Business ebbs and flows. Some months, your team might be slammed. At other times, it’s tumbleweeds.
You might be working on a project that needs a very specific skill that, as great as your team is, no one has in their tool kit. Or, you just can’t find the exact right person to bring on full-time, but the work still needs to get done.
The solution to these problems is often the simplest: hiring an independent contractor.
We’ll walk you through the difference between employees and contractors, the pros and cons of hiring a contractor, and best practices to keep in mind.
Key takeaways:
- Employees and contractors aren’t the same, and knowing the difference is essential.
- Contractors offer many advantages, including specialized skills, reduced costs, and flexibility.
- An Employer of Record can simplify the process and reduce the risks associated with hiring contractors.
Independent Contractor vs. Employee: What’s the Difference?
First things first, let’s look at what an independent contractor is and how they differ from an employee.
Independent Contractors
An independent contractor is self-employed and operates as a business entity. They may work for more than one client at a time and typically:
- Set their own schedule
- Pay their own business taxes
- Don’t receive benefits from the companies they work for
- Use their own equipment
- Are paid according to the terms of client contracts
Employees
On the other hand, an employee works directly for an employer. They also:
- Are required to work the specific hours set by their employer
- Don’t need to file payroll taxes
- Receive benefits, such as health insurance or a 401(k)
- Use equipment issued by their employer
- Are paid on an hourly or salaried basis
Advantages of Hiring Independent Contractors
1. Global Talent Pool
One of the most significant benefits of working with contractors is that you’re not limited by geographic area.
You can literally hire someone from anywhere in the world to do the work as long as they have the chops you’re looking for.
If the contractor lives in another country, you’ll also benefit from a different perspective.
Not only will this help diversify the viewpoints and insights of your team, but the contractor might also be able to provide insight into a market your company is eyeing for a potential future expansion.
2. Access to Specialized Skills
Say your company is working on a project requiring in-depth data analysis, backend development skills, or copywriting. Basically, anything beyond the scope of the work your employees typically perform.
Hiring a contractor gives you instant access to someone with these specific skills who can come in, perform the work needed for that particular project, and then move on to their next gig.
3. Ability to Flex With Business Needs
Hiring contractors instead of employees offers companies the flexibility to adapt quickly to fluctuating workloads without the long-term commitments that come with full-time hires.
This is especially beneficial during periods of increased demand, such as seasonal peaks, or when tackling large, short-term projects.
For instance, if your business anticipates a temporary surge in activity during a specific season or takes on a project that requires additional hours for only a limited period, bringing on a contractor can be a more efficient solution than hiring an employee.
4. Fast Onboarding
While it’s still important to clearly outline expectations with contractors, since they’re typically hired to work on a specific project, it’s generally much faster to onboard a contractor than an employee.
Unlike employees, contractors don’t need to go through benefits enrollment or lengthy HR processes such as orientation sessions. Since contractors are already familiar with managing their own work setup, tools, and timelines, they should be able to integrate quickly into projects.
5. Easy Re-Engagement
One benefit that companies often don't think about with engaging independent contractors is the ability to easily re-engage them on future work.
Since your contractor has been acclimated with the company already, understand how deliverables are handled, and you have them in your payroll system — you can avoid all those tedious tasks.
Now the contractor can just pick up where they left off and start on the project much sooner.
6. Cost Savings
Contractors operate as a business entity, so your business won’t have the same expenses as you would with a full-time employee, such as benefits, healthcare, retirement contributions, and paid time off.
Employers also save on payroll taxes since contractors manage and pay their own taxes.
7. Trial Run as a Potential Full-Time Employee
Depending on the country, there can be a lot of laws and regulations around terminating an employee.
France is a good example. So, if you hire someone and it doesn’t work out, it could be time-consuming and costly to terminate their employment.
Hiring someone initially as a contractor allows you to “audition” them for the job before hiring them as a full-time employee. Then, if it’s a match, you can convert the contractor to a full-time employee.
Best Practices for Hiring Contractors
Before bringing on a contractor, there are several steps you should take to make sure the person you’re hiring will be the right person for the job and to protect your company from potential risk.
Review Their Portfolio
Ask to see samples of tasks performed for other clients. This will allow you to see examples of their past work and assess if they possess the skills needed for your project.
The portfolio should also highlight the diversity of the contractor’s skills and provide insight into their ability to adapt to different types of work or challenges.
Check Their References
Ask for a list of past clients and reach out to get their honest feedback on their experience with the contractor.
Some questions to ask should include if the contractor was able to:
- Meet deadlines
- Communicate effectively
- Deliver quality results
Also, ask references if they’d hire the contractor again and why/why not.
Perform a Background Check
Even if they’re not coming on board as a full-time employee, you’ll want to ensure the contractor is trustworthy, reliable, and legally eligible to work on your project.
A background check will also verify their identity, professional qualifications, and if they have any past financial instability or criminal history.
Verify Insurance Coverage
Check to make sure that any contractor you’re considering hiring has insurance coverage to protect your business from potential liabilities.
For example, suppose a contractor is injured on the job or makes an error that results in a financial loss. In that case, their insurance can cover these costs, shielding your company from legal or financial responsibility.
Your business might be liable for accidents or damages without proper insurance, resulting in potentially pricey lawsuits. Verifying a contractor’s insurance ensures that both parties are protected, and reduces the risk of unforeseen costs and legal complications.
Define the Scope of Work
Be as detailed as possible when describing what work the contractor is expected to perform, and verify that you’re both on the same page.
Outlining specific tasks, deadlines, and the quality of work expected will help avoid misunderstandings and reduce the risk of scope creep or project delays.
It will also serve as a reference point for tracking progress and ensuring that the contractor stays focused on the agreed-upon objectives, which improves the chances of a successful project outcome.
Create a Contract
When hiring a contractor, there are several elements that it’s imperative to include in the contract to ensure clarity and protection for both parties.
The contract should stipulate the following:
- Scope of work
- Task details
- Deliverables
- Project timeline
- Deadlines
- Payment rates
- Payments terms
Including confidentiality agreements or non-disclosure clauses is vital if sensitive information is involved.
The contract should also spell out that any work created by the contractor for your business will be the sole property of your business, and you will retain intellectual property rights.
And the contract should also cover liability and insurance requirements and provisions for termination — specifying how and under what conditions either party can end the agreement.
Establish Communication Expectations
Be proactive in setting communication expectations at the beginning of the engagement. This could include establishing regular check-ins to answer questions, assess the contractor’s progress, etc.
It’s also essential to discuss response times. Since they aren’t your employee, a contractor can work on their own schedule.
If they’re based in a different time zone that requires asynchronous communication, you’ll want to establish parameters in advance. For example, you might stipulate that you require a response within 24 hours of reaching out for an update.
Keep Records of All Payments to Contractors
Even if companies are not required to withhold taxes from a contractor’s pay, keeping detailed records of all payments made to contractors is essential. Businesses must often provide contractors with specific information to help them accurately file their taxes.
For example, companies hiring U.S.-based contractors are required to issue Form 1099-NEC. When hiring international contractors, U.S. companies must complete IRS Form W-8 BEN, which certifies the contractor’s foreign status and allows them to claim any applicable tax treaty benefits.
Potential Disadvantages of Working With Contractors
While there are many reasons why working with contractors can be beneficial to your business, there are some potential downsides to consider, too, such as:
- Less control over work/schedule: A contractor can set their own hours since they aren’t your employee. They may also be juggling multiple clients, potentially delaying progress or communication.
- Potential for flakiness: The stakes are lower for a contractor than an employee, and there is the risk they might drop off the face of the earth in the middle of your project, especially since they probably won’t feel the same sense of loyalty to your company as an employee would.
- Communication difficulties: If they’re working asynchronously, communication could be challenging. Depending on where the contractor is based, there could also potentially be language and/or cultural barriers impeding communication.
- Low culture integration: although contractors will offer valuable specialized skills, it may be challenging for them to integrate with the team or company culture due to limited involvement and remote work. If you don't have a process in place, that can impact morale and make contractors not smoothly fit into the daily workflows as easily.
- Misclassification risk: Different countries — and, in the case of the U.S., different states — often have strict laws to determine if someone is an employee or a contractor. For example, a worker must pass the ABC test in California to be considered a contractor. Misclassification can result in serious financial penalties.
Hire Contractors with RemoFirst
Hiring contractors can be a real advantage for your business, but it can be time-consuming and require a lot of due diligence. One way to save time and minimize risk is by partnering with an Employer of Record (EOR) like RemoFirst to meet your contractor hiring needs.
RemoFirst allows you to manage contractors in 150+ countries on our contractor platform at no charge. Other benefits include:
- Built-in contract generator: Create customized contractor agreements based on local laws and company policies.
- Identity verification: Ensure the credibility and safety of your hires with immediate verification results.
- Guided onboarding process: Our platform ensures contractors can enter their information and get onboarded quickly and efficiently.
We also offer a full-service option that allows you to pay your contractors through RemoFirst with one invoice, and contractors will receive payments in their local currencies.
Another plus is that if any of your contractors are based in the U.S., RemoFirst will file the 1099-NEC forms on your behalf.
The RemoFirst contractor dashboard also includes any necessary tax and compliance documents to ensure your team is compliant, no matter where your contractor is located.
Register now and start hiring contractors through RemoFirst today.
