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.
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.
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.
Four significant differences between a contractor and an employee are
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.“
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.
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.
For more information on recruiting employees for your service business, check out the MarketBox archive.
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