Deciding Between Hiring and Contracting: What You Need to Know

It’s a common conundrum with growing companies. When more manpower is needed, should the company hire new employees or bring in contractors. Often, HR professionals are asked to weigh in on the pros and cons of both choices. Here are some key factors to consider when deciding between hiring and contracting.

Understanding Costs
You need to understand the costs of both options. However, calculating the costs is not always straightforward. Some costs are easy to calculate, like salary and benefits packages. Other costs, such as engagement and loyalty, are harder to put a number on.

Broadly speaking, there are three categories of costs to consider when weighing your options between contractors and employees:

  • Recruitment costs
  • Regulatory costs
  • Soft costs

Recruitment Costs
What is the cost of adding a new employee? This cost includes everything from the recruitment process to the cost of screening resumes and conducting interviews. Initially, the cost of hiring an employee may be similar to the cost of adding a contractor. There is, however, one important difference—turnover. Employees usually last longer than contractors. That means you may have to spend recruitment money two or three times more often on contractors than on an employee.

Regulatory Costs
Regulatory costs are legally mandated. When you hire a contractor, you have few, if any, legally mandated costs. However, when you hire an employee, you have a long list of potential legal obligations. Some examples of these costs include:

  • Overtime
  • Health insurance
  • Retirement
  • Mandatory withholding
  • Employer FICA contribution

While costs like health insurance and retirement benefits are traditionally optional, if you offer them to some employees, chances are you are required to offer them to all employees. You do not have such obligations to contractors. The regulatory costs of hiring a new employee are much higher than hiring a contractor.

Soft Costs
There are also soft costs when hiring an employee and a contractor. These are often difficult to measure and they can significantly impact the bottom line for years to come.

Some examples of soft costs include:

  • Cost of developing employees
  • Training costs
  • Decreased engagement or “buy-in” from contractors
  • Decreased loyalty from contractors

When you hire an employee, you are invested in their long-term success. This means you may incur development costs as they learn new skills. Hopefully, these costs will be paid back over time with increased productivity. New employees will need to be trained on everything from the way you want the work done to the company policies. Contractors traditionally require less training.

Employees are more likely to feel connected and committed to the organization. They have every incentive to help the company succeed through creativity and innovation. Contractors are not as connected to the success of the company. They are less likely to buy into management goals.

Contractors often work for multiple companies at a time. At the very least, they are free agents. They know they will only be at the company for a short time. This makes contractors less productive over the long term. An employee will become more valuable over time. A contractor’s value often remains stable over time.

What Are Your Goals For This Position?
Costs are not the only factor you need to consider when deciding between contractors and employees. You also need to consider the company’s goals and needs.

For example, companies should consider:

  • Are personnel needed for a single project, or is there a long-term need?
  • How will the addition of an employee or contractor affect cash flow?
  • Is hiring an employee financially sustainable?
  • How will bringing in a contractor affect the existing employees?

If there is only a seasonal or short-term need, contractors will prove not only to be cheaper, but they may also be better for the morale of the other employees. Short-term contractors do not threaten the job security that employees feel the way long-term contractors can. Hiring employees and then letting them go for financial reasons can devastate company morale and increase turnover as employees begin to worry about the stability of the company.

Dangers of Misclassification
One of the hidden costs of hiring a contractor is misclassification. If you bring on a contractor, and it later decided by an agency or court that you misclassified the employee as a contractor, the company could be on the hook for significant damages and penalties.

It is important to remember that if want to dictate the time, place and manner an individual works, you have an employee, not a contractor.

Contractors are generally expected to set their own hours and use the methods they deem best to complete a project.

One halfway point between hiring a contractor and an employee is to use a staffing agency to hire a W-2 contractor. This means that the individual is an employee of the staffing agency. The agency is responsible for all of the regulatory costs. Your company simply pays the staffing agency an agreed upon rate. The company is able to direct the W-2 contractor the same way they would their own employee, without the risks of misclassification.

This can help you avoid the problems of bringing on a contractor paid on a 1099 basis, and who is later ruled to be an employee.

Choosing between hiring a contractor or an employee is not easy. By carefully considering all of the likely costs and consequences, you can mitigate against future problems.

Oasis can assist your company with this and all other HR-related challenges. Please contact us at 866-AT-OASIS (866-286-2747) or visit us online at www.oasisadvantage.com.

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