Whether ‘tis nobler to hire employees or independent contractors is a question of individual business circumstance and need. Where one company hires employees to best control customer experience, another may prioritize the flexibility that only independent contractors (ICs) can provide. Essential benefits and notable drawbacks to hiring employees are listed below.
Benefits to Hiring Employees
- Worker Control: Employers can require employees to wear uniforms, perform specific tasks, and treat customers a precise way. ICs can’t be told how to do their work and can accept or reject any task request. As a result, customer experience may suffer when ICs are hired.
- Worker Loyalty: Job security and team membership are conducive to feelings of pride and allegiance. ICs are not staff, they are hired guns who likely won’t feel the same sense of company loyalty that full-time employees will.
- Company Culture: Through orientation, trainings, and regularly experiencing the behaviors and environment set by ownership, employees are immersed in company culture. ICs are prohibited from attending orientation or trainings and are rarely engaged in company culture.
- Legal Compliance: Uber, Lyft, GrubHub…business models built on hiring ICs are likely to face lawsuits from workers who feel they’ve been treated but not compensated like employees. Hiring employees from the start can reduce the risk of worker status lawsuits.
Drawbacks to Hiring Employees
- Taxes and Benefits: Employers are required to pay taxes and certain benefits to employees. Conversely, ICs are paid a set price for a defined job and there is no requirement for employers to withhold taxes or to pay overtime, health insurance, reimbursements, etc.
- Equipment Requirements: Computers, software, office space, and other support are necessary for employees to perform their jobs. In contrast, employers are prohibited from providing ICs with job tools or otherwise financially investing in them.
- Fixed Scheduling: New businesses may have unpredictable work requirements that make scheduling employees challenging. ICs are hired as needed, which may better serve companies with uncertain demand that don’t need workers covering eight-hour shifts.
- Training Needed: Training typically first occurs during orientation and continues throughout the employee’s tenure. By hiring ICs, an employer gains access to workers with highly specialized skills, often with many years of experience, who don’t require training.
What Does This Mean for Startups?
- Whether a company hires employees or ICs, properly classifying workers is critical. Estimates show more than 30% of employers misclassify workers. Penalties for misclassification include IRS audits, payment of back wages and taxes, fines, and lawsuits. Consult counsel and take action to avoid IRS penalties by determining if hiring employees is right for your company.