Independent Contractor vs. Employee: What’s the difference? [Service Business Edition]

Whether you’re hiring for the first time or looking to expand your existing team, one of the most important factors to consider is the type of working relationship you’re looking for. In other words, should you hire an employee or a contractor? 

With self-employment on the rise (i.e., contract work), this is a question more and more service businesses are facing. And not understanding the difference between employees and contractors can be costly. If a worker is classified as a contractor when they should be an employee, the employer may be liable for back payments of employment taxes, benefits, and other costs. 

With that in mind, let’s examine the definitions and differences between independent contractors and employees. 

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What is a Contractor? 

An independent contractor is a self-employed individual (or business) that provides services to a client for a specific project or a specified period of time. As a self-employed contractor, they are responsible for paying their own taxes and insurance. Unless otherwise agreed, a contractor is also responsible for other expenses related to their work, such as software or tools, materials, etc.  

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What is an Employee? 

An employee is an individual hired by an employer (ie. your service business) to perform work relating to the employer’s business. Although they may work within a specific job role and have duties assigned to them, employees may occasionally perform additional duties relating to the overall running of the company at the employer's discretion.

As a business, you are responsible for withholding the appropriate taxes from an employee’s paycheck, providing benefits (if applicable), and adhering to the relevant labor laws and regulations relating to your industry and state/country. You are also liable for any injuries an employee sustains on the job. In addition, you can control an employee’s working hours, e.g., 9-5, etc., and may employ them part-time or full-time.

In general

• Part-time = between 20-29 hours per week
• Full-time = 30+ hours a week (or at least 130 hours a month)

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What’s the difference between a contractor and an employee? 

Four significant differences between a contractor and an employee are

1. A contractor is responsible for their own taxes, meaning as the employer, you would pay their agreed fees in full, with no withholding
2. Typically, a contractor has more control over their work and when and where they do it.
3. An employee is hired for an indefinite period of time, whereas a contractor is hired for a specific time period or project. 
4. A contractor is responsible for their own safety, whereas a business with employees is liable for any injuries the employee sustains while on the job

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Employees also have certain rights concerning their working hours, benefits, pension, hiring/firing, notice periods, and pay, which don’t extend to contractors. For more information on this, I reached out to Michelle Hague the HR Manager at Solar Panels Network USA to elaborate. Here’s what she said

“Employees must receive at least the minimum wage and are entitled to paid leave. They also have the right to a pension and workers' compensation if they are injured at work. Contractors, on the other hand, do not have these same rights. They may work flexible hours and are typically paid per project, but they are not entitled to benefits such as paid leave or a pension.“

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Should you hire contractors or employees for your service business? 

Whether you should hire a contractor or an employee to join your service business depends on several factors. There is no right or wrong answer, so consider these questions to help you decide. 

• Is cost a significant factor? — Hiring a contractor can sometimes be more cost effective than hiring an employee because you are not responsible for payroll taxes, benefits, or insurance. However, it’s important to account for the cost of recruiting too. Unless you lock contractors in for extended contracts, the cost of constantly hiring new workers might outweigh the cost-savings of choosing a contractor over an employee.
• Does demand fluctuate in your industry, making a scalable workforce preferable? — If your business does 90% of its revenue in the Summer months, it may not be financially viable to have employees you need to pay all year. In cases where you need to increase/decrease your workforce regularly, contractors are a better choice as you can sign contracts for set amounts of time, e.g., four months. 
• Are you overwhelmed with admin? — Hiring an independent contractor over an employee can reduce the admin you need to deal with as you don’t need to manage payroll, benefits, taxes, etc. However, it’s worth noting that admin relating to employees can be significantly reduced through software like MarketBox. 
• How much control over staff do you want? — If you need to dictate specific work hours, be able to assign tasks to your team, or require that they wear a uniform, then hiring employees is a better option. 
• How important is a consistent workforce to your customers? — If you run a service business where who performs the service matters to your customers, e.g., a swim school, physiotherapy clinic, mobile tutoring company, etc., then hiring employees might be a better decision. Employees tend to be more loyal than contractors as they have a vested interest in the company's success, so turnover is lower. 
• Does your service business require a workforce with a specific set of skills? — Contractors are often chosen for their specific skills and expertise in a particular area. However, it doesn’t always make sense to sink money into training and upskilling contractors, who leave once their contract ends. Employees, however, can undergo ongoing training to improve their skills, leading to increased productivity, higher quality services, and improving the job satisfaction of your workforce and your customer's satisfaction levels.

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As you can see, choosing whether to hire an independent contractor or an employee for your service business depends on your business's and its customers' individual requirements. Hopefully, this article has clarified the difference between a contractor and an employee and outlined some factors to consider as you contemplate your new hire.

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For more information on recruiting employees for your service business, check out the MarketBox archive.