Your company has work to do and so many roles to fill. The question is whether you’ll hire contractors or employees to get those jobs done. In some scenarios, you may need a mix of both. However, each avenue comes with its share of pros and cons. You’ll want to weigh them carefully before you move forward.
While independent contractors don’t usually involve the same amount of overhead as employees, your business won’t have as much control over them. Misclassifying workers as freelancers when they fit the definition of an employee can also result in legal and financial consequences. And matters can get more complicated if your company wants to hire across international borders. If you’re unsure which path best meets your needs, here’s what you need to know.
Determine How Local Regulations Influence Hiring
Typically, an employee joins your company in exchange for a steady paycheck and benefits. Your company manages their work, provides job-related equipment, and trains them. You also determine an employee’s work schedule and location.
With contractors, you usually don’t control precisely when, where, or how they complete their tasks. They may complete various projects for you, but you don’t guarantee consistent income. Your company also doesn’t pay their benefits, withhold their taxes, or supply equipment. Freelancers are responsible for their own tax withholdings and supplies. While they may only work on projects for your business, they’re free to take on more than one client.
Countries and even various U.S. states have different rules governing the classification of contractors versus employees. If you want to hire international employees, having a local legal entity in your targeted country is a must. Some business owners find establishing such an entity too time-consuming and cost-prohibitive, so instead they consider hiring international contractors.
Yet regulations for freelancers in other countries can be tricky. The rules may look different from the way they do at home. Forming a partnership with an employer of record service can help companies navigate international legal minefields. EOR services already have established legal entities in several countries, allowing companies to hire employees — as well as contractors — without violating labor laws. The EOR takes care of the compliance end while you benefit from global expertise.
Consider Workload Demand
All companies experience workload fluctuations. Sometimes it’s full speed ahead, and other times the corporate engine appears to slow down. Factors such as increased turnover will also influence how much each contributor has on their plate. On average, a large enterprise will rely on contract labor for 28% of its workers. Reasons include increasing efficiency, augmenting internal skill sets, and fulfilling temporary demand.
Staffing shortages can also exist because there’s a gap between the workload demand and the number of filled positions. Many organizations struggle to recruit and retain enough employees with the desired expertise. Independent contractors can help companies meet the demand while closing existing skill gaps. Plus, freelancers may be able to step in when the workload increases temporarily.
Since you pay contractors per project, you won’t have the same labor costs when demand goes back down. The drawback is that freelancers aren’t as obligated to stick around. They may decline to work on your next project or not be able to meet consistent, ongoing work. If your business has the demand to justify permanent in-house positions, it’s probably more advantageous to hire employees. This way, you’ll have more assurance someone will be available to handle the workload.
Think About Your Budget
Employees come with wages, benefits, and tax obligations. In contrast, contractors usually only require fees. You both agree on these fees in advance and pay them for each completed project. Employee expenses continue regardless of how many tasks they finish. You might have more variability if you hire hourly workers, but you may also have to pay occasional overtime.
Smaller companies, especially those just starting out, might not have the budget for a full staff. Larger businesses looking to expand into new territory may face the same problem. Leaders may hesitate to hire employees in the early stages of an expansion. You might need to scope out the market before committing. A local contractor’s fees can fit into your preliminary budget better, and you’ll gain the market insights you need.
Part of your budget should also include what wages and perks you could reasonably offer. Are those numbers competitive with local labor market conditions? While you might pay a contractor more for a project than an employee’s wage, it’s a one-off expense. You don’t have to pay taxes or benefits like health insurance. Freelancers will be more feasible if you have enough to pay competitive contractor fees but not employee compensation packages.
Hiring Contractors vs. Employees
Whether your company will benefit more from hiring contractors versus employees will depend on worker classification regulations, workload demand, and budget. Working with freelancers typically gives companies increased flexibility but less control. With international talent, hiring contractors is sometimes less of a compliance headache. However, this isn’t always the case, and you’ll want to do your homework before you decide.
Employees usually come with additional expenses and compliance complexities. Nonetheless, internal staff can deliver consistency, and companies can keep a tighter hold on the reins. Meeting your company’s staffing needs in the best way comes down to balancing your priorities and capacities. As you grow, achieving the right balance might mean employing both strategies.
