In today’s recruitment landscape, it’s not uncommon to hear of business owners hiring independent contractors. Business owners can get the specialized help they need to complete a project without having to expend efforts on training and shell out money for employee benefits and taxes. But before you get started read on for the five things you need to know before hiring an independent contractor.
1. The difference between an Independent Contractor and an Employee
The very first thing you need to know is the difference between an independent contractor and an employee. While this may sound like quite a basic principle, you’ll be surprised at how gnarly and complicated this definition may be. Depending on where you live and the department of labor laws related to independent contractors, the definition of independent contractors versus employees may vary.
Generally speaking, the main differences between the two can be outlined as follows:
- Independent contractors are paid per project, pay their own taxes, use their own equipment, work offsite, and can usually work when and where they want
- Employees are paid a regular wage, have their taxes withheld, use company owned equipment, report to a company office or facility, and have a working schedule that is dictated by their employer
If you’re hiring an independent contractor, make sure your agreement matches the key factors that differentiate an independent contractor from an employee. If even one factor matches those of an employee, you may be liable to misclassification and other risks (see number three).
2. The pros and the cons
Before undertaking any action that will impact your business, it’s always good practice to do a quick study on the pros and cons of your decision. In this case, the pros and cons can be summarized below:
- Save money: Paying independent contractors may generally come out cheaper than paying full-time employees. The reason for this is that employers will usually spend more on paying their employees’ taxes and benefits, as well as incur costs for space (office) and supplies for employees, as compared to independent contractors who will not need any of these.
- Staffing flexibility: If you have a limited budget and can only afford a lean organizational structure, hiring independent contractors to work on a per project basis allows you the freedom to hire, work with, and terminate your staff following an easy cycle, instead of having to follow the usual workplace regulations.
- Increased access to skills: The main reason business owners hire independent contractors or freelancers is because they are skilled in a certain area. Let’s say you want to hire a freelance designer to design your website. It’s a one time project that doesn’t require full time engagement, which means hiring a specialized talent like a freelance designer can come in handy.
- Save time: By hiring specialized talents, you save yourself the time and effort you would have needed to train and manage an employee. Independent contractors will usually just need to know the nature of the job, be given a set of instructions, and can work independently with minor supervision.
- Less potential for lawsuits: One of the major headaches of employers are the lawsuits that employees can file against them. Depending on your country and its laws, employees may have a large amount of fodder they can use to take legal action against you. The possibilities of lawsuits such as wrongful termination, discrimination, and compensation are significantly lower with an independent contractor.
- Less control: If hiring independent contractors helps save you time, money, and effort, it also comes with the downside of less control. Because these are specialists who know what they’re doing, you’ll be putting a lot of faith in them completing the job without much interference on your end. While a few back and forths are acceptable on the job, there is the possibility where the outcome of the job will not match your expectations.
- Intellectual property: This can go two ways. First is that you may have to give out sensitive information to independent contractors with no guarantee that they will keep this information private. The second factor is that an independent contractor may provide you with copyrighted works which you may lose ownership over. This can apply to photos, designs, writing, etc. To help avoid this, make sure you iron out the intellectual property rights for the project in a written and signed contract beforehand.
- No exclusivity: Because independent contractors are free to work for whomever they choose, there’s nothing to stop them from working for your competitors. If you have given them access to sensitive information, this can also prove to be risky for your company.
- Potentially higher turnover: If your workforce is made up of a majority of independent contractors, you are essentially keeping a revolving door in your recruitment pool. This type of setup may work for some companies and businesses, but if you’re looking for the stability and longevity of a group of workers, you might want to consider hiring full-time employees instead.
3. Misclassification and other risks
Besides the disadvantages mentioned above, one of the most critical cons of hiring an independent contractor is your exposure to misclassification and other risks. Misclassification happens when a governing body deems the nature of an independent contractor’s job as that of an employee. This is why being aware of the definitions and differences between an independent contractor and an employee is extremely important. The consequences of misclassification usually result in heavy fines on the company’s end as well as increased scrutiny under the governing body.
Unfortunately, misclassification in Asia is not uncommon. In 2018, the Philippines’ Department of Labor and Employment cracked down on the Philippine Long Distance Telephone Company, mandating that they regularize over 8,000 contractual workers, and pay a settlement fee of approximately $1.8M USD. In 2019, the Indian multinational company Infosys, was fined $800,000 USD for worker misclassification and tax fraud.
To avoid misclassification, you have to be aware of your local labor laws and pay particular attention to the misclassification clauses. While our general description of an independent contractor and an employee should apply to most countries, it’s always best to err on the side of caution. You can also take this up with a lawyer just to make sure you have all your bases covered.
4. There is still a lot of paperwork involved
Even though independent contractors will only be working for you for a short amount of time, it is even more important to ensure that you have the necessary paperwork ready. Depending on where you are based, there are still a number of forms you may need before you start the hiring process. In the U.S. for example, employers will still need to collect tax information from their independent contractors.
Besides this, having an iron-clad contract that specifies the scope of the project, the owners of the finished product (to protect yourself from property rights), billing and invoicing, payment, and the withholding of taxes is an absolute must.
Other additional documents you might want to consider to avoid entanglements in the future are a non-disclosure agreement, a non-compete agreement, and a non-solicitation agreement. However, you must make sure your independent contractors are aware of all of these agreements before they agree to sign the contract, as signing these additional documents may be a deal breaker for them.
If you want to avoid the headache and stress that comes with copious paperwork, you can use companies like Multiplier that allow you to effortlessly generate a contract and set up an easy payroll system for your independent contractor. With Professional Employer Organizations (PEOs) like Multiplier, you can also rest easy knowing that the amount of risks involved in hiring an independent contractor are limited because you’re entrusting the professionals to help you hire and employ your independent contractors legitimately.
An Employer of Record or EOR, is a service that assists companies in outsourcing expertise and engaging with independent contractors through an existing legal entity.
5. Some form of background check is highly recommended
Even though independent contractors may end up working for you for a short period of time, do not skimp on vetting them before you hire them. A bad hire can cost you time and money, with the worst case scenario being that the independent contractor runs away with your money and does not even complete the job.
It’s only normal to undertake some form of background check when it comes to hiring. Whether it’s an independent contractor or a full-time employee, you can apply the same recruitment protocols for both. Take a good look at their resume, ask for a portfolio and some references, especially from their previous employers and colleagues. You can also set up an interview process where you schedule a one on one video call with them to verify if this is someone you want to entrust work to.
At the end of the day, hiring an independent contractor will really boil down to the nature of the job. If it’s a project that can be completed in a certain amount of time without much supervision on your end, that’s a perfectly acceptable job description for an independent contractor. If however, you want more say and control over the job, will require the individual to be present during certain hours, then you may want to consider hiring him or her as an employee instead.