Employee or Contractor? – get it right!

June 23, 2008

Being able to make the right choice between hiring a full-time employee and outsourcing a function or activity is crucial for growing small businesses and by no means an easy choice in a lot of cases.

We have put together a list of important criteria to consider before making such a choice.

How long your need will continue for?

One of the most important questions to answer is how long your particular need for the skills in question will continue for. If you are unsure or you are looking to staff a particular project, outsourcing to a contractor or freelancer is the best way to go.

The other parameter that should be examined is flexibility – if you need to remain flexible and being able to easily and quickly divert resources and budget where needed, a freelancer or contractor will be ideal.

Independent contractors and freelancers can be particularly suited:

  • During economic downturns – using a contractor allows you to easily scale back on expenses by terminating the contract. This is not the case with full-time employees as it is legally (and emotionally!) more difficult to terminate, as well as most costly.
  • When you need more help during a particular season/period. Hiring contractors or freelancers is a good way of dealing with seasonal needs while keeping your company flexible
  • What your company is growing but you are not yet at a stage where you can confidently predict future revenues and hence able to justify a permanent hire.

Does it make financial sense?

Before hiring an employee, it is a good idea to do a cost comparison exercise. Depending on the geography, hiring an employee adds an extra 30%-45% to your cost because of the benefits, pension, holiday pay, training, NI and other expenses associated with a permanent appointment.

The above exercise will enable you to compare like-for-like when it comes to comparing the cost of a contractor to that of a permanent employee. It will also enable you to work out the point at which you will ‘break even’ if you were to hire a full-time employee i.e. how long it would take before hiring a contractor becomes more expensive than paying for a permanent hire.

Typically, a lot of small businesses start by outsourcing to a contractor and freelancer and then transitioning to a full-time employee as they are nearing this break even point or as they are confident of future needs/revenues. This is generally a sign that your company is outgrowing the outsourcing arrangement.

What skills do you need?

If you need specialised skills and extensive experience, hiring an independent contractor or freelancer is the easier and most cost-effective way of getting the skills you need.

Small businesses can more often than not struggle to find and attract highly-skilled and experienced staff as they cannot beat the salaries offered by the bigger players or offer the same level of security and ‘CV building’.

If you are a small business, you are also most likely to need a number of different skill sets, making it virtually impossible to find a permanent employee with all the required skills. By hiring freelancers with the necessary skills, you can cover all your needs in a financially viable way.

How much management time can you afford to invest?

A lot of small business owners often underestimate the time they need to devote in managing permanent staff. Trying to grow a small business and properly manage permanent employees can be extremely challenging, so it’s important to only hire when absolutely necessary.

Hiring a permanent employee and not having time to manage them properly will almost certainly result in losing that employee after a few months so it’s important to be realistic when it comes to taking on permanent staff.

Handling performance and personal issues, training, defining work assignments, team-building and similar necessary activities can quickly take up a lot of your time whereas outsourcing to an external provider does not require day-to-day management or assistance as freelancers and contractors get paid to deliver and are expected (and used to) working independently.

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