The independent contractor vs. employee checklist: Who should you hire?

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Table of Contents
Hiring Remote: A Wealth of Options
Full Time Employees: A Full Time Commitment
Hiring Employees: Advantages/Disadvantages
Independent Contractors: One-Time Specialization
Hiring Independent Contractors: Advantages/Disadvantages
Skip to the Independent Contractor vs. Employee Checklist

Hiring remote: A wealth of options

It is often said that wealth is not about having money … it’s about having options.

This phrase perfectly describes the process of taking a business remote. From hiring, to business model selection, to strategy implementation, the process of going remote never will fail to present you with a wealth of options.

One of the most important business strategies remote businesses must develop is their hiring strategy, specifically whether to hire employees or independent contractors. As previously discussed, this decision has the potential to present significant legal ramifications. From taxation, to benefits, to termination liability, employees and independent contractors are treated differently in the eyes of the law.

While an employer typically has more responsibility to employees than to independent contractors, this does not necessarily mean that it is improper to hire one over the other. Both have their benefits and drawbacks, and each option can serve your business given the proper “make or buy” circumstances.

Understanding this, one common problem that arises with young businesses going remote is that the doctrinal definitions of both employee and independent contractor are vague. It is important to understand each type of worker and when each can, and should, be implemented.

Without further ado, let’s take a look at both independent contractors and employees as well as their advantages and disadvantages. By the end of this article, you not only should have a better idea of each but also when their implementation is ideal.

Full-time employees: A full-time commitment

Within the context of a remote team, a full-time worker will engage in remote work 100% of the time.

They will be the exclusive employee of a single company and will be compensated by either a salary or hourly rate. The employer will have a vast range of responsibilities to the employee, including filing for tax withholding and reporting, employee benefits and the expectation of long-term and integral employment, even if the employee is “at will.”  All of these responsibilities are to be clearly stated in a full-time employment contract.

Another important characteristic of employees is that they are subordinate to employer authority to a greater extent than independent contractors. What exactly does this mean? It means that employees will have to adhere to company policies and requirements as a contractual obligation of their employment. Employees will be bound by the value statement of their employer and will receive their supervision, work hours and requirements from their employer.

What is a phrase that clearly defines the relationship of employer/employee?

Complete control.

Complete control over work method, complete control over work product and complete control over training.

But remember! With complete control comes complete responsibility. Health insurance, life insurance, long term disability insurance, full compensation, overtime, 401(k), etc. all come with the territory.

With all these duties and responsibilities, why would any employer opt for employment? Let’s take a look at a few of the advantages.

Hiring employees: Advantages/disadvantages

Contrary to popular opinion, hiring employees can still bring a return on investment (ROI) and value in the digital age. Well-trained and appreciated employees can help form the foundation for a strong and team-focused work culture.

Aside from work culture, some of the most important advantages of hiring traditional employees include:

1. Enhanced Authority: While yes, “enhanced authority” does sound somewhat draconian, the fact is employers have more control over employees than they do independent contractors. This control is, in many aspects, a distinct advantage to working with independent contractors. Control allows for more efficient project oversight and accountability. In a business climate where professional reputation means everything, enhanced employee control gives an employer the ability to foster and build a reputation based on high-quality engagements crafted in the manner they see fit.
2. Low Turnover Rates: Employees understand very well that there is a mutual investment that exists within the employer/employee relationship. Knowing that an employer has invested time and resources into them will ultimately result in a higher degree of loyalty, and in turn, increased production. To employees, companies represent stability and career growth. This long-term outlook is unique to employees and in most cases leads to predictable year-end turnover rates.
3. Employee Training: When compared to independent contractors, one big advantage that stands out for employees is the jack-of-all-trades nature of employment. Employers have the ability to train employees on a wide range of skills and proficiencies and within a variety of departments. Diverse knowledge results in increased worker diversity and flexibility to adapt to demand.

While traditional employment has proven adaptable to the digital age, it is not without its flaws. Advantages and disadvantages are typically subjective and dependent on circumstance, but the following are generally agreed upon as the major disadvantages of hiring traditional employees in the digital age:

1. Increased Legal Liability: This disadvantage is directly related to the benefits and accommodations listed above. Employee benefits are not merely a form of benevolence; they are a right. Employees often have a valid legal claim to collect unemployment insurance and compensation benefits and also have the right to sue for harassment or discrimination.
2. Benefits and Accommodations: The most glaring disadvantage to hiring employees in the digital age is the capital required for employee maintenance. Much like a five-star hotel, an employer must provide accommodations, and those accommodations are not cheap. From office space, to equipment, to social security and taxes, the costs can quickly add up. Factor in overtime and paid time off, and we are now looking at a very large monetary investment.
3. Lack of Specialization: In an ever-evolving digital economy, it is important to remain flexible. While jack-of-all-trades employees can benefit company growth and efficiency, typical employees lack the specific skills and services that can be utilized for high-level engagements. Typically, independent contractors are superior in this regard because they offer a specialized skill set for specific projects, a skill set that is not generally found with normal employees.

While no longer the most popular option, research does show that given the right growth conditions, traditional full-time employees (when remote) can be productive and engaged over the long-term. Therefore, they should always be considered when looking to hire remote.

Independent contractors: One-time specialization

While it is easy to say that independent contractors are simply the opposite of full-time employees, it would serve us well to review in what distinct ways they differ. Whereas an employee is subject to the full authority and control of their employer, independent contractors work with multiple clients on a per project basis OR with one company for a specified period of time. They are paid an hourly wage and are responsible for securing (on their own) almost every benefit allocated to full-time employees.

Retirement?
Tax reporting?
Paid time off?
Training?

Depending on the agreement, all of these benefits and more will likely be delegated as the responsibility of the independent contractor. These cost savings are a distinct advantage in today’s digital economy and one of the main reasons why the independent contractor movement is expected to include 40% of the U.S. workforce by 2020.

To further understand this movement, let’s take a look at some of the commonly cited advantages and disadvantages of hiring independent contractors.

Hiring independent contractors: Advantages/disadvantages

It is generally agreed upon that the independent contractor/freelance movement is mutually beneficial to both laborer and employer. Employers lower long-term risk and cut costs, while workers take more control over their careers and earning potential. Both enjoy enhanced flexibility. As we previously discussed these benefits in a prior post, let’s take a look at one additional (but just as important) advantage of hiring independent contractors:

Global reach.

A trademark of the digital age is the ability to access on-demand specialization.

Mobile and remote businesses have a unique set of needs in the global economy. With the rise of modern technology and the destruction of global information barriers, it is now easier than ever to find unique workers to meet unique needs.

Third-party staffing agencies exist that specialize specifically in freelance placement. From lawyers, to salesmen, to programmers, the global workforce is ready to meet the specialized needs of today. Companies such as Upwork and Freelancer can connect independent contractors to employers faster than ever before and without the need for training, HR processing and paperwork. Focused skill sets allow employers to supplement the jack-of-all-trades workforce by hiring independent contractors as needed.

Traditionally, specialized labor in the form of full-time employees resulted in a difficult cost-benefit analysis for employers. While employers were certain that specialized labor would be needed to resolve certain high-level issues, hiring specialized labor full-time often brought about diminishing returns in the long-run. If the highly unique skill set of specialized labor was not being used, the employees suddenly became a glaring cost due to lack of production and their guaranteed benefits.

Today, independent contractors can now be hired as needed, and if demand for work slows down or stops, specialized labor can be reduced or cut.

However, all is not perfect in the independent contractor world.

While generally yielding positive results, hiring independent contractors is not without its downfalls. Here are the most common disadvantages of hiring independent contractors in the digital age:

• Worker Classification: As previously discussed, worker classification can function both as a positive and a negative. On the one hand, it acts as a cost-saving mechanism when a worker is defined as an independent contractor. However, on the other hand, the definition has a tendency to be vague. When a dispute arises between employers and independent contractors, courts and other governing labor bodies will not hesitate to change worker classification if it appears that the nature of the relationship did not reflect that of an independent contractor. The key is control. As a best practice, employers should build a defense file and prepare to show that the relationship is not that of employer/employee. If you fail to do so, you could join the ranks of employers who had to pay $79 million in back wages in 2014.

• Relationship Longevity: Independent contractors are not your friends and they are not your employees. They are the mercenaries of the digital age workforce. They look for the highest bidder for their specialized talents and represent their own values and brand throughout the work process. Knowing what to expect from an independent contractor relationship is essential, as their ROI is likely to be per project and lack the ROI arch often associated with jack-of-all-trades employees. A high turnover rate often makes it difficult to develop a consistent and strong work culture, one of the biggest factors associated with long-term success.

• Worker Specialization: As you can see, a pattern has developed here. Almost every advantage of hiring an independent contractor has the potential to develop into a disadvantage. Specialization is no different. Specialization means that for what independent contractors lack in skill diversity, they make up for with exceptional work quality. Yet, as we know in the digital age, needs often change on a whim. Most independent contractors do not provide the multi-tasking ability necessary to adapt to need changes unless the new needs fit within their specialized skill set. While rare, it is something to keep in mind when developing a hiring strategy.

Conclusion: Independent contractor or employee?

So there we have it!

You now have a basic idea of what to expect from hiring both independent contractors and employees. Which should you hire? Unfortunately, there is no one clear answer. Ultimately, it depends on the needs of your engagement.

Ask yourself these questions:

1. Does the work require supervision? If yes, employee.
2. Is the work long-term? If yes, employee.
3. Do you want/need to control the hours and means of production? If yes, employee.
4. Can the work be completed without much supervision? If yes, independent contractor.
5. Do you need specialized knowledge for the short-term? If yes, independent contractor.
6. Is the work non-essential for your overall business? If non-essential, independent contractor.

Review these questions, approach each decision on a case-by-case basis and always remember to be familiar with the legal rules and regulations of your work jurisdictions. Follow these simple steps and watch your ROI build with a wealth of options.

Independent contractor Vs. employee checklist

Here is a 10-question test to help determine the classification of a worker as either an employee or independent contractor. There is not a single factor that will indicate whether a worker fits one definition or the other, but rather it is a cumulative test. If there is a high number of “yes” answers, it is likely that the relationship is that of employer/employee. Remember, misclassification can have important legal ramifications and ultimately result in additional costs.

1. Does the worker work full-time for the employer? (Y/N)
2. Is the worker required to comply to work when, where and how the employer wants? (Y/N)
3. Does the worker have a mandatory schedule with set hours? (Y/N)
4. Does the worker use the employer’s equipment? (Y/N)
5. Does the worker receive payments of regular amounts and at set intervals? (Y/N)
6. Does the worker work for more than one employer at a time? (Y/N)
7. Does the employer’s business depend on the performance of workers’ services in order to remain viable? (Y/N)
8. Must the worker personally perform the services or tasks? (Y/N)
9. Must the worker submit regular reports and updates to the employer? (Y/N)
10. Does the worker have the ability to hire and pay other workers in the employer’s name? (Y/N)

Number of “Yes” ____
Number of “No”  ____