needed for a specific complex project;
- Work is a short-term or a specific project;