$100,000 a year per American job—that’s how much tech companies can save by hiring a contractor instead of a full-time employee, according to the New York Times. It can also be easier to hire quickly for a contractor position than for a full-time employee role. On the other hand, hiring contractors can bring certain challenges—because they set their own hours, work on an as-needed basis, and may work with multiple companies at once, they may be less engaged with your company and brand than full-time workers are, and they may be harder to retain for longer or multiple projects. While hiring contractors could help your business save on payroll and hire quickly for immediate projects or tasks, hiring full-time employees can mean better retention and, thus, better consistency of work in the long term.
4 Key Differences Between Contractors vs. Full-Time Employees
By definition, in the US, the difference between a contractor and a full-time employee boils down to three aspects: behavioral control, financial control, and relationship.
- Behavioral control: Businesses have the right to direct and control the work performed by their employees, according to the IRS. This means businesses can tell full-time employees when, where, and how to work, including the tools they should use and the processes they should follow.
- Financial control: Businesses also control how employees are paid, including the medium (i.e., direct deposit, check, etc.), how much, and when; in contrast, contractors have more leverage in setting their own rates and choosing payment terms and methods.
- Relationship: The IRS looks at various factors to evaluate the relationship between a worker and a business. While no one factor designates a worker exclusively as an employee or a contractor, the IRS looks at a combination of these factors to holistically assess the relationship. Written contracts could spell out the terms of the employer-worker relationship for both contractors and full-time employees, explicitly stating the length of the term of employment or the permanency of the relationship. Businesses hire contractors for short periods of time, temporarily, while bringing on full-time employees permanently. Employees also typically receive benefits such as paid vacation, retirement funds, insurance, and more, while contractors usually do not.
Each state and country may have different tests and rules to distinguish between an independent contractor and a full-time employee, so make sure to do your research by checking with your local government and tax agencies or consulting legal counsel. Determining whether to classify workers as contractors or employees is critical because employers who misclassify their workers can face hefty fines and legal consequences.
However, the differences between contractors vs. full-time employees go much deeper—let’s delve into them.
1. Contractors Dictate How, Where, and When They Work
By law, contractors set their own schedules and working hours, whereas full-time employees often follow the company’s working hours and must either commute to the office or, if they work remotely, be available online at certain times. Because companies can only specify the end product and deadline for a project when hiring contractors, you can rest assured that your project will be complete within a certain time frame—but you won’t have supervision over how and when that work is being done. On the one hand, you don’t need to supervise contractors and manage their hours, as they’ll work on their own time to complete their tasks. On the other hand, it can be harder to contact contractors because you can’t mandate their hours or where they work.
2. Contractors Can Cost Less Overall
While the price tag on services provided by a contractor might be higher than the wages paid to a full-time employee, you may save on payroll over time by hiring contractors. Here’s how:
- Less spent on resources: Contractors invest in their own tools, equipment, and workspaces so that they can be readily available to work at all times. Employees, in contrast, are not responsible for these costs; businesses must pay for and maintain tools for each employee and offices for their workforce.
- Easier to manage costs: Businesses hire contractors as needed for a flat-rate fee or agreed-upon wages per project. Compare this to the costs involved in hiring full-time employees.
- No benefits: In the US, businesses of 50 or more full-time employees must provide employer-sponsored health insurance or receive a tax penalty. Employers also offer paid time off and sick leave (both not required in the US, but offered in many industries); workers comp; and, if the employer is covered by the Family and Medical Leave Act (FMLA), they must also offer FMLA leave to allow employees time away from work as needed. Contractors don’t require any of these benefits.
- No taxes: When hiring full-time employees, companies are responsible for paying employment and payroll taxes, Social Security and Medicare taxes (FICA), and State and Federal Unemployment (SUTA and FUTA) taxes—as well as withholding the employee’s portion and remitting to appropriate tax agencies. Calculating and paying these taxes can be a complicated process that usually necessitates hiring accounting professionals or leveraging external payroll solutions. In contrast, contractors take responsibility for paying their own taxes, alleviating their clients of that extra burden.
- No training: Contractors don’t require training to do their jobs; companies specifically hire someone with the exact specialized skill set necessary to successfully complete a certain task as soon as possible. Employees, though, require more time and training to scale up—and pay for the time spent training them. More on this below!
- Less expensive and faster to hire: Employee turnover is expensive, costing about six to nine months’ salary to replace just one full-time employee—this includes the time necessary to recruit, train, and ramp up a new hire. On the other hand, finding a new contractor should be relatively easy, and employers can pick from a skilled talent pool to find the right person for each job that can then start immediately, accelerating projects.
3. Full-Time Employees Require Training and Development
When hiring a full-time employee, your company commits to providing each individual with training and development opportunities to reach their maximum potential. While costly to provide, these opportunities result in higher employee satisfaction and guarantee that full-time employees have all the knowledge and skills to succeed in their positions for the long term.
- Training: In stark contrast to a highly skilled contractor who can knock out a project quickly, a full-time employee has to go through a training period—and you’ll have to pay them for it. However, you have more control over how they learn to do their work, enabling them to develop a deeper knowledge of the company and brand and to more easily deliver consistently high-quality work.
- Development: Full-time employees need opportunities to grow—whether that comes in the form of upskilling, promotions, raises, or otherwise—or they’ll stagnate, which endangers employee satisfaction and can increase turnover rates.
4. Full-Time Employees Can Be More Engaged
Because of the long-term working relationship forged between companies and their employees, full-time workers are typically more engaged with and committed to a company, which increases the likelihood that they can deliver better work over time.
- Culture: Employees are more immersed in company culture, thanks to forming relationships with each other, seeing each other more regularly, and participating in company events like team-building sessions and trips.
- Loyalty: Though it’s common practice that they sign nondisclosure agreements to avoid giving away company secrets, contractors aren’t beholden to you—they make themselves available to the public and may work for more than one client at a time, including your competitors. In contrast, employees often sign more exclusive contracts where they agree not to work with the competition—contractors may also be asked to sign these agreements, but it’s a less common practice.
- Engagement: Employees are more engaged in the business’s day-to-day operations and meet with their colleagues and supervisors regularly, either in the office or online. Employees may be more involved in the success of the company, seeing themselves as “us” instead of “them”—rather than seeing the employer as an external client, employees view themselves as part of the company. Contractors may consider each project as a one-time or temporary gig instead of a long-term job, which could impact their engagement with the work.
- Work quality: Due to having a long-term relationship with the company and receiving continuous feedback from supervisors, full-time employees are likely to deliver better and better work over time that consistently shows the company in the best light. With contractors, you have much less control over the quality of their work, and they’re more likely to not work outside the strict parameters of their contract, which may mean less room for creativity and growth over time.
When To Hire Contractors
Here are some examples where it may make more sense to hire contractors vs. full-time employees:
- Seasonal projects: If you could use additional help during holidays or certain seasons, but not year-round, contractors can provide an extra boost of support when you need it most.
- Specialized, one-time projects: When you hire a contractor who already has the advanced skills and tools to kick out a specific project, they can handle those one-off needs quickly and efficiently. Some industries where contractors may be especially helpful include copywriting, website design or development, graphic design, social media management, construction or renovation, and bookkeeping.
- Narrow-scope projects: Contractors excel at handling clearly defined deliverables, like 10 tweets per week, a five-page ebook, five hours of bookkeeping, etc. Contractors can tackle projects with a narrow scope more efficiently than broader ones like redesigning an entire website or devising a content marketing strategy.
When To Hire Full-Time Employees
Here are examples of when it may make more sense to hire full-time employees instead of contractors:
- Collaborative projects: Employees may be better suited to handle projects that require interdepartmental collaboration and teamwork, since they have the availability (particularly if project work is on-site) and also may, over time, be at the company long enough to build strong relationships with different departments and team members and to develop long-term institutional knowledge.
- Long-term or ongoing work: If you envision a worker’s responsibilities stretching across multiple months or even indefinitely, hiring a full-time employee for that role makes more sense. Positions that handle higher-level initiatives like diversity, marketing strategy, and operations are examples of such roles.
- Supervision required: Hire full-time employees if your business wants to have more control over how, when, and where workers work, e.g., with work that requires frequent check-ins and timely communication.
- Client-facing work: Employees are often more successful in forging and maintaining relationships with stakeholders, customers, and colleagues. For any client-facing work, e.g., customer success or sales, full-time employees serve as more reliable and knowledgeable points of contact.
Next Steps: Hiring a Hybrid Workforce
For some, a hybrid workforce comprised of both contractors and full-time employees may be the way to go—it all comes down to evaluating your needs and determining which type of worker fulfills them best. Whether you hire contractors or full-time employees, make sure that you thoroughly research your options and classify your workers correctly—the wrong decision could mean hefty fines and penalties for your business.
That’s where we come into the picture: Pilot manages payroll, benefits, and compliance for remote teams. We can help you classify your workers correctly and adhere to all local laws and regulations involved in paying and managing your global workforce. Try Pilot today and find out how.
⚖️ Legal Disclaimer: The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.
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