The Pros and Cons of Hiring Employees vs Hiring Contractors

Which Is the Right Hire for Your Business?

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Image (c) William Andrew / Getty Images

So your small business is doing so well that you need to hire help. Congratulations!

But should you hire employees or contractors for the available position(s)? This look at the pros and cons of each will help you decide.

The Pros of Hiring Employees

Employees make more of a buy-in to your company and its culture. The employee views your company as offering potential security for the future, so is more likely to invest more of her time and energy into furthering your company’s goals and participating in company projects.

Those groups of grinning people wearing company T-shirts and frying up hot dogs for charity? They’re not contractors.

Employees provide dependable expertise. Just about anybody can learn how to cook a burger. But not everyone can machine an aircraft part or write code in C++. If your business has a constant need for particular types of expertise, hiring employees can increase the chance that you’ll always have the right person for the job around.

Employees provide continuity. Suppose you run a service business and every time a customer comes in, an employee knocks on your office door and asks, “There’s someone here. What do I do?”

Running a business with contractors can be like this, especially if you have a lot of short-term freelancers working for you. No business can operate without someone who serves as the repository of operational procedures and if you don’t have people to do it for you, it’s going to be you.

Individual employees may draw customers and/or clients. People generally prefer to deal with people they’re familiar with, so if the position that needs filling is a customer-facing position, hiring an employee and hoping to keep them on is probably best.

Plus, some people are just so good at what they do that they bring in business in their own right.

If you luck out and hire one of these people, he or she will be worth whatever extra you have to invest in them.

Retaining employees saves money on human resources activities as you don’t have to continuously recruit new staff and/or renegotiate contracts. (Here’s a sample contract for consulting services, if you’d like to see one.)

Most small businesses don’t have dedicated human resources departments – which means that recruiting and all the related activities such as preparing job descriptions, advertising the position, reading applications, interviewing prospective workers, etc. is way down on the list of “things-that-I-would-most-like-to-spend-time-on-today” for small business owners. If you can retain them, hiring employees rather than freelance contractors can greatly cut down on the amount of time you have to spend on filling positions.

Some people are happiest as employees and are not willing to work as freelancers or contractors. So you’re cutting down on your chances of finding the perfect person for the position if you make the position available to contractors only.

The Pros of Hiring Contractors

Hiring contractors can provide staffing flexibility. If your small business is like most, it has busy periods followed by less busy periods.

Freelancers can save you from having to carry staff during slower periods. They can also give you the “people power” you need to take on projects that would normally be too much for your regular staff to handle.

Contractors can provide missing expertise. You might find that you need a person to do some work that your regular employees can’t do – but hiring an employee to do the work would be silly because your business won’t have a continued need for the expertise involved. A publisher, for instance, may need an illustrator for a particular project. Or a business may need to hire someone to train their staff to use a new application.

Decreased paperwork. Hiring contractors instead of employees can cut down on your administrative paperwork. In Canada, for example, if all the people working for you are contractors/freelancers rather than employees, your payroll procedure is great simplified because you won’t have to open a payroll account with the Canada Revenue Agency, fill out and remit related tax forms, and withhold various taxes.

(See How to Do Payroll in Canada.) You also won’t have to fill out other forms related to employment such as the Record of Employment (ROE).

Contractors may cost less. Salaries being equal, the cost of employing a contractor rather than an employee to fill a full-time position may be less, because contractors don’t get benefits packages. Medical, dental, pensions – these are all costs that the contractor bears himself. Nor do you have to contribute to their Employment Insurance.

You may also be able to contract out a specific project for less than you would have to pay a local employee to do it. Some types of work, such as programming, mobile development, writing, marketing and design are rife with freelancers – freelancers that are easier to find than ever thanks to websites such as UpWork and Freelancer.

So should you hire a contractor or an employee?

Hiring a contractor may not even be an option for you. The position you need to fill may not lend itself to freelancing. There are no “freelance” fast food servers, for instance.

If it is an option, whether you hire a contractor or an employee will depend greatly on what kind of position you’re trying to fill and how you see the position developing. If it’s a short term position that doesn’t involve the kind of expertise you need to have on tap all the time, then hiring a freelancer can be a great alternative for your small business.