Many employers think that it’s unnecessary to know the distinctions between subcontractor vs. employee and often use these terms interchangeably. But doing so might be legally unacceptable.
Hence, understanding the difference between a subcontractor and an employee is vital because mistaking one for the other might lead to employee misclassification. Moreover, both subcontractors and employees come with their unique advantages and disadvantages.
For instance, hiring a subcontractor instead of a permanent employee helps employers save money because subcontractors aren’t eligible for mandatory employee benefits. However, hiring full-time employees gives employers more control over the work schedules, employee availability, and performance. So, which one should you choose?
This blog highlights the pros and cons of hiring subcontractor vs. employee and answers the question, “is a subcontractor an employee?”
Who is a Contractor?
A contractor is any person offering their services to clients on a contractual basis. It may also be an agency or business that undertakes temporary work contracts. These self-employed individuals are solely responsible for managing their work and taxation requirements. Some contractors can also hire employees and subcontractors to delegate work.
Who is a Subcontractor?
A subcontractor is a self-employed individual who works for a contractor. Subcontractors usually take charge of a specific part of a project taken by the contractor. They are highly specialized in a particular domain,hence, helping contractors finish parts of a project quickly. Hiring subcontractors is a standard norm in industries like construction, retail, technology, etc.
Working as a subcontractor offers financial and professional independence, where they can set their dedicated work schedules for different projects.
Who is an Employee?
An employee works for an organization either part-time or full-time. Unlike independent contractors, they work exclusively for a firm under an employment contract. In other words, they are not self-employed individuals. Employers must provide their employees mandatory, locally compliant benefits, like health insurance, vacation leaves, sick leaves, etc. An employee works for a single organization at a time and has a fixed payment cycle (bi-weekly or monthly).
To hire an employee, the employer conducts a structured hiring process comprising an application, written tests (sometimes), interviews, etc. After selection, an employee receives an offer letter along with an employment contract that outlines their salary, job requirements, benefits, etc., and can onboard the company legally. Employees have set working hours, beyond which they must be paid overtime wages.
What is the Difference Between Employees and Subcontractors?
The factors determining the choice of hiring a professional as an employee or a subcontractor are multifaceted. For example, in the US, the Internal Revenue Service also tiptoes around this complexity and offers a set of generalized guidelines instead of a rulebook.
However, you can distinguish between the two based on certain factors like work schedule, benefits, payments, etc. Clarity on these points helps an employer decide which situations demand an employee and when a subcontractor is a better fit for a particular job.
This section points out the difference between a subcontractor and an employee on multiple grounds.
Type of project
The type of project for which you’re hiring is an important factor to consider before finalizing on any worker. Employees work for long-term projects and offer work stability to your company. They are budget efficient for long-term projects. Subcontractors usually work for short-term projects and are skilled in a niche. Since they’re experienced in their field, they do not require much training, unlike employees. Thus, a subcontractor is ideal for short-term projects that do not demand you to invest in full-time employees.
The work schedule of an employee is largely determined by their employers, unlike subcontractors who set their own schedules. Subcontractors operate independently and can take breaks or off times from their work, as long as they meet the stipulated deadlines. In contrast, employees cannot lag in their work – they must stick to their fixed working schedules.
A subcontractor is self-employed with full professional freedom. They can accept or reject jobs as they please. But an employee doesn’t have the liberty to choose their tasks or projects. They must work on the tasks assigned to them by their employers/managers. Plus, subcontractors can work for multiple clients/projects simultaneously. However, employees can only work for a single employer at a given time.
The subcontractor vs. employee checklist includes a pay structure, which is quite different from each other. Employees receive their salary from their company, and the payment duration is also fixed. They also have a fixed remuneration, sanctioned by the employer before they join the firm. On the other hand, subcontractors receive their payment on a per-project/task basis. They can collect their pay only after completing the job. They don’t enjoy fixed remuneration – it varies with projects, industries, experience, clients, geographical area, etc.
Generally, employers handle the tax filing process for their employees. They deduct a calculated tax amount from the employee’s salary and file taxes for each employee. Contrarily, subcontractors manage and file their self-employment taxes.
Companies hire employees either on a full-time or part-time basis. Naturally, employees have a certain level of work consistency, which isn’t available to the subcontractors. Subcontractors sign for time-bound projects and they don’t earn if they have no projects at hand. Thus, work inconsistency is a part of their job designation.
To complete any job, professionals require numerous resources, like office space, equipment, tools, supplies, etc. While companies provide such resources to their employees, subcontractors must arrange for their work resources themselves.
Availability of mandatory benefits
Employees enjoy mandatory benefit packages, including insurance, medical facilities, vacation leaves, sick leaves, unemployment benefits, etc. The list of benefits given to the employees varies across countries. However, subcontractors aren’t entitled to any such benefits from the companies or contractors they work with.
This subcontractor vs. employee checklist chart sums up the differences for you:
How to Categorize Your Empoyees: Use a Three-Part Subjective Analysis
Categorizing your workers correctly is important to avoid employee misclassification.
Employee misclassification is when the company classifies a worker differently than the standard norms and fails to meet the government-mandated criterion. For instance, a firm has considered a candidate as a contractor or subcontractor. But the candidate is an employee according to the local, state, or federal laws. This is a clear case of employee misclassification.
The government takes employee misclassification seriously because it causes hefty losses of revenue. Hence, it punishes guilty employers by charging monetary penalties and fines.
The IRS presents three categories you must know about while determining employee classification. These are:
- Behavioral control
- Financial control
- Relationship type
When an employer controls the employee directly or their work, it is known as behavioral control. The more control an employer exercises over a candidate’s behavior or dictate their work performance, the more likely they are to be considered employees.
When an employer has the full right to command and/or direct their company’s business and financial domains, it is called financial control. For instance, the decision to invest in tools and resources needed by workers falls under this category. Higher financial control indicates higher chances for the candidate to be an employee instead of belonging to the contractor/subcontractor group.
The type of relationship indicates how workers and their employers interact in their daily communications regarding work matters. Most firms offer benefits like sick leaves, vacation leaves, insurance, pension, medical facilities, etc., to employees. Contractors do not have any such benefits. Likewise, an employee enjoys job security, unlike a subcontractor who maintains a relationship with a client in the duration of the project.
We hope this blog offers clarity on the subcontractor vs. employee debate. Often employers hire both employees and subcontractors to capitalize on their advantages on different use cases. However, managing independent contractors and employees may sometimes get challenging for businesses, especially those expanding to new markets.
In such a scenario, the best thing would be to outsource HR operations to an established PEO-EOR firm like Multiplier. Our experts can handle everything – from employee onboarding to payroll management. Trusted by multiple industrial leaders, Multiplier gives you a chance to tap the global talent hub at minimal risk.
Frequently Asked Questions
What is a subcontractor vs. employee test?
It is a test designed by the IRS to determine a candidate’s classification. The test includes parameters like set hours, and one can choose either affirmative or negative.
What are the mandatory benefits offered to an employee but not a subcontractor?
Any company must provide certain benefits to the employees, like health insurance, pension, provident fund, bonuses, vacation leaves, etc. These benefits aren’t available to subcontractors.
Hiring subcontractor vs. employee: Which one should I choose?
The decision solely remains with the employers. If the project is for the short term and requires a specific skill set, it’s wise to hire subcontractors. If the company wants stability and timely updates from their workers, they can opt for employees.