Hiring Contractors or Employees? What you need to know 🧐
With remote work becoming the rule, you can hire from anywhere in the world. It become increasingly important to understand the differences between formal employment and hiring independent contractors.
The first rule is that you need local advice for your jurisdiction. Labor and tax regulation is very specific to each geography and the last thing you want is to put more tax liabilities into your business for not having the right set up in place. I highly recommend having a look at the solution provided by Deel, a great platform for both employees and employers across the world.
Now let’s look at 3 key points to guide your decision making:
Talent Preference
Costs
Talent Retention
People have their preferences. They may have already the structure in place to be hired as a contractor (and may prefer to keep the engagement in this way), but a few talents may be new to this whole ‘flexible work’ environment and still like the safety that a traditional full-time employment engagement provides. Preempt these questions before doing any corporate engineering.
Now down to costs. While it may seem like it always costs more to hire an employee, contractors usually pay for their own self-employment taxes and benefits. Don’t expect that they will not incorporate that into their hourly rate. They may also have markup to compensate for the lack of predictability on their income - when compared to formal employment.
So even if hiring an employee would incur mandatory benefits and taxes from local employment (that can add up to 40-50% of the salary cost) you could expect the same gross-up being charged by the independent contractor hourly rate. The conclusion is that there’s no obvious answer from the cost perspective.
Lastly, but really not least: talent retention. On one hand, there is the obvious benefit of a moat creation for the employee moving to another company. The time invested in gathering knowledge about the company; the relationships created with internal and external stakeholders - are by no means a factor that employees would consider before making the decision to move on. It is much easier for the employee to just take on another project or client if they are just an independent contractor. That is why is so relevant to provide employee benefits to increase loyalty and relationships that are hard to replicate between the company and employee.
Independent contractors can be a good solution if the work you need to be done is a short-term project (like a new product launch or a website redesign), specialized and transactional (you won’t need to coach the contractor through each step).
A full-time employee is usually a better option if the work is long-term and ongoing, central to what your business does, and highly collaborative. Once duly onboarded, employees augment the work output - they create relationships within other company employees, they understand the business model and can handle multiple projects at the same time. That, in itself, can make employees more cost (and time) effective in the long-run.
Further to the cost efficiency in the long run for full-time employees, there’s also mitigation of tax liabilities. If the engagement with evolves from being a more long-term basis, be mindful. For a few geographies such as the US, the main difference in the definition between an employee and an independent contractor is that the former you control what will be done and how it would get done. With the independent contractor, you only control the output. You should be mindful of these definitions in order to avoid tax evasion from tax authorities.
🎧 Podcast recommendations
▶️ Petter Attia: Patrick Radden Keefe The opioid crisis—origin, guilty parties, and the difficult path forward: Shocking story. Not a very bright future ahead but awareness is more than needed on this topic.
▶️ Business Breakdowns: Bill Doyle - Novocure: Using Physics to Fight Cancer When disruptive technology and the smartest brains in the world try to solve the biggest global health problems the output is transformational. This episode with Bill Doyle, Chairman of Novocure shows how physics is being applied to try to cure cancer. Inspiring.
This is Open Books - a weekly newsletter carefully curated by me, Leticia Souza. Every week I’ll be compiling relevant topics around finance and financial strategy - from choosing your first accounting system to how to successfully close a fundraising round to your business.
In a world full of noise, I aim to bring clarity and direction to your finance processes so you can manage your business in peace. If you find the content useful, do your friends a favor, and please share this newsletter with them.
See you all next week 👋🏼
Leticia
great newsletter