Identifying the Differences between Contractors and Employees

The key differences between Contractors and Employees

Navigating the different ways of classifying your workers as a contractor or employer can feel rather overwhelming. What does it mean to hire someone as a contractor or as an employee? What are the associated costs, benefits, and risks with each option? Are there any compliance concerns with hiring contractors vs employees? This blog post seeks to simplify the key distinctions between contractors and employees with a goal of helping you make more informed decisions about how to hire workers in-line with your personal, financial, and business goals. 

What are contractors?

  • Contractors are independent workers hired by a company to perform employment services on a contract basis. 
  • Contractors are usually short-term workers hired by a company to complete specific tasks (ex: US-based company hires programmers in India to work on product improvements)
  • Contractors do not receive benefits or additional support from the company they work for, so they tend to carry fewer associated costs than a standard employee. 

When should you hire contractors?

Before hiring contractors, it's important to research the local regulations in the country that you wish to hire in to ensure that you are engaging in compliant practices. 

  • Contractors should be hired by companies looking to address short-term projects in an efficient manner.
  • It is important to be wary of the consequences of contractor misclassification – the process of labeling employees as independent contractors to reduce labor costs and eliminate benefits. 
  • Contractor misclassification carries significant legal repercussions and your company can face heavy fines for breaking the law in addition to reputational damages. 
  • Make sure that you are working with a trusted contractor management provider that allows you to easily switch the designation status of workers to reduce any risk on this end. 

What constitutes an employee?

Thus, to avoid legal trouble, companies looking to hire full-time workers for multiple projects should hire them as employees. 

  • Employees are hired as members of a company and usually receive benefits and health insurance from their employer. 
  • There are stricter legal regulations regarding the definition of an “employee” that are variable across jurisdictions, so make sure that you are researching before hiring employees across the globe. 

When to hire employees?

  • Employees are best fit for your firm if you are interested in hiring workers to build a long-term project for your company. 
  • Employees tend to work primarily on-site and are provided tools and technology (i.e. software subscriptions, computers, keyboard, etc.) by the company. 
  • If you are looking to make strategic investments in your firm by strengthening human capital, then hiring employees is a better fit for you. 
  • Since employers must provide benefits for employees, make sure that your business is financially able to take on the responsibilities of providing for your employees. 

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Elizabeth Wellington

Liz writes about business, creativity and making meaningful work. Say hello on Twitter or through her website.