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Independent Contractor vs Employee Pros and Cons

Since 2010, the gig economy has exploded around the world. Growing access to the Internet has created new opportunities for independent contractors around the world to work with companies and individuals wanting their expertise. In the United States, about 1 in 3 workers are freelancing, with many of them working full time. Over $700 billion is added to the economy each year in the U.S. alone because of the efforts of independent contractors.

Platforms like Fiverr, TaskRabbit, and Upwork make it easier than ever before to locate independent contractors with relevant skills to work on your short-term projects.

The definition of an independent contractor is this: “The general rule is that an individual becomes an independent contractor if the payer has the right to direct or control only the result of the work, not what will be done and how it will be done.”

As technologies continue to evolve, the desire to get out of the employer/employee relationship will only grow stronger. Before that happens, it is essential that you review the pros and cons of hiring an independent contractor vs an employee to know if the option is right for you.

List of the Pros of an Independent Contractor vs. Employees

1. Most companies save money when hiring independent contractors.

Most employers actually pay an independent contractor more than they pay formal employees when comparing hourly rates. It also costs an employer more to hire an employee because there are benefits involved. With an independent contractor, there are no equipment, office space, or utility costs to consider. You’re not even paying the 7.65% self-employment tax like you are with an employee. Even the workers’ compensation and unemployed costs disappear when hiring independent contractors.

Companies typically save at least 20% on their staffing costs by hiring an independent contractor. If benefit expectations are high in your geographic region, you could save 40% or more.

2. There is added flexibility with your staffing.

When working with independent contractors, there is more leeway available to you when you need to hire or fire people. If the workloads of a company fluctuate, you can bring an independent contractor on for one specific project, then let them go. The trauma which comes along with an employee being fired or laid off goes away, as does the potential legal trouble and separation expenses which could be involved.

3. Independent contractors often work at higher efficiency levels.

Most independent contractors bring specialized experiences to the job. You are hiring them because of that specific skill they possess, which most likely isn’t part of your current company structure. That means the training costs for an independent contractor vs. an employee are often much lower. Your workforce is able to expand when needed, contract as required, without the company taking on extra expenses.

4. You have reduced exposure to legal issues.

Employees are provided several rights under the local, state, and federal laws in the United States. That means a worker can bring a lawsuit against their employer if they feel like one of their rights is violated in some way. Many of those laws do not apply to the independent contractors which are hired for specific tasks. Unlike employees, the independent contractor is seen as an independent businessperson, which means minimum wage, overtime, union formation, and other rights or benefits are not always obligations to provide.

5. There are fewer wrongful termination issues.

When you’re working with an independent contractor, the arrangement is based on a contract that you sign with the individual involved. As long as you follow the terms of the agreement, there is nothing that the independent contractor can do to stop you from moving on to another person. Independent contractors are only permitted to bring a lawsuit when the other party violates the terms of the deal which both parties agreed to in the first place.

6. You can search for specific people to fill unique roles.

If you’re trying to hire an employee to fill a role, then you’re limited by the local job market. When there is no one with the relevant skills available, you’re forced to search regionally (or nationally) for the best worker. With an independent contractor relationship, you can work with people online without ever needing to meet them. They can work on the other side of the planet – it doesn’t matter. When you find the best talent, all they need to do is agree to your terms. Then they can start working immediately.

7. Independent contractors earn business by producing quality work.

It is true that you have less control over the quality of work that your independent contractors provide. It’s also true that you can choose to stop hiring the contractors which give you inferior work. You will always encounter an independent contractor or two that misrepresents their experience or skills, but for the most part, these people earn a living because they’re the best at what they do. Without a strong reputation, most independent contractors struggle to find work, which means quality is automatically built into the relationship.

8. Independent contractors have more availability than employees.

When you’re managing employees with a work project, they will be present during their scheduled shift. Salaried employees can stay longer, but you’ll pay more to have hourly employees stick around. You’re operating under a structure of normal business hours. With independent contractors, there is added flexibility in the timing. Contractors work when they feel like working. If you hire people in different time zones, you could have someone working on projects 24/7 for your organization.

9. They are responsible for permits, certifications, and licensing.

If you hire employees to complete tasks which require a specific license, permit, or certification, then you are typically responsible for providing the training which grants these items. The employee is then able to take that training with them to other employers. When you hire an independent contractor, they are responsible for bringing the necessary items to the job. That saves you time and money because you don’t have the same need to bring independent contractors up to speed from a skill or educational standpoint.

List of the Cons of an Independent Contractor vs. Employees

1. You have less control over the actions of an independent contractor.

You can closely supervise employees and micromanage their tasks when necessary. Independent contractors receive more independence in how they complete the work. Under most laws, regulations, or guidelines, the independent contractor is permitted to use their own methods to produce the work you require. You’re permitted to set a deadline for delivery, but it may not go beyond that. If you start telling the contractor what to do and how to perform their work, then that makes the person look like an employee. You could then be exposed to other forms of legal liability.

2. Independent contractors come and go as they please.

Most companies use independent contractors for short-term projects. That means new faces are always coming in and out of your organization. There are times when that movement feels inconvenient, even disruptive, to the workplace. Your employees will struggle to form personal relationships with the independent contractors because everyone knows their presence is temporary. That can make it difficult to collaborate on some projects.

3. The quality of work received is always uneven.

If a company wants consistency in the final product for each project, then they must hire employees. There’s no other way to accomplish that need. Independent contractors will deliver projects with a wide variety of quality outcomes. Your only other option is to hire the same independent contractor each time, which begins to make that person look more like an employee. Even if you perform thorough due diligence on your independent contractors, there always seems to be an unpleasant surprise or two waiting for you at the delivery deadline.

4. You don’t have a 100% right to fire independent contractors.

If your company operates in an at-will state in the U.S., then you can terminate an employee for almost any reason – as long as that reason doesn’t violate regulations or laws. Your insurance might pay that worker unemployment for some time, but the separation is permitted. With an independent contractor, your only out is if there is a violation of the contract both parties signed. If you fire the contractor in violation of the agreement, you could be held liable for damages.

5. Independent contractors can sue you under specific circumstances.

Let’s say that you have an unintended acute workplace hazard which causes someone to trip. If the employee trips over the hazard and injures themselves, then your workers’ compensation insurance will cover their care and injuries. To receive the benefits of care, the employee agrees to give up their right to sue for damages.

Now let’s say an independent contractor trips over the same hazard when they came in for a meeting with you. Their injuries are not covered by workers’ compensation (unless your local laws mandate that it is). That means they can sue you to make themselves financially whole. If they lose wages or contracts because of the injury, you could be sued for those as well.

6. You must designate work completed by an independent contractor as “work-for-hire.”

When you hire an employee to complete creative works on your behalf as a company, then the organization is the owner of the copyright. You hired that worker, under your copyright ownership, to complete tasks for which that person was compensated. Under a standard independent contractor agreement, it is the contractor who holds the copyright, not the organization. You must designate a work-for-hire stipulation in the contract or have an agreement of copyright transfer if you have someone working on a creative item for your company to own it.

Even then, you only own the copyright for 120 years or 95 years from the date of publication. The heirs of the independent contractor could pursue your company in the future for a return of the work, which could be costly if the value is high.

7. There is a higher risk of audits when hiring independent contractors.

Federal agencies want to see workers classified as employees more so than independent contractors. The reason is based purely on finances: more employees means the government earns more tax revenues that can be used for a variety of needs. When independent contractors are hired, they can reduce their income obligations by keeping track of their business expenses. It’s also easier to hide income as an independent contractor compared to an employee. That is why you’re obligated as a company to send out compensation forms to independent contractors at the end of each tax year when the amount exceeds a specific threshold.

8. You will encounter a lack of loyalty.

People become independent contractors because they like the idea of becoming their own boss without the risks of becoming an actual business. That means if someone is willing to pay the contractor more than you are for the work being done, you might find yourself behind on a deadline because the work is no longer being done. When you work with people who focus on the highest bidder, you must pay the most to receive some type of guarantee. To avoid this issue, try placing a stipulation in the contract which requires the independent contractor to pay you something if they don’t fulfill their contractual obligations.

That’s not to say an independent contractor isn’t loyal. Many are dedicated to seeing your company succeed because that also brings success their way. If push comes to shove, however, the contractor will stick up for their best interests first.

9. Your project might be juggled with multiple other assignments.

A common mistake that organizations make when hiring independent contractors is that they believe they receive (or are obligated to have) an exclusive relationship with that person. You might be if you’re offering someone full-time work over an extended time. Most independent contractors work with multiple clients over a variety of projects. That limits their accessibility, which means you must have alternative plans in place if your preferred contractor is unavailable for some reason.

Every organization which hires independent contractors will find that the priorities of the contractor don’t always match the priorities of the company. Hiring an employee in this circumstance will offset the disadvantages mentioned.

10. Independent contractors promote themselves.

When work is completed by an independent contractor, it is done under their name or their DBA. Their logos are associated with the work. They might even use examples of the work they completed for you to promote themselves. Unless specifically mentioned in the agreement, you may not have control over how this information is used. That is why any agreement which involves intellectual property must be crafted to protect the best interests of your organization. If the independent contractor doesn’t want to sign such an agreement, then search for someone who will. This relationship should be mutually beneficial for everyone involved.

The pros and cons of hiring independent contractors vs. employees is based on the needs of each project. If you have long-term obligations to meet, and want work completed in a consistent manner each time, then an employee is your best option. When you have short-term projects that you don’t mind having completed without oversight, then an independent contractor could be a better choice.

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