Holly founded ExitPromise.com as well as StartupPromise.com and so far has answered more than 3,000 questions asked by business owners about starting, growing and selling a business.
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According to the Fair Labor Standards Act there is a distinct difference between an employee vs. independent contractor. This difference lies mainly in the way they are paid and the way taxes are withheld. Understanding the difference between them and times when both are appropriate to use can help business owners determine which is best for their situation.
Who Controls the Work? Employees vs. Independent Contractors
The main distinction between an employee and an independent contractor lies in who controls the work. In an employee/employer relationship, the employee’s work is dictated by others. When, where, and how they do the work is determined for them. Independent contractors however, have the ability to manage their work. They make decisions on when, where, and how the work is completed.
Independent contractors typically have their own business and may work for several companies at once while employees only work for one business. Employees are given training regarding the work to be performed while independent contractors are expected to hit the ground running.
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Pay & Benefits for Employees vs. Contractors
In terms of compensation, employees are eligible for all benefits and compensation offerings afforded by the company. Independent contracts are offered a billable wage and are not eligible for company benefits or other perks.
There are many benefits of using independent contracts such as reduced costs and liability and flexibility in hiring and firing. However, the cost of misclassifying an employee as an independent contractor can result in thousands of dollars in back wages, benefits, and fines. A key distinction is the extent to which the independent contractor makes his or her services available to the open market. It is risky for an employer to hire an independent contractor who does not have a presence in the marketplace.
When Should I Hire an Independent Contractor?
There are distinct situations where independent contractors make sense. For short term projects or in a startup situation where the work will only be performed for a short period of time, it may be wise to hire an independent contractor rather than invest in full time employees. If you have work that needs specialized skills and a person who can come in and make an impact quickly, then you may need an independent contractor. Finally, if you do not have time to manage the individual and need them to work independently then a contractor may work out nicely.
In summary, the key to determining whether an employee or independent contractor is the best fit can be answered in a few questions. Who has control of the work? How long with the project last? How much time and money does the business want to put towards this on its own? If the business has control, the project is ongoing, will always be an integral part of the business, and the time and money are sufficient to support a full time employee, then it is best to hire direct. Otherwise, an independent contractor offers great flexibility and long term cost savings.
[…] first employee. From deciding whether you need an employee or a contractor, something I wrote about here, to figuring out the true cost associated with hiring, this talk will give business owners the […]
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