Independent contractors are non-employees who provide professional services to clients on a project- or fixed-term basis. They are self-employed, which means they have complete control over how and when they work. They also need to pay self-employment taxes and do not receive statutory employee benefits from the companies for which they work. They frequently (but not always) contract for multiple companies, working part-time and on a short-term basis for each.
Companies that use independent contractors reap significant benefits, but also take on significant risks. When businesses misclassify their employees as independent contractors rather than employees, they expose themselves to tragic financial and operational consequences.
The fact that there is no single set of rules that determines whether a worker is an independent contractor or an employee complicates matters. Contractor qualification laws differ greatly amongst countries, and sometimes even within states. Companies in Spain, for example, are required to provide benefits to independent contractors who spend 75% or more of their time working with one client. Other countries have different standards for distinguishing between independent contractors and employees.
In this blog, we’re going to talk about some very important advantages and disadvantages of hiring independent contractors. Let’s get started.
The Advantages of Independent Contractors
The use of independent contractors rather than employees has several significant advantages, the most important of which is financial savings.
- You get to save money: Companies are typically paying independent contractors low wages compared to employees. Hiring an employee necessitates additional costs such as payroll taxes, health insurance premiums, employee benefits, office space, and other expenses. For example, additional employee expenses in the United States can add at least 20 to 30 percent to a typical employee's salary.
- You have increased staffing flexibility: Hiring independent contractors allows employers to assemble teams on their timetables. Employers hire independent contractors for a specific project and then relieve them when their independent contractor agreements are completed. There are usually no additional legal steps required to terminate employment, nor is there any need to consider unemployment payments, the continuation of health insurance, or other obligations that employers must consider when terminating an employee. The ease with which independent contractors can be offboarded is precious in foreign markets, where many countries require companies to meet complex legal requirements before terminating employees.
- You’ll see an increased efficiency: Independent contractors have specialized skill sets and require little training to begin working right away. Employers who hire contractors can find the specialized skills required to meet their specific business requirements.
- You reduce your risk of being sued: Employees have a plethora of rights under state and federal laws, as well as a plethora of legal claims they can potentially bring against their employers for infringing on those rights. Many of these laws do not protect ICs because they are independent business people.
The Disadvantages of Independent Contractors
After reading about the potential benefits of independent contractors, you may conclude that you will never hire another employee again. However, there are some significant disadvantages to using ICs, including the risk that your classification decision will be challenged by government agencies.
- You have less power: Hiring a contractor is not for you if you are a manager, supervisor, or boss who likes to monitor their employees and have a lot of say over how and when the work is done and more. Because contractors are not treated as employees, they have a degree of autonomy that prevents you from interfering excessively.
- You take on a lot more risk: Yes, one could argue that even if you fully employ someone, you still have a lot of liability. When you hire independent contractors, however, you expose yourself to a whole new set of liabilities that you can easily avoid with full-time employees.
- You may face tax implications: Many people prefer to hire contractors because they do not have to pay benefits or taxes. The independent contractor, who should only be working for a short time, should not require benefits and should pay his or her own taxes.
- To be able to pay their own taxes, freelancers must usually register as an independent entity. However, in many developing markets such as India, the Philippines, and Vietnam, freelancers avoid registering due to the hassle of following the government-mandated steps, resulting in multiple labor law violations.
- You have no assurance: Even if you avoid all of the previous risks, hiring an independent contractor who is not licensed or referred is a risk in and of itself. You can request a portfolio or samples of work, administer tests, and conduct interviews, but at the end of the day, a contractor is only as good as his or her word.
At best, you'll have a good one who checks all the boxes and meets all the deadlines. At worst, you'll have someone who either botches the job or doesn't finish it at all. Consider hiring someone full-time and having the ability to manage and supervise their work, control their pay, and incentivize them to work harder.
While hiring freelancers and independent contractors has many advantages, the risks and dangers that come with it can be costly. You can easily avoid these legal complexities by partnering with an Employer of Record (EOR) like Skuad.
Leave the stress of complying with labor laws and the headache of figuring out local payroll to us, so you can concentrate on what matters most: your business. Learn more about how Skuad can help you avoid the risks and hazards of hiring independent contractors. Talk to our experts today!