Should You Hire an Employee vs Contractor? Here Are the Things You Need to Look Into

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Let me start by saying that I believe that if you want to scale your business, it is better to hire your team members as employees instead of hiring them as contractors. This way, you can impose their boundaries, which you can’t and shouldn’t do with contractors. However, if your business is on a budget or you are just starting to build your team, you can do a blend of these two or hire a contractor first. This lets you decide of should you hire an employee vs contractor.

In the United Kingdom, being a contractor or an employee depends on the business’s relationship with the person being offered the contract. Some questions you will have to answer to determine their position are the following:

  • What is the nature of the work that you want them to do?
  • What does their role look like?
  • How many hours do you expect them to work for you?
  • Who determines the number of hours that they work for you?

 

If the role you have given them has strict boundaries, then they are technically an employee, and you should hire them as your business’s employee. Still unsure? You can do a quick test on this on the HMRC website.

 

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The Differences of Hiring an Employee vs Hiring a Contractor

 

Their Commitment: Employee vs Contractor

The level of commitment between an employee and a contractor is very different. 

When you hire an employee, you have the right to dictate that they cannot take on another job to supplement their income. Both of you approach the job with a mindset that it is a career. As their employer, you dedicate your time to leading them and nurturing them. In return, they dedicate themselves to their role and are accountable for the work that you give them, which accelerates your business.

For a contractor, on the other hand, there are not so many rules or restrictions you can put in place for them. They also have the choice to assign someone else to do the job for them or even look for other part-time or contractual jobs that can supplement their income. This means their loyalties and commitments are divided. You’re just one of their bosses, and you do not hold much of a difference from the other bosses they’re working for.

The Cost of Hiring an Employee vs Contractor

For employees, you will need to process their salaries. You will also have to deduct tax from their payroll, pay for National Insurance, and process their pension contribution requirements. You won’t need to look into these things when processing payments for a contractor or a freelancer, making having employees more costly for you and your business.

However, you will need to review the contract with your employee or contractor and correctly identify them. 

A mistake in identifying them as an employee or a contractor is expensive; 

Because HMRC can look back on your contracts, get back to you and ask you to pay for taxes and contributions that you missed before just because you wrongly identified the person you hired as your business’s employee.

While costs are indeed higher when hiring employees and entail more responsibility from you as their employer, the returns are still better than when hiring a freelancer. Again, the more you commit to leading your employee, the more they will also return that commitment and work efficiently for you and your business. It just works as a two-way street.

Should I not hire contractors anymore?

I am not against hiring contractors, especially if they are your initial hires, or you are just starting to add people to your team, or you can’t afford to pay their hours yet. If you’re still unsure, most business owners hire virtual assistants or VAs first and slowly transition them to full-time employees.

 

During your part-time VA onboarding process, just make sure that they are documenting all the processes in place and all the things they are doing for their jobs in an organized manner. This way, when the time comes that you’ll transition to hiring a full-time employee, you can ask them for those documentations, and you won’t have to start from scratch again.

 

What roles are okay for contractors? How can I identify those?

If you cannot bundle up a person’s role with another role for a full-time position, then the person can be hired for a contractual position. Some of the roles that you can give your contractors are roles that you occasionally or seasonally use. For example,

  1. Designers. If your business doesn’t need a full-time graphic designer and you can’t bundle this up with another skill or another role for a full-time employee, then you can hire a contractor for this job and give them work whenever needed.
  2. Financial functions. Most business owners do not have full-time finance employees until they reach a seven- or eight-million-pound turnover level. Instead, they hire an external service for the business to do the work for them, which mostly happens during tax season.

Again, before hiring your business’s employees, make sure that they have a positive impact or a profitable impact on your business and that you can afford their services and the hours they work for you.

 

Conclusion

Commitment and costs are two reasons I lean towards hiring employees instead of contractors whenever I can afford their services. What we do not want to happen as business owners is the boomerang effect, which is when you assign a contractor to do the work for you, they do not give you quality service. You end up firing them and taking back all the work you’ve assigned, and looking for another contractor to hire. This just becomes a cycle that never ends!

To avoid this from happening, you can make sure that you are moving towards leadership. You need to make sure that you are nurturing, mentoring, and leading them so they can do their work excellently and truly give something to your business. You can only do these things when they are your employees. It requires you to have a firm understanding of your finances and the current needs of your company. If you would like professional input on this matter, don’t hesitate to reach out! Or you can follow us from one of our social media where you can dm us as well

Annette Ferguson

Annette Ferguson

Owner of Annette & Co. - Chartered Accountants & Certifed Profit First Professionals. Helping Online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.

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