Every employer needs workers to handle various business tasks. Small businesses find extra help beneficial for expanding operations and reducing workload, while bigger companies require even more people to manage orders and growth. When hiring for these roles, employers must carefully consider the type of relationship they establish, choosing between employees and independent contractors. Both get the job done, but the terms differ significantly.
An employee works directly within your company, whereas an independent contractor is self-employed, offering services to several organizations. Contractors usually run their own business and provide their expertise in exchange for payment. Some employers may choose to hire both types, while others prefer only one. Their relationships differ in terms of legal protection, pay, and more.
A major difference between the two is legal protection. Employees are protected under the Fair Labor Standards Act, which entitles them to minimum wage, overtime pay, and other benefits. Independent contractors aren’t recognized by this law since they run separate businesses. However, you can offer similar compensation through a contract, which serves as legal evidence of the terms agreed upon.
Employees are on the company payroll, receiving a fixed salary and entitlements like paid vacation, federal income, and Social Security tax contributions. Contractors, on the other hand, might get a fixed salary or an hourly rate based on the hours they work, or they might be paid based on the work output. In this case, you might skip offering leaves and bonuses.
Onboarding is crucial for integrating new employees into a company. This process boosts engagement and familiarizes them with company processes. Independent contractors generally skip onboarding since they are hired for specific tasks and require less company information. However, you can make training mandatory when needed.
Employees must adhere to set work requirements, including company policies, assigned shifts, and office attendance, if necessary. They have skills suited to their responsibilities. Contractors, meanwhile, often work remotely or in a hybrid setup. They’re less bound by company obligations unless specified in their contract. About 37% of businesses hire contractors for specialized skills, while 29% focus on cost implications.
While employees independently fulfill their duties, contractors can hire subcontractors for bigger projects. These subcontractors usually have separate terms for work time and payment. Employers might have a clause about subcontractor hiring at their discretion and can require a surety bond from a general contractor to ensure project completion. These terms don’t affect subcontractors directly, so it’s important to monitor who you’re working with.
Employees have the potential for advancement within a company, progressing from support to managerial roles. This possibility incentivizes long-term employment and aids faster onboarding and recruitment. In contrast, contractors work on a temporary basis. Employers can keep in touch and rehire them for future projects, which is beneficial for short-term needs.
Recruiting employees is common, as they provide a steady workforce during operational hours and pose less risk since they go through onboarding and adhere to company rules. However, finding the right candidates is tough due to labor shortages. For instance, the manufacturing sector has around 622,000 job vacancies and even with successful hiring, employers face high quit rates.
Working with contractors offers a unique relationship because they’re on equal footing with employers, running their own businesses. Nonetheless, agreements beneficial to both parties are possible. Contractors fill workforce gaps by providing specialized skills that can expedite projects. In 2023, there were about 36.6 million independent workers in the U.S., compared to 15.8 million in 2020, indicating an increase.
The decision of choosing between employees and contractors depends on your company’s specific needs. It’s essential to evaluate both types of employment relationships as every company is unique. Make informed decisions by reviewing the experiences and determining the best fit for your business.
