Employment has changed dramatically over the last 20 years. The days when someone graduated high school or college and then went to work for the same company until retirement age are now long past.
We are now living in a world where people change jobs every few years. There’s an entire generation of a flexible workforce where someone may drive of Lyft, Uber, or some other on-demand company and then take long periods of time off while they pursue other interests, hobbies or perhaps travel the world.
As a business owner, it’s important to understand this changing environment. When you hire someone, that person might only be around for a year or two (if you’re lucky). But with this flexible workforce, you also have options for being flexible. Depending on your needs, you may be able hire a contractor versus a full time employee.
Understanding the difference between these two types of employees, why one might make sense over the other and what you can do legally is the focus of this article.
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So, let’s get into it.
What is the difference between a contractor and an employee?
The biggest difference between the two is that a contractor is essentially in business for themselves. You usually hire a contractor to perform a specific task. They are responsible for completing that task as well as handling most of the paperwork associated with the employment.
In contrast, a full time employee will often fill a more general position and may have less specific duties. They may have to adapt to what is required for the job and there’s usually less of a specific timeframe associated with the work. The assumption is that they will continue to work for you as long as they and you are happy with that work.
When can you classify someone as a contractor?
There can be some ambiguity here, but it’s important to get this right. Misclassifying an employee can get you into legal trouble.
Someone can be a contractor if:
- They use their own tools to perform a job
- They work from their own office or place of business
- They work for more people that than just you
- They work on their own schedule and set the hours
Someone is an employee if:
- They work for only you
- You give them orders and supervise their work
- They use your equipment to complete the work
- You set and control their hours
What are the cost differences?
The cost differences can vary a lot. With full time employees, although not required, you will usually pay for benefits like health and dental insurance, paid sick leave, vacation time, etc. This may end up costing you more than hiring a contractor.
However, with a contractor, you may potentially pay more because they are likely an expert at the task you are paying them for. It’s for a shorter term where they often set the price.
Depending on what you are hiring the person for, with contractors you may be able to hire someone outside of the U.S., which can often be less expensive. This flexibility is definitely an advantage and low cost option.
What are the turnover rate differences?
With contractors, turnover is often more manageable. You’re generally hiring the person for a specific length of time. If you are unsatisfied with their work, you can terminate early or wait until the agreed period of time is over. There’s less expectation of long term employment, so disengaging is less personal and easier.
However, this is true for the contractor as well. They may finish up the work for you and jump to another contract that pays better or is more interesting to them. There’s less loyalty, so you may lose someone that you like.
In contrast, with full time employees, letting someone go because of cost constraints or because you are unsatisfied with their work can be very difficult. There’s more of an expectation about a long term engagement. Depending on your needs, you may want this expectation.
What are the cultural differences?
Contractors are essentially hired mercenaries. They may be really skilled at the job you hired them for, but generally they are going to be less engaged with the mission of the company. A full time employee is far more likely to go above and beyond because they believe in the company’s vision.
Where to source contractors vs employees?
For both contractors and employees, general job boards like Monster, Indeed, or Craigslist are viable options, but there’s also some specific sites available for hiring contractors.
UpWork and Fiverr are great options for hiring freelancers. These sites provide reviews and ratings for workers along with details about the services the freelancers provide. They are often lower cost because a lot of the freelancers are located outside the U.S. where the cost of living is lower.
There’s definitely a lot to think about when considering a contractor versus a full time employee. The first step is to make sure you can legally classify someone as a contractor, after that, you need to weigh the pros and cons and decide what is right for you.
At my company Proven, we use a combination of full time employees, freelancers and contractors. I love having the option to scale up and down our operation based on budget and need with contractors. This flexibility is great, but you get exactly what you pay for, while in contrast, our full time employees are amazing, ready to do anything and contribute to the company in innumerable ways. It’s more of a collaboration and our relationship is completely different than my relationship with a freelancer.