Should I Hire an Employee or an Independent Contractor: Advantages and Disadvantages? 

Companies considering expanding their business may be faced with the question of whether to hire employees or independent contractors to cope with the business growth. There are various advantages and disadvantages to hiring an employee or independent contractor, but any decision made should reflect business needs.

If you would like to know more about the specific differences between an employee and independent contractor as well as the consequences of sham contracting, you can find this information here[PP1] .

The following are the advantages and disadvantages of both employees and independent contractors:

1. EMPLOYEES

Businesses that require workers to perform a wide range of duties over a longer period of time may find employees to be a better suited option, especially if the business would like to retain control over the method of quality of the work done.

Advantages

1. Constant Workforce

Employees are a constant workforce and will perform work for the employer until employment is terminated. This means that companies may utilise them in a myriad of ways to accommodate any changes in the workplace, such as resignations or other workers away on leave. In such cases, companies will be able to shuffle their employees around to take on the workload left behind. A constant workforce also has the benefit of workers who are very familiar with the business’ operational requirements and processes.  

1. Loyalty and Dedication

Employees are usually employed by one employer at a time whereas independent contractors may be working on multiple jobs concurrently. As employees will not be juggling multiple jobs, the business can be secure knowing that their requirements and tasks will always be prioritised by the employee. With an independent contractor, the business may not always be the highest priority since an independent contractor will be managing multiple jobs.

1. Control and Management

A company has more control over employees’ performance when compared to independent contractors as employees are obligated to comply with lawful and reasonable directions.  This allows the company to monitor the work done by employees and manage expectations on a day-to-day basis. The employer will also be able to dictate how and when tasks should be performed, with the capacity conduct performance management should the business be dissatisfied with the work completed by the employee.

Disadvantages

The most common consideration for businesses is costs. Employees can be more expensive to hire and difficult to terminate, given the breadth of regulations that cover employees.

There are a number of additional costs that come with hiring an employee instead of an independent contractor. The employer will likely be responsible for any additional costs borne by the employee in the course of performing their duties, which may include tools, equipment, protective wear, vehicles, and uniforms.

Additionally, employees are heavily regulated by rules that provide a number of paid entitlements otherwise not provided to independent contractors, such as public holidays, paid leave, and penalty payments.

There are also the added costs of training, and investment into performance reviews, which are not usually the responsibility of the business when hiring an independent contractor.

• INDEPENDENT CONTRACTORS

Independent contractors may be more suitable for businesses who need greater flexibility with their workforce or dealing with temporary increased demands for work. Independent contractors are usually utilised for a specific period of time with no expectation of continued work and can be more cost efficient as most of the costs attached with hiring an employee do not apply to independent contractors. However, greater flexibility with independent contractors also results in the business having less control over the method and quality of the work performed by the independent contractor.

Advantages

1. Management

An independent contractor is usually able to perform the services required without any additional training from the business. As such, the business does not need to manage independent contractors the way they would with employees, by providing training or guidance with the day-to-day activities.

1. Flexibility

Businesses may only need a worker for the length of specific projects or timeframes. This kind of arrangement may not work for an employee as these workers usually remain employed until the employment is terminated by either party. Businesses would either be required to provide work to the employee or terminate the employee by way of redundancy, which can be quite costly. Independent contractors would be ideal in these circumstances as they can be employed for specific projects and timeframes without the obligation to provide work during quieter periods. The contract between the business and the independent contractor would clearly express the timeframes for the services required with no obligation to continue beyond the agreed time.

1. Cost saving

Hiring an independent contractor may be more economical compared to an employee as there are a lot of added costs attached to employees that are not relevant to independent contractors. Independent contractors are responsible for their own insurance, tools, equipment, and vehicles and so, these costs would not be borne by the business. Independent contractors are also not entitled to a number of the employee entitlements such as paid leave unless otherwise agreed.

Disadvantages

As noted above, independent contractors do not require as much guidance and management as employees. However, this also means that the business has less control over the method and quality of the work completed by the contractor. As such, there is a higher risk that the work may not be completed to the standards expected by the business or in line with the business processes. A way to mitigate this risk would be to set out guidelines and deadlines from the start so that there is a clear framework for contractors to adhere to.

It should be noted that the flexibility enjoyed by the company is also an aspect of the relationship that can be utilised by the contractor to the company’s detriment. Just as a company has the flexibility to only engage contractors in accordance with its preferences, the contractor also has the flexibility to refuse, which may be exercised if they are concurrently working for multiple companies. As such, a contractor’s time and focus on work is spread across several different companies which can be in conflict the company’s interests and timelines.

You should consider all the above factors when determining whether an employee or an independent contractor is the right addition to your business. If you would like further advice on these arrangements or assistance with preparing an agreement for an independent contractor, please contact Constructive Legal Solutions on admin@constructivelegalsolutions.com.au.