When you’re ready to expand your business and grow your team, you generally have two options for increasing your workforce: Hiring employees or engaging independent contractors.
Both options have pros and cons but determining which is right for your business comes down to individual needs and preferences. Keep in mind, though, the Department of Labor (DOL) draws strict distinctions between these two groups, and you could be heavily fined and be forced to pay taxes on prior payments to contractors now reclassified as wages to employees.
Once you’ve weighed your responsibilities as an employer and business owner in properly identifying if someone would be an employee or an independent contractor based on the DOL distinctions, it’s time to consider the pros and cons of each choice.
Overall, hiring an employee provides greater control, flexibility, and a long-term relationship, but it also means greater costs and responsibility. Consider the following:
Pros of hiring employees
- Immersion in company culture and mission: Employees who understand the company’s mission and are bought into the culture are typically more engaged and invested in the performance of the company and will become advocates for you in the marketplace.
- Valuable long-term investment: The more your employees learn and grow with you, the greater the asset they become to your organization. They can advance to managerial roles, be repositioned to serve new needs, assist with training new employees, and provide perspective on growth and evolution of the company based on their experience growing with you.
- Greater flexibility: Employees can be trained up and reassigned as needed to suit your company’s needs.
- More consistency: An employee is a dependable team member with a consistent schedule that you can adjust to align with the company’s core hours and needs. You always know if and when they are available to help you with your next project.
Cons of hiring employees
- Increased overhead costs: Hiring employees goes beyond salary. You must consider the cost of providing benefits, paying payroll taxes and worker’s compensation, as well as the physical costs such as technology and workspace.
- Responsibility for growth: Employees are a commitment and should be treated as such. Continuing education for employees and upskilling them so they do not stagnate in your company is your responsibility.
- Strict labor laws: There are no shortage of labor laws you must follow for employees, ranging from overtime to accommodations to family and medical leave.
- Potential for bad hires: Searching for, interviewing and hiring employees takes time, energy and money. If you make a bad hire, it can be challenging to let the employee go, and it can be costly to start the process over.
Overall, hiring a contractor is less commitment and lower cost, but you don’t get the company loyalty or consistent availability.
Pros of hiring contractors
- Access to advanced skillsets: Contractors can provide access to an advanced skillset you need for a special project or for a long-term commitment but possibly cannot afford to hire at the time.
- Flexible short-term commitment: Short-term commitments can be good for special projects where you don’t need a contractor’s skills on a permanent basis, and they also release you of some of the legal burden of letting go an employee. Contractor agreements are generally at-will, allowing you to move on if someone is not a good fit.
- Less supervision: Less energy and time is needed on your part because the contractor works independently and on their schedule.
- Low-cost asset: While you will have to pay a fee or wage, you do not have to provide the benefits, employment taxes or other associated costs that you would with an employee. However, contractors may come with an initial sticker shock as you will need to pay them more than you would pay an employee, keeping in mind they are responsible for paying their own employment and income taxes.
Cons of hiring contractors
- Lack of brand loyalty: Contractors are less likely to buy in to your culture or garner any brand loyalty. Additionally, they likely work with multiple companies and therefore set their own priorities on whose work comes first.
- Limited internal knowledge: Since a contractor is not working within your business, they may have limited knowledge of your internal workings, preferences or products. This can require more time spent in editing their work.
- Inconsistent schedule: Contractors operate on their own schedule. They often have the right to deny work based on their preferences or time commitments.
- No control: Contractors are free to complete the work in a manner that suits their skills and schedule. You do not have control over their schedule or process.
Determining which route is right for your business is personal. There is no one-size-fits-all answer for each business or even each industry. Your rate of growth, tasks required, risk tolerance and organization structure all play a part in determining whether hiring employees or contractors is right for you.
Nathan Cacka is a CPA and manager at the Wenatchee public accounting firm of Cordell, Neher & Company PLLC. He volunteers as treasurer for Lighthouse Christian Ministry and is a member of the Washington Society of CPAs. He holds bachelor of science degrees in business management and accounting from Pensacola Christian College and a master of accountancy degree from Gonzaga University. As an avid college basketball fan, he enjoys watching his favorite team, Gonzaga Bulldogs, as well as organizing the firm’s March Madness Tournament. He can be reached at (509) 663-1661 or firstname.lastname@example.org.