We live in an interesting time, the time of the sharing economy. I keep
reading these articles about Millennials and their preferences–like not wanting to own cars or homes. They want to rent, to use a driving service. They’re not sure they want to get married or have kids. In fact, for some, the ideal life would be to simply lug a 3D printer around and make what they need, melting it down or giving it away when they’re done. In such a culture, using a contractor for your company’s needs, rather than hiring someone, seems a no-brainer. But actually, that’s not true. Don’t make contractors your default option. When you crunch the numbers and weigh the pros and cons, it might be smarter to use a contractor in some cases. In others, the employee wins hands-down.
Cost: Let’s say you decide to hire an employee, part time or full time. Yes, you’ll have to pay 2.9 percent of the employee’s first $9,000 in income to cover Social Security and Medicare. That’s $261. On the other hand, you will pay a contractor a lot more per hour than you will an employee. That’s to make up for the fact you’re not paying for other things, like that $261. But by the time you’ve hired the contractor for $10 an hour more and used their services for 25 hours…well, you see the math. Don’t forget the contract your contractor had you sign that requires a notice of cancellation. That could be even more money out of your pocket. Obviously there are other costs associated with having an employee, but until you actually sit down with a calculator, you can’t just assume that hiring a contractor is going to save you money.
Control: This is a big one. When you have an employee, especially if you’ve given them benefits and equity in the company, it’s very clear that the work you’ve hired them for belongs to you. But contractors work for lots of people. Yes, you usually sign a work-for-hire agreement that states that what they produce for you belongs to you. But there’s a gray area around work they do that’s similar for other clients. With an employee it’s easier to control your intellectual property and other proprietary information.
Another point on control is time. True contractors have many clients. They can’t necessarily do something on the fly or by the deadline you need met. With an employee, you can redirect priorities.
Institutional Knowledge: Commitment can be difficult to come by these days. Even employees tend to think of themselves as free agents. But if you’re careful to structure rewards and culture around things that are important to your employee, you’re likely to keep someone around longer. And the more time they put in, the more institutional knowledge they’ll have. What that means is that they really understand the mission, the business model, the way you like to interact with clients or customers and which clients or customers are key to your success. The more they know, the more they can contribute and the more integral they become to your growth. Contractors, even long-time contractors, are always a little bit outside of that institutional knowledge.
Don’t get me wrong, we contract our services and we work with contractors. I have some great contract relationships that are structured exactly as they need to be for those transactions. But contractors aren’t the panacea they’re made out to be. A lot of companies hiring their first employees feel like they’re stepping into concrete shoes and throwing themselves off a bridge. They see it as a point of no return. But with “at will” employment, it really doesn’t work that way. A contractor relationship can be just as confining—if not more so—than hiring an employee.
Having said that, if you’re really just not ready to hire an employee, don’t. You don’t want to hire someone if you don’t know that you’ll have enough work for them or you’re not confident in your ability to hire or manage someone yet. Just don’t treat the contractor relationship as a default without thinking it all through first.
And if you’re looking to contract with an HR consultant to help you sort it all out, call us!
We work with companies on a project basis or on retainer, providing a custom level of HR help designed for your business, with offices in Austin, San Antonio, Dallas and Houston. Contact me at Caroline@valentinehr.com or call (512) 420-8267.