Hiring an Employee vs. Contractor 05.01.2018 | by scaaadmin

Has growth or unexpected circumstances created a need for additional help in your organization’s accounting department?  If so, knowing the dynamics between hiring employees versus independent contractors can be of great value.  Understanding the basics will give you tools that can ultimately provide better cash flow management, better optimize workflow capabilities, and ultimately provide better quality.  Accordingly, here are a few steps and suggestions to consider.

Most organizations typically have 3 options when growth and additional workload arrives.

  • Hire an employee; either part-time or fulltime.
  • Hire an independent contractor
  • Increase the number of hours worked and/or productivity of your existing personnel.

For purposes of this discussion we focus on option 1 and 2 and assume existing staff are working near a maximum number of hours at maximum efficiency.  Accordingly, the following should provide you with some basic steps and insights to consider during the hiring process.

Step 1: Estimate the organizations existing and future staffing needs

Most organizations hiring needs are necessitated by growth or employee turnover.  In either event, you should do your best to estimate current workload as well as expected workload in 6 months and after 1 year.  Looking past the first year can also be useful, but much of the hiring strategies applied to a single year can also be used for year 2 and beyond.  The purpose of this step is to identify variations in staffing needs allowing you to develop contingency plans and make other arrangements with the present and future in mind.

Step 2:  Determine availability of qualified personnel resources

Hiring through an employment or contracted structure both provide challenges to finding qualified personnel. Location, demographics, and job complexity play major roles in our hiring decisions. Hiring in a rural area versus a large city will produce far different results in finding qualified personnel. Depending on available options, the organization may even need to consider training programs to develop qualified workers.  Just like employees, there are contractors that provide good high quality services and other that provide bad low quality service.  Before you hire any contracted service provider, you need to assess their qualifications, including the firm’s reputation, experience, qualifications, and contract flexibility.

Once you have a good estimate for service hours needed and availability of personnel resources, you should consider the advantages and disadvantages of hiring an employee vs. a contracted service provider.

Contracted Services Considerations:

  • Needs Based Agreements

When contacting services you can usually design the agreement so that services are provided based on needs and workflow. For example, you may need 10 hours of services in one week and 40 or more the following week.  With this type of agreement, you can create flexibility as it relates to growth capabilities and cash-flow management.  In contrast, an employee setup usually requires the employer to commit a specific number of hours per week, regardless of workflow.

  • Access Multiple Levels of Expertise

A contractor can usually offer access to a wide range of expertise by providing access to multiple individuals.  Our CPA firm, for example, can provide clients’ access to individuals with skill-sets that range from bookkeeping experts to executive level assistance.  Typically an employee will possess a certain level of abilities until new skill-sets are developed.

  • Expected Efficiency Through Specialization

A provider of contract accounting services would be expected because of specialization to be more efficient then an employee hired to do the same job.

  • No Employee Benefits

It is very unlikely that a contacted provider would ever be paid for vacation, sick time or any other benefits.  In addition, contractors will usually provide their own buildings, equipment, etc.  Although most employers pay contractors more per hour than they pay employees, it is often possible that the overall cost and production can be better filled through a contractor relationship.

  • No More Vacancies

When you contract services to our organization we expect you to have an indefinite relationship term.  Unlike employees, contractors don’t carry the turnover risk within a company.  Employees can quit, find a new job, become ill, retire, or be fired. When this happens it can create voids, the lead to a disruption of workflow.

  • Reduce Certain Lawsuit Exposure

Employees have many rights under state and federal laws, and therefore, exposure to variety of legal claims can be an eminent threat to the organization.  Contractors are independent business people, so they are not protected by many of these laws.  However, legal matters will continue to exist in any relationship and you should consult an attorney to assist in mitigating the risk related to contract relationships.

Employee Relationship Considerations:

  • Favorable Pay-rates

The hourly rate paid to an employee is typically less than the rates charged by a contract provider.

  • Constant Access

Your employee is likely on the job and on-site during most business hours.  This is especially beneficial when something comes up and needs to be addressed right away.   However, technology has drastically enhanced our ability to access those offsite by use of remote desktop access, shared file portals, Email, texting, video conferencing, and many other communication tools.

  • Closer Supervision and training capabilities

Employees can be more closely supervised, which provides an environment for more training opportunities and teaching of other processes tailored for your organization.  Independent contractors use more autonomy to decide how best to do a task.  Additionally, monitoring and controlling how a contractor performs their duties can create a risk of making the contractor look like an employee, for whom the law says you should be paying payroll taxes, workers’ compensation insurance premiums, and more. Therefore, if you want to exercise significant control over what your workers are doing and how they’re doing it, classify them as employees.

  • Team Environment

If your organization is building toward a path of more organizational culture your employee is a part of your team while the contractor is a part of another organization’s team.

  • Growth Capabilities

Your employee can be trained and developed into career-long professionals dedicated to your organization.

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