Pros and Cons of Hiring Independent Contractors vs Employees

Whenever you need to hire new staff for your company, you encounter the concept of employee classification. Depending on the degree of control, time spent working for your business, and the duration of the contractual agreement, you may employ a person as a full-time worker, a part-time worker, a classified employee, or an on-call (seasonal) staff member.

Each of these categories comes with specific legal regulations as to your duties as an employer, the maximum number of hours they have to work for your company, and the number of social benefits they are entitled to. Thus, classification is vital from the viewpoint of the local labor law, which governs your relationship with the employee and regulates it in case of lawsuits or other legal issues.

Many employers have resorted to independent contractors instead of engaging employees full-time. This hiring arrangement relieves the administrative burden from the employer because independent contractors are entitled only to payment in line with their contractual terms, receive no social benefits or pension payments, and have to report and pay their taxes on their own. Yet, this model also comes with limitations, especially for the long-term orientation of business growth.

Here, we discuss the pros and cons of hiring independent contractors to give you a glimpse of the employment landscape you will need to operate in. Read on to see how you can take advantage of this flexible hiring model and which business cases it is more suitable for.

Differences between Contractors and Employees

Let’s start with the distinctions that full-time employees vs. independent contractors have in a legal sense.

• Full-time employees are the staff employed for a permanent work position, working from 35 to 40 hours a week. The employer covers their taxes, pension plans, health insurance, and social benefits in exchange for their loyalty and compliance with the set working schedule and requirements.
• Independent contractors work with your business on a freelance basis, so they are not included in your payroll. They don’t receive benefits, work in line with a self-paced schedule, and set the price for their services. That’s why it may be technically cheaper for a business owner to work with independent contractors because of the absence of the need to pay taxes, cover pension and vacation benefits, paid leave, and other extras to which full-time staff is entitled.

Pros and Cons of Hiring Independent Contractors

At first glance, it may seem that hiring an independent contractor is a win-win situation because you don’t need to pay any extras and taxes for that employee. Indeed, it’s a much simpler working arrangement that gives you flexibility in staff scaling up and down depending on the changing workload and needs.

Naturally, this type of employment also comes with its own peculiarities and nuances, so it can’t be fully regarded as a one-size-fits-all solution to all business needs. Let’s take a closer look at the pros and cons of an independent contractor as a hiring alternative to full-time staff.

Benefits of Hiring Independent Contractors

Independent contractors have risen in popularity for a reason. This form of hiring is flexible and cost-effective for businesses, many of which have been long manipulated and pressured by labor unions and worker rights advocates. Thus, a temporary contractual agreement with a qualified freelancer seems to be a great remedy to a ton of legal obligations an employer needs to assume when welcoming new staff on board. Other notable pros of hiring contractors include:

• Quick scaling of the team. Companies that have fluctuating workloads may benefit from contractor hiring because they can adjust the number of people in the team dynamically. This way, you reduce the risk of having people whom you pay salaries on standby without any work to do.
• Access to expertise without commitments. There is a huge pool of qualified freelance workforce around the globe, and you can access that talent pool without limitations. It’s easy to partner with an expert with the needed tech stack in any part of the globe, either by direct hiring or via an EOR agency. As a result, you find the skills and expertise you need without making expensive long-term commitments.
• Flexible contractual arrangements. It is you and the contractor who set the terms of collaboration. Therefore, you don’t need to comply with countless laws, regulations, and limitations of a relevant jurisdiction because you skip labor laws for full-time employment.
• Less administrative hassle. Full-time staff are usually paid less than contractors, but you need to keep a separate department for accounting, recruitment, payroll, compensation management, etc. Once you work with independent contractors, you can shift all those administrative tasks to them.
• Hiring cost cuts. It’s pretty expensive to get a new full-time employee into your team. You should hire a professional recruiter, screen candidates through multiple qualification tests, relocate staff if needed, and sign a contract that imposes many financial and regulatory duties upon your company. When you deal with independent contractors, you can resort to the services of a recruiting agency or EOR provider to have your staffing needs closed in due time.
• Hiring turnaround. The speed of hiring is much faster with independent contractors, most of which are already pre-screened and classified in the EOR agency’s database. Full-time employees usually take up to several months to locate, evaluate, and sign all employment documents.
• Lower regulatory risks. Working with independent contractors is mostly regulated by contract law, while full-time employment is regulated by labor law. Needless to say, the latter comes with many more nuances and imposes a greater regulatory burden on the employer, and you can avoid this hassle by working purely on contractual terms.

Cons of Hiring Independent Contractors

With all these advantages in mind, you might probably think of working with independent contractors as a solution to all hiring problems. Still, it’s not the case, as this hiring model comes with some limitations worth taking into account as well. The most frequent challenges you should factor in your working relationship with a contractor are:

• Advocacy for employee rights. Even in the independent contractor field, the movement for employee rights and protection of employee interest is gaining momentum across the globe. Many opponents of freelance hiring state that such arrangements open numerous paths to worker exploitation. That’s why you may face litigation or worker dissent even when working with contractors; this often happens if your working terms resemble full-time commitments, while on paper, it is a freelance contract.
• Regulatory compliance. Businesses working with independent contractors also need to comply with local regulations and labor laws, though to a lesser extent. Therefore, it’s important to know local laws and understand the classification tests that apply to worker type determination.
• Workers’ loyalty. Independent contractors are less loyal to their employer and can leave or deliver substandard work without the commitment to your long-term success. Full-time staff are usually much more invested in the company’s culture, growth, and development as they feel being a valuable part of your business culture.
• Retention and continuity. It’s much harder to ensure continuity of staff talent accumulation, training, and succession if you over-rely on independent contractors. This type of employee is less inclined to stay with one employer for a long time, as they usually work for numerous clients and can cause knowledge gaps in your team.
• Control. The matter of control is very problematic with independent contractors, as most of them work on a remote, freelance basis. That’s why you may risk sensitive corporate data when giving these employees access to internal systems and data repositories.
• IP issues. It is also challenging to fully delineate the IP issue with independent contractors who may retain the IP rights for products and software they’ve created. Regulating IP ownership is much easier with a full-time employment contract, giving the employer undisputable rights to the products of its staff.