Growing a successful company means that a business owner will probably need to hire help at some point. A business owner must not only determine the company’s needs but also whether those needs will be best served by independent contractors or employees. An independent contractor’s job expectations and compensation are usually outlined in an independent contractor agreement, while employees at-will in Texas typically have no formal agreements. The IRS and the Fair Labor Standards Act (29 U.S.C. Chapter 8) both provide guidance on proper employee classification. Some key factors might help a business decide whether to hire employees, independent contractors, or both.
Training and Supplies
A job that requires training and needs to be completed on a tight deadline might best go to an independent contractor, who can often hit the ground running. Employers are not expected to train independent contractors for a job. In fact, providing training to independent contractors is often a factor in employee misclassification cases. An independent contractor has the required skills and is able to begin a project sooner than a hired employee who may require specialized training. Another consideration for a business is whether or not necessary supplies and equipment are readily available for an employee to use. If not, an independent contractor may be a better fit since an independent contractor is expected to provide the necessary equipment, tools, and resources to complete a job.
Timeline
The scope and length of the job are also important factors when deciding between hiring an independent contractor and hiring an employee. If it is a specific job which will be completed within a shorter timeframe, an independent contractor may be the best choice. Once the job is complete, the contract is fulfilled, and the independent contractor no longer works for the company. A job that is long-term or evolving may be better suited for a hired employee who can grow with the job as the company’s needs change
Cost
In addition to training and supplies, other expenses need to be calculated when choosing between an employee and an independent contractor. Because independent contractors’ compensation must account for that contractor’s overhead, the hourly rate may be higher than those of an employee. In fact, independent contractors need to earn approximately 30% more than a hired employee in order to match the wages and benefits of most employees. The long-term total cost to the company for each may be roughly equivalent since an employer pays for employees’ insurance and other benefits. However, on paper the employee may earn less per hour than an independent contractor.
Simplicity
The relationship with an independent contractor may be simpler and more straightforward than a relationship with an employee. The contractor’s job and pay are fully defined in the contract, including the timeframe for job completion. Relying on an outside source to complete a job also means that a business owner has fewer problems to solve; a contractor will be trained, have the necessary supplies, and be ready to move forward on a job quickly.
Hiring may also be simpler. Instead of trying to find and hire employees who have many different skills, business owners can narrow their focus to more specific employee skills and hire independent contractors to fill in the gaps. Paying contractors is also more straightforward since they receive a 1099 form as opposed to a W-2 form. Business owners therefore do not have to withhold taxes or worry about reporting wages, tips, or other compensation.
Generally, the law prefers businesses to classify almost all workers as employees, as federal and state government benefit from the additional tax revenue generated through a traditional employment relationship. Many also believe that labor rights are best protected through an employee model. Long-term employees may be more vested in their jobs than independent contractors since they work for only one company. Feeling this sense of loyalty may lead to greater motivation, higher quality work, and company stability.
Ultimately, the decision to hire an independent contractor or an employee depends on the unique needs of the company. However, specific rules and regulations apply to each type of hire, so classifying them accurately is important in order to follow IRS guidelines and various other laws. Consulting a lawyer with expertise in business law will provide helpful insight and guidance to ensure the best decision for the company.
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