Pros and Cons Hiring a Contractor vs Employee
When businesses start up they may invariably decide that you need extra help.
Most small businesses start by hiring outsourcing their work to agencies and freelancers, but eventually, they may decide to hire staff instead to make things more permanent. This article discusses the advantages and disadvantages of hiring employees vs. independent contractors and how starting out can save you money hiring companies rather than employing staff.
Hiring employees, a business owner is obliged to pay a wage regardless if there is any work or not. The perfect example is being furloughed during lockdown; this was a headache for most business owners unable to trade.
An employee is basically a person who works for a person or company whereby the employee is under the control of the employer and has to work a certain number of hours each week.
The advantages of hiring an employee are you have sole control of the employee’s work schedule which would mean the employee only works for you and is trained and guided by you. You have few restrictions or limitations on what you can assign to the employee or about your ability to terminate the employee without paying out a contract.
However, by employing a staff member, you have to abide by the laws and regulations of your given country. You cannot hire and fire unless it is legally warranted. You have to abide by the payment of wages or salaries, overtime, and other work rules.
You must adhere to comply with payroll tax requirements, including paying National Insurance and Taxes, Pensions. (This part is an example for the UK, other countries have different payroll rules).
Hiring Independent Contractors
By hiring an independent contractor, you pay for a job or assignment. You do not have to worry about paying for holidays or sick leave. You do not have to worry about paying wages and P.A.Y.E.
The advantages of hiring an independent contractor are you assign a job to meet a deadline and once the job is completed you have no other obligation to the person or company you hired. You can assign duties to an independent contractor and impose a deadline, but you cannot tell that person how to get the job done. You can however ask the independent sub-contractor to sign a non-disclosure agreement to ensure your trading information is not shared with their competitors.
An independent contractor sets his/her/their own hours and fees which are agreed by the client and he/she can work for other companies as well as yourself. An independent contractor often provides his/her/their own equipment and tools i.e., computers, cameras, software, and may come to your place of work or work remotely based on their terms and conditions.
However, when you are doing your tax returns (HMRC UK) you should also include that you have paid sub-contractors.
To be defined as an independent contractor the following must apply:
- He/She/They consult for multiple businesses.
- He/She/They control the hours worked.
- He/She/They choose where they work.
- He/She/They are ineligible for employment benefits from your business.
- He/She/They work independently and choses their location where to work.
- He/She/They decide how they will complete the work.
- He/She/They incur costs that relate to the comletion of the assignment.
- He/She/They are experts in a chosen field with the relevant qualifications and experience.
- He/She/They are responsible for paying self-employment tax.
- He/She/They are not entitled to workers’ or unemployment compensation benefits.
- He/She/They are not eligible for overtime pay.
- He/She/They are not entitled to holiday pay, sick pay or maternity leave.
This post is meant for UK Businesses and in other countries, federal laws will be different, so you must check the rules and regulations appertaining to your location.
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