The question of whether to hire an Employee vs Contractor is a big topic in the world of business. As you’re growing your business you may be wondering about whether contractors or employees are the best way to go.
When you’re growing a business, you’re probably growing a client base, and so you’ll need to also growing a team. So that means you’re going to be directing a lot of your efforts into hiring and training up your staff.
Here’s a few areas you might consider in the process, or if you’re trying to decide whether contractors or employees are going to be best for you in the short, mid and long term.
Cost and Hidden Employee vs Contractor Costs
Managing your costs as you grow is really important. And the reality is that staff cost money, whether they are employees or contracts. When you’re paying a contractor, what you pay is usually all you pay. Whereas with employees you need to plan ahead, and be more organised.
What you pay each pay-run is only part of what you are actually having to pay. You need to put aside PAYG and Superannuation into a savings account because it’s easy to spend it if you don’t.
On the flipside, contractors tend to charge more to account for the fact that they have to bear all their own costs, so they aren’t necessarily more affordable. Given this, you need to weigh up the other factors, because cost isn’t going to tell you everything you need to know when growing your business.
Contractors are more expensive up front but once they’re paid, that’s usually all you owe them, although you still need to be careful because some contractors must be paid superannuation, or may even be deemed an employee by the ATO.
Employees are cheaper up front but you need to plan ahead for additional payments like PAYG, superannuation, Workcover and long service leave.
Contractor vs Employee compliance and Legalities
This is the perfect follow on from talking about the cost of employees vs contractors. Because not only do you need to set aside money for your employees costs, but you also have a higher level of compliance. Fairwork is pretty strict on business owners, and that’s often a good thing, because it means businesses have to treat there employees fairly.
However this puts a huge burden on business owners that is simply not relevant when hiring contractors, for example, making sure all the correct entitlements and allowance are tracked and paid. And also terminating staff in the correct way, so that you don’t get caught for unfair dismissal.
Contractors can be terminated easily and come with a lot less compliance and extra entitlements to worry about.
Employees must be paid correctly and terminated fairly, which means you need proper processes in place and accurate advice.
Risk and Errors Of Employees vs Contractors
When you hire an employee, you are liable for the risk if things go wrong, for example if they make mistakes and have to re-do the work, you have to pay them for all their hours. Where as with contractors you can expect them to fix the mistakes free of charge.
Contractors are usually liable to fix their own mistakes free of charge, just make sure it’s in their contract! Contractors should always have professional indemnity insurance, so it’s important to check this before hiring them, in case something seriously goes wrong, you want to be covered.
Employees can make mistakes and you have to pay for it to be fixed, employees are protected by the Fairwork laws so when you hire them you agree to take on the responsibility if they don’t do a good job.
Intellectual Property With Contractors vs Employees
On the other hand, when it comes to your Intellectual Property, if you hire a contractor, make sure that you’re very clear in your contract about ownership of work completed.
With employee contracts, any work completed by the employee belongs to your business, but with a contractor, if it’s not stipulated in the contract, you might find that when they leave, they have the right to take some or the work they completed with them.
Contractors may own rights to the work they have completed if they decide to leave, so make sure your contracts are very clear about ownership.
Employees don’t own rights to the work completed on the job, so if they leave your company they can’t use the intellectual property that they developed on behalf of your business.
Contractor vs Employee Focus and Loyalty
When growing a stable team and a great culture, you need people who are there for you, and focusing on what your business is working on. Contractors are often juggling multiple clients, and often from a range of different industries, meaning that they don’t have 100% of their focus on what you’re doing. So you can find the contractors, for the long term, will really be focusing on growing their business at the end of the day.
That’s not to say that employees necessarily care about the future of your business, but you have a much better chance, if you treat your team well, and have the right people that they will grow to love your business. As a long term strategy, building a loyal team of people who believe in your company vision.
Contractors are often focused on many other clients at the same time and at the end of the day their ultimate loyalty is to their own business.
Employees have more opportunities to be focused on your business and to become loyal, longterm team members.
My Personal Experience With Our Contractor-To-Employee Transition
As you read through this you may have been wondering ‘why bother with employees’ and think ‘they seem more trouble than they are worth’. And that may seem true on the surface, but as you can see, there are definite advantages of having employees rather than contractors.
In the start up phase of my business I relied on contractors, but when I moved beyond start-up and entered the growth stage of my business, I started to realise that having contractors might not work long term.
What happened in the beginning is fairly natural; we were hiring contractors to fill various needs that were arising in the business. We ended up with a lot of contractors, each only focusing on their specific area of expertise, and it because difficult to collaborate the team. And it was very expensive and eating into our profits.
What changed for us was that we received the following advice from a trusted advisor, who said;
Contractors are great to fill a need for short term, but my strong belief is that if you want to build a strong company and team culture, you need to have more employees, and less contractors.
When I heard this, I didn’t believe it at first. I was convinced that our contractors were loyal and loved working for us, in fact I actually thought that if I offered any of them a job with us, they would take it. So I tested the waters and not a single contractor was interested in working with us long term, and quite a few of them said they felt their ultimate goal was to grow their own brand. (Which, by the way, is not wrong or bad, it just wasn’t going to work for us long term.)
So I accepted the reality, and began the slow, difficult process of redeveloping the roles the business actually needed, rather than the business growing around the contractors skillsets. It took us close to eight months of hiring (and firing) to get together a team of A-players.
Now we have a team of motivated people, who love what they do, and so importantly, love working for us and with our clients.
Are You Ready To Grow Your Team?
If you’re in the growth stage of your business you may want to consider this for yourself. We can help you in the transition phase; it’s not easy in the short term, but the long-term benefits are great.
Hopefully this has given you some insight, and if you need some help planning or transitioning to employees, I can help you in a few ways;
- Looking at your bigger picture and breaking it down into smaller goals
- Working our which team members and skills sets are missing or present in your business
- Setting up your staff onboarding processes and payroll system
- Creating a financial budget for your team
- Reviewing your existing payroll for accuracy
CEO & Founder
Off The Hook Bookkeeping