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The Ins and Outs of Hiring: Employees or Contractors

Posted on 11.03.2016

:: By Corey Bray, LegalNature ::


An important step in growing your business is hiring the right people for the right positions. There are usually two options: employees or contractors. The term “freelancer” is very ambiguous and is generally used to describe a self-employed independent contractor, who is a contractor nonetheless.

Risk Management in Action

The first risk management issue is making sure that you are classifying these two groups appropriately. The main issue here is, just because you call someone a "contractor," it does not necessarily mean that in the eyes of the law and the IRS they are actually contractors. It is usually more cost-effective to hire contractors because employees bring with them payroll taxes and health insurance requirements.


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Employees vs. Contractors, What’s the Difference?

Let's explore what makes these two hiring types unique and what could be the better fit for your business based on their differences:

Supervision:

A contractor should be provided with identifiable tasks and a set deadline for those tasks to be completed. Outside of these set terms, there is normally very little if any supervision for the completion of those tasks. If the contracting party is intimately involved in the overseeing and day-to-day management of those tasks (for example, setting working hours), then there is a higher likelihood that the contractor will be seen as an employee.

Means of work:

Although specialist equipment must sometimes be provided by the contracting party, in most cases a contractor should already possess or acquire their own means of completing the work.

Payment:

Employees are normally paid at regular intervals, whereas contractors’ pay is normally linked to results and meeting deadlines.

Ability to incur loss:

A contractor is usually at risk of incurring a loss of profit, whether that be due to higher cost of work materials or the need for them to outsource work. This is opposed to employees who receive the same salary no matter what.

Hiring Employees – What Are the Considerations? 

When hiring employees, there are several considerations to take into account. The first one is the employment costs per employee. Not only is there a salary to be paid, but there are also additional employer taxes and benefits. A business needs to be sure that it can meet these payments every month.

Maintaining health and safety standards should also be a high consideration when hiring employees. It is the responsibility of every employer to ensure that they provide a safe working environment. This, in practice, means that all threats should be eliminated from the workplace and all employees are adequately trained in safety procedures related to their jobs. Every employer should have a safety policy and procedures document in place and regularly monitor employees to ensure that the procedures are followed. This will mean different things to employers depending on the industry and environment they are in. Even an office-based location should have health and safety procedures in place, ranging from the correct office equipment to first aid.

Remember that you are going to be dealing with human beings and all the problems and issues that come along with that. Having the correct HR policies and procedures and training in place is key to risk reduction. Without the correct knowledge and processes, you run a higher risk of being non-compliant with labor laws and employee actions.

Employer liability also needs to be mitigated. When taking on employees, you are taking on agents that represent and act on behalf of your business. Your business could potentially face liability due to employee's' negligent or tortious actions. With proper supervision and the correct procedures in place, you can mitigate your company’s exposure to these types of claims.

In terms of insurance, when you have employees, workers’ comp is always a must, whereas this does not apply to contractors. However, if the contractor is going to be on your premises, it is important to have adequate general liability insurance.

So, there you have it. What are some of the hiring procedures that you have in place? We would love to hear them!


Corey Bray is the CEO and Founder of LegalNature. A serial entrepreneur, Corey has successfully exited several startups and is currently focused on revolutionizing the business document industry.

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