Employees vs. Independent Contractors

The differences, definitions, and duties

Although it may seem as though employees and independent contractors are similar in the roles that they play in helping a business to succeed, there are a number of key differences that set them apart.
Both employees and independent contractors have different responsibilities and obligations to the businesses that they contribute to. The businesses and clients that they work with also need to meet different standards depending on whether they are considered the employer or customer of the individual.
To better understand what separates an employee from a contractor, it helps to start with a simple definition of each.

What is an employee?

An employee is someone who works for a business in exchange for a specific wage or salary. The business that they work for is responsible for withholding taxes from each paycheck and must provide a W-2 form to their staff members for each year that they are employed. Employees are also entitled to benefits from labor laws, such as minimum wage.
Typically, employees:
  • are eligible to receive benefits,
  • only work for one company,
  • are given training,
  • and do not have to provide tools or a workspace.
Employees can be temporary, permanent, part-time, or full-time workers, and they must adhere to a work schedule provided by the employer.

An employee signs an Employment Contract after accepting an offer from a potential employer.

What is an independent contractor?

Independent contractors typically work for themselves and make money by providing their services to clients (either individuals or businesses). Independent contractors are often freelancers with specialized skills who work or consult on specific projects.
When a business hires an independent contractor, it is the consultant who must ensure that they deduct the proper amount for taxes. The business is not required to provide benefits, training, workspace, or tools to the contractor, and will usually provide a Form 1099 instead of a W-2 form.
Independent contractors may work for multiple clients at a time and are generally hired temporarily. Because independent contractors work for themselves, they can set their own hours, choose their workspace, use their own tools, and negotiate their own rates and fees.
Some of the most common types of independent contractors include freelance writers, developers, designers, accountants, publicists, marketers, and analysts.
  • are eligible to receive benefits,
  • only work for one company,
  • are given training,
  • and do not have to provide tools or a workspace.
Employees can be temporary, permanent, part-time, or full-time workers, and they must adhere to a work schedule provided by the employer.

Consultants, freelancers, and contractors sign an Independent Contractor Agreement after negotiating terms with a client.

What type of hiring contract should I use?

The type of document used when bringing on a new worker helps to define the business’s obligations and responsibilities to that person, as well as theirs to the company. It is important to ensure that the correct document is created and that the terms are relevant to the employee or contractor so that they understand what is expected of them.

Employment Contracts

An Employment Contract is a document that dictates the terms of a relationship between a business and their employee. It includes information about the type of employment (full-time or part-time, temporary or permanent), information about the company and employee, and details about the position, such as:
  • Job title and description
  • Whether the employee will need to pass a probationary period
  • How often the employee will be paid, and how much (salary, hourly, commission, etc.)
  • Vacation time, work hours, and overtime
  • What (if any) confidentiality, non-solicitation, or non-compete clauses will cover
Employment Contracts are generally created after a candidate has accepted an Employment Offer and are typically provided by an employer.
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Independent Contractor Agreements

An Independent Contractor Agreement is used to define how a business and a contractor will work together. These contracts may be provided by either the client or the consultant, and include information such as:
  • The duration of the contract
  • A description of what services the contractor will provide to the client
  • Details about the freelancer and the business or individual hiring them
  • How much the contractor will be paid and when
  • If there will be a deposit on the work, and what happens if a client pays late
  • Information about expenses and intellectual property
Independent Contractor Agreements are usually made after the contractor and client have negotiated terms and discussed the work that needs to be done. Sometimes a contract may only last for the duration of a project, for example, coding a website, and other times the work may be ongoing, like providing marketing support.
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The pros and cons of hiring employees

There are pros and cons to employees, both from the jobholder’s perspective and the employer’s. Weighing them against each other can help to determine whether it’s best to go the employee or freelancer route.
Pros of employees
Both from a hiring perspective and a worker perspective, hiring or being hired as an employee can be beneficial in the following ways:
  • They are more likely to be a part of the team and the office environment.
  • They typically receive consistent, long-term paychecks which is good for the worker and can be less costly for an employer than hiring a contractor.
  • They can assist where needed, helping to grow their experience in different areas.
  • Having job security makes employees more likely to stick with a business long-term.
  • Employers are able to exercise more control over things like hours, wages, and deadlines.
Independent Contractor Agreements are usually made after the contractor and client have negotiated terms and discussed the work that needs to be done. Sometimes a contract may only last for the duration of a project, for example, coding a website, and other times the work may be ongoing, like providing marketing support.
Cons of employees
There are some downsides to hiring an employee for your company, or even to being hired to work for a business. These include:
  • Vacation time. Employers will need to provide it, and employees will be restricted to taking it when an employer allows.
  • Salaries. Employees may cost more over time than a contractor because of things like vacations, overtime, and benefits, although contractors tend to charge more per hour or per project than what an employee would receive.
  • It is easier to end a contract with a client or freelancer than with an employee or employer.

The pros and cons of independent contractors

Alternately, independent contractors come with their own pros and cons. Although they may be perfect for some projects or roles, they may not be the best fit for others.
Pros of independent contractors
Independent contractors can offer a lot of benefits to businesses and individuals looking for support from skilled and trained individuals. Some of these benefits include things like:
  • Short-term contracts. If, after a project is complete, either party doesn’t want to continue working together in the future, there is no obligation for either the freelancer or the client to sign another contract.
  • They tend to specialize. This is great for clients as they get an expert’s advice where they need it, and freelancers are able to focus on what they do best instead of generalizing.
  • They don’t cost overhead for the employer and contractors can choose their own hours and workspace.
Cons of independent contractors
Despite all of the positives that come with consultants, there can also be negatives, such as:
  • Contractors often take clients on a first come, first serve basis. That means that the employer and contractor may not get to work together in the future.
  • Consultants aren’t part of the staff, so they may not be as knowledgeable about the product or service as a long-term employee would be.
  • Because contractors work for themselves, they can be more selective about the projects that they take on.

Merging employees and contractors in business

As you can see, employees and contractors come with their own sets of rules and regulations, as well as their own pros and cons.
The important thing to remember is that no matter which you hire or decide to become, both can contribute positively to a business. In fact, many businesses often enlist freelancers to help with projects outside of their internal staff. This can help businesses to optimize their workers, and contractors to take part in projects that fit their specific skillsets.
Make sure to start off on the right foot by making either an Independent Contractor Agreement or an Employment Contract so that the type of employment is clear from the beginning. As long the parties involved understand the expectations and responsibilities of their roles, there’s no reason why the outcome of the relationship shouldn’t be positive.
Know someone looking to hire an employee or contractor? Help them out with this guide:
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