Benefits and Challenges of Hiring Independent Contractors
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Are you considering hiring independent contractors? Are you already working with them?
As technology changes, enabling an ever-increasing number of people to work remotely, the use of independent contractors is growing. Although there are quite a few benefits, deciding to work with independent contractors should be carefully considered. We will talk about this in one of our next articles. For now, let's take a look at the primary benefits of hiring independent contractors.
What is an independent contractor?
An independent contractor is a person or entity performing services as a non-employee, which means they work for themselves. Contractors are usually small business owners who are self-employed, pay their own taxes and benefits, and earn a living by working for multiple clients on a short-term or per-project basis. They're often referred to as freelancers. This is the basic definition of a contractor, but if you want to find out all the legal implications and tax aspects of being a freelancer, you can read more in our dedicated article.
Hiring contractors instead of or in addition to full-time employees can bring your business multiple benefits. Here are some of them.
Benefits of hiring independent contractors
Here are some of the biggest benefits of hiring independent contractors:
- Cost per employee savings
- Reduced office and supplies costs
- Access to global talent unlocked
- Staffing flexibility
- Little or no training expenses
- A higher level of efficiency
- Reduced exposure to lawsuits
- Ending the working relationship is easier
Cost per employee savings
One of the main reasons companies choose to hire independent contractors over employees is the cost that is saved based on the working relationship. Employers are not responsible for covering traditional benefits, such as health insurance, unemployment insurance, and others. On top of that, independent contractors are usually the ones responsible for taxes.
So, when hiring contractors, you save money on payroll taxes (federal income tax, social security, medicare taxes, and federal unemployment), employee benefits, and worker's compensation insurance.
Reduced office and supplies costs
If you work with independent contractors, they most likely won't need an office space as they work off-site, especially when working remotely. This is a huge money-saver that leaves you with additional finances that can be put elsewhere. Besides that, independent contractors work with their own equipment and usually do not require your resources to perform work.
Access to global talent unlocked
We already touched upon independent contractors working remotely. Since you are not tied to a specific location, you can source talent from wherever you need. This gives you a bigger pool to pick from, makes it relatively easy to promote the job posting, and ultimately reduces recruitment costs. At the end of the day, you choose from a vast pool and select those contractors that would do the best job, not the ones available in your area.
Independent contractors can be brought in for a specific project or on a needs basis. Once the agreed period of time or a project is completed, you can assess if this person is a good fit and can continue the working relationship. If not, you simply do not renew the agreement for the next project. Contractors are also an excellent option for companies that have a fluctuating workload.
Little or no training expenses
Since you are sourcing your independent contractors from a pool of people globally, you will pick the person with the skill-set you need specifically for the type of work. Contractors are usually specialized and do not require any training to fulfill their tasks.
A higher level of efficiency
When you are hiring an employee, a lag is expected between the time they join and when they start performing at their full capacity. As we already mentioned, independent contractors often have specialized skills and allow the employer to get more accomplished faster. Contractors save you money and time by skipping the training and onboarding processes you have when hiring a full-time employee.
Reduced exposure to lawsuits
Hiring full-time employees comes with knowledge of their set of rights under state and federal laws. Employees are protected from injury at work and wrongful termination, as well as discrimination and harassment. They are also guaranteed minimum wage and benefits such as healthcare, employment taxes (like FICA), and unemployment compensation under the employment laws. Finally, they have the right to overtime and sick leave and time off. All of these rights mean that companies and their human resources departments spend quite a lot of time drafting procedures and shielding themselves from liability.
Most of these protections are not extended to independent contractors, who pay their own taxes, don't have mandated time off, and can't form unions. Hiring contractors can thus make you less susceptible to a nasty legal battle. This, of course, does not mean you should encourage dangerous behavior at work, discriminate, or harass your contractors.
Ending the working relationship is easier
When you work with an independent contractor, it's much easier to end a working relationship. In some countries like France, for example, firing an employee is very tough. Since contractors are usually hired to work on a specific task or project, they will probably move on to other clients once their work is done. This gives you a chance to assess their work and decide whether you want to call them back for future projects. However, there are a few things to keep in mind so we suggest reading our guide outlining how to fire a contractor.
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Challenges of hiring independent contractors
Just as hiring employees has its set of pros and cons, the same goes for contractors. Even though the flexible relationship and freedom from paying benefits sound great, there are challenges you should keep an eye on when hiring:
- Limited control over the work schedule
- Ownership of work
- Fluctuating availability
Limited control over the work schedule
This may sound obvious, but independent contractors are, you know... independent. They work for other clients too (some of which could be your competitors), how they complete their tasks is out of your control, and they don't have set working hours. If you are an employer that has trouble trusting their workers or wants to control every aspect of the job, hiring contractors isn't a good option for you.
Ownership of work
If you hire contractors to work on products that can be subject to copyright, the ownership of the final product may lie in the hands of the contractor. In these cases, it's necessary to make a written agreement transferring the copyright ownership from the contractor to their client.
The availability of independent contractors on the market can vary depending on many factors. Sometimes, you will find a contractor that fits all your needs quickly, and they will be available to start working instantly. Other times, you can find yourself searching longer if the need for specific services surges in some areas or some parts of the year. Apart from availability, finding a contractor you are happy to work with can be a long process. One of the ways to bridge this, of course, is to expand your talent pool and look out for foreign independent contractors.
Independent contractors vs. employees: misclassification risks
Although there are many benefits to hiring independent contractors, you need to be well aware of misclassification risks. Governments around the world are paying a lot of attention to this matter in an attempt to ensure that the self-employment of contractors is real and they are genuinely independent. Many governments are introducing more strict rules and local labor laws to fight potential tax avoidance (AB5 in the USA, IR35 in the UK, and many more).
The United States Internal Revenue Service (IRS) keeps a close eye on independent contractor status and misclassification since some companies have started deliberately misusing the benefits they provide. The IRS aims to ensure companies don't disguise employees as contractors and get away with not paying healthcare, unemployment insurance, and other benefits. Together with the Department of Labor, the IRS is in charge of ensuring all workers are correctly classified and paid.
If you are a US company, take into account the 20-Factor test that can guide you through the classification process. For more general information, take a look at this guide to hiring independent contractors.
Tips for hiring independent contractors
With a little knowledge and attention to detail, you can set on to hiring independent contractors without legal or other obstacles. Here are the most useful tips and tricks from our playbook:
1. Create a good independent contractor agreement
An iron-clad contractor agreement doesn't define the worker's status, but it can help you outline the working relationship in a transparent manner. Laying out the groundwork and expectations on both sides makes both sides confident in the relationship.
2. Keep the necessary IRS forms on hand
When working with independent contractors, you need to fill out several forms, such as Form W-9 and Form 1099-NEC. Make sure to always have them on record, along with the contractor agreement.
3. Hire and pay contractors worldwide with Deel
No matter where your contractors live, with Deel you can generate localized contracts in seconds while staying compliant with local labor laws. Deel offers automated tax document collection and worldwide payouts to make your contractor relationships frictionless and hassle-free. Schedule a demo to find out more.