What are the differences Between Employees and Independent Contractors?
While the fundamental differences between an employee and an independent contractor should seem obvious to most employers, there are essential factors to consider when thinking about your staffing needs.
Knowing how they will relate to your company and payroll structure and considering the direct and indirect benefits they’ll bring to your company are significant differences that may change your ideas about who to hire next
What is an Employee, and What is an Independent Contractor?
Operate at the instruction of a manager or boss
Work full-time (or part-time) for one company
Are part of their employer’s payroll and benefit structure
Are the responsibility of the employer in terms of all areas of labor law
Aren’t part of an employer’s payroll and benefits structure
Pay their own taxes
May work for multiple companies at once
Are primarily responsible for themselves in terms of labor law (unless subject to specific regulations regarding independent contractors in some countries)
Which are the main differences between an employee and an independent contractor?
When to want to hire more staff and aren’t sure whether you would be better off with a new employee or not, you can first ask yourselves these questions:
Is the hire for a specified project or long-term goals?
Does the work require specific or rare skills or knowledge?
How hands-on do you want to be in terms of management?
How essential will their work be to the company?
Can your company manage payroll and HR operations for more employees?
Will typically show more loyalty due to job security and benefits
Will add more in the long-term to the company’s success in potentially unforeseen ways
Will likely align better with the company goals or values
Will grow and develop with the company
Will add valuable skills or knowledge to your team
Can teach or train your other employees simply by being there
Can largely go without direct management
Are more easily scaled up or down
Require no costs outside of their fee
Don’t need to be trained (unless the work requires specific knowledge of internal processes)
Reduces your need for payroll or HR management overheads
The most significant benefits of an employee are in the long-term and indirect bonuses they can bring to your company. An independent contractor may bring a vital boost of specific skills or ideas quickly and leave you more time to focus on other tasks.
Will cost more in overheads in terms of salary and benefits, even when not working
Will require more management attention and long-term progression of salary
Will need more onboarding and training
Will require more responsibility from the employer in terms of taxes and social security contributions ( e.g. in some countries, employers should expect to pay as much as 30-40% of the employee’s salary towards their social security contributions)
Will add more workload to your HR and payroll teams
Will likely come with a higher starting salary rate
Will be less dependable in a crunch due to outside influences
May resent management interference
Won’t provide employers with copyrights on anything created as part of a project
In general, the disadvantages for both relate to the time and money you as an employer wish to put towards ensuring the relationship is put to use positively. For example, when everything is considered, an employee’s true cost can be double what you’d expect from their basic hourly rate.
Points to Remember
Misclassifying an employee or independent contractor can leave your company liable for serious fees or fines. These can range from small one-off fines to hundreds of thousands or even millions of dollars in penalties.
Generally, this comes from employers treating employees as independent workers and not providing them with the correct benefit structures required by law or not paying taxes on the employee’s salary.
Hiring an independent contractor may be the right choice for a short-term project, but if that project runs for longer than expected or changes in its scope, you will incur higher costs and lose out on valuable long-term benefits.
How to Hire Employees and Independent Contractors
How you hire an employee or independent contractor may depend on how much time you wish to put towards the process or how much you are willing to spend on company fees.
For independent contractors, many agencies may act as intermediaries on your behalf. Still, they will require a hefty fee to provide you with the best contractors available. Employers should expect to give as much as 15% in payments to agencies in terms of commission.
Hiring an employee or contractor may be as simple as searching online via a large job website such as monster.com or indeed.com or via a smaller site dedicated to the country or region.
However, this method typically doesn’t make the most of the range of online and offline resources available to professional recruitment process outsourcing (RPO) providers.
An RPO will use industry-specific technical skills and tools inaccessible to others. This means you can benefit from a larger talent pool and avoid many of the more arduous tasks related to screening or selecting candidates.
How Can a PEO Help You Hire Employees and Independent Contractors in Your Country or Overseas?
Whether you’re looking to make the most of employees or independent contractors, you may wish to consider a third-party HR outsourcing services provider to help you recruit and manage your staff.
A PEO (Professional Employer Organization) or EOR (Employer of Record) services outsourcing provider can allow you to hire and manage both employees or independent contractors as you need. This can be a very large benefit if you want to hire staff in countries where you don’t have a physical presence or if you wish to hire staff for short-term projects without going through the hassles or onboarding and managing HR operations.
A PEO/EOR services provider will provide you with access to a team of legal professionals to ensure you stay compliant with every element of labor law. A PEO or EOR service agreement can also save you overhead costs and minimize your company structure in terms of payroll or HR requirements for both employees and independent contractors. A PEOs payroll outsourcing service can quickly take care of complex processes, leaving your employees free to focus on other tasks more directly related to company growth.
The final costs of hiring an employee or an independent contractor will depend highly on your situation, including all relevant tax and benefits laws for your country. However, it’s important to remember the indirect advantages and disadvantages that both employees and independent contractors will bring to your company. Instead, focus on making the decision that will best benefit your company with both the short and long term in mind.
INS Global has been an international provider of PEO, EOR, and RPO outsourcing services for over 15 years. We have helped companies worldwide achieve their expansion goals by providing critical recruitment and HR operations management services for companies wishing to hire employees or independent contractors in their own country or overseas.
If you are considering the next move in hiring, contact our team of specialists today to discuss your needs and learn more about what our range of services can do for you.