Employees vs. Independent Contractors

You’ve likely noticed that the workplace is changing. Perhaps the conventional 9 to 5, desk job arrangement will never completely go away, but it’s also no longer the absolute norm. Part-time, work from home, job sharing, freelance, temporary, and dozens of other non-traditional job categories are more prevalent than ever.

This is partially because many in the workforce prefer these kinds of arrangements for personal or family reasons. And some employers, for legal, regulatory, or financial considerations prefer these scenarios, too.

One of the most popular – and growing – categories in the non-traditional workforce is that of the independent contractor.

For purposes of this discussion, an independent contractor is a person who provides specific services to a company, but is not an actual employee of that company. Independent contractors work as required or needed for their client companies, and can be retained on short-term project basis, or under a long-term arrangement.

Usually, independent contractors provide particular skills or abilities to the table that aren’t present at their client companies. Typical independent contractor roles include software and IT management, graphic design, management training, and bookkeeping and accounting, but there are hundreds more. 

Independent Contractors: What the Law Says

Classifying a worker as an independent contractor can be tricky. Much of the classification has to do with control.

According to the IRS, a worker is an employee if the company controls her regarding when and where to do the work.Typically, regular employees work at certain hours, while contractors set their own. And employees receive regular paychecks, while independent contractors send invoices and are paid by the task or job.

The IRS provides information on independent contractor vs. employee status, but be sure to check with your legal adviser or accountant for verification.

Is an Independent Contracting Arrangement Right for Your Company?

It could be. Especially for project-based work, or for tasks requiring specialized skills that no one at your company can provide.

In any case, it’s worth a quick look at the pros and cons.

Advantages of Working with Contractors

Expertise and Experience

Most independent contractors being a high level of skill and a great deal of experience to their roles. This expertise is generally the result of a significant amount of training and practical implementation of their skills.

Independent contractors have completed a learning curve that it might take one of your staffers months or years to get through. That means better results and more efficiencies for your company.

Less Paperwork and Expense

A contractor’s non-employee status translates to less paperwork, expense, and red tape. Independent contractors provide their own benefits, their own equipment, and are responsible for their own tax payments.

Focus

A contractor will typically have a fairly narrow or limited role in your company’s operations. (Example: Software Training.) As a result, you can count on his complete focus on that particular responsibility.

Regular employees, who generally have dozens of responsibilities relating to their job function, usually don’t have the luxury of giving 100% focus to any particular project or task.

A Fresh Perspective

Successful contractors have usually worked for a number of companies, and bring the experiences and knowledge gained to you. This is beneficial from not only a “nuts and bolts, how to do the job perspective,” but also because certain processes or methods that have worked for another client might help your company, too.

It’s likely that your independent contractor can suggest solutions or improvements that no one at your company could have envisioned, because of a lack of experience in that area. In cases like this, an independent contractor takes on the role of a consultant or adviser.

Disadvantages of Working with Contractors

Less Control

Maybe it doesn’t matter to you or your business, but the contractor arrangement results in your having less control over a worker. Independent contractors have a lot of autonomy to decide how best – and when and where – to perform the tasks you’re paying them to do.

In cases where more direct supervision or your particular input are constantly required, the traditional employee arrangement might be more effective.

Loss of Continuity

Management consultants used to talk of “institutional memory.” This was believed to be a sum of all the employees’ experiences as they related to the company’s culture and its role in the marketplace. In English, that means how we get things done and how we serve our customers.

When your contractor finishes her work, her experience at your business leaves with her. How much that really impacts your company’s performance is debatable, but it’s undeniable that having more people around who understand how your company operates is a good thing. A company that relies too much on contractors doesn’t develop that.

Liability

Your regular workers are usually covered by workers’ compensation insurance, should they be injured on the job. That’s generally not the case with contractors.

If a contractor is hurt while working at your company, you could be held liable for damages.

The Decision

The decision as to hiring a regular employee versus an independent contractor should be made on a case by case basis. But, generally, if the work being performed demands regular supervision and is a core function of your business, the employee route might be preferable.

But if the work is peripheral, project-oriented, or very specialized in nature, an independent contractor might serve your company well.

 

MP Star Financial’s team of advisers can help you make decisions regarding your cash flow and business funding needs. Call for more information at (800) 833-3765, extension 150.

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