Contract Employees Versus Direct Hires. Which is Right for Your Business?

It’s a happy day when your company finally lands that big piece of business you’ve been pursuing for what seems like an eternity. But, then the unnerving reality sets in: you need to staff up immediately in order to actually complete the work. What’s the best way to do it? Do you recruit new employees, bring in temporary contract hires, or a mix of both?

To determine the ideal approach for your company, it’s important to understand the difference between a direct hire and a contract worker—and the benefits and drawbacks of each.

What’s the Difference Between Contract Workers and Direct Hires?

In the last decade or so, economic forces, demographics, and advances in remote digital communications technology have produced a burgeoning population of freelancers and independent contractors. In fact, according to the results of a January 2018 NPR/Marist poll, one in five jobs in the U.S. is held by a worker under contract and that number is expected to increase to 40 percent by 2020. This trend, coupled with record low unemployment is making it increasingly necessary for employers to use independent workers to fill in their workforce gaps.

A contract worker is a professional who works for a company temporarily either through a talent acquisition company such as LINK, or as a freelancer. It is common for contractors to possess some specialized, value-added skill that distinguishes them. Oftentimes, companies pay contractors by the job—or for their output—and not on an hourly basis, but that can vary, depending on the contract.

While companies can hire freelancers direct, there are logistical and legal reasons to hire a contract worker through a recruitment agency. For starters, just because a prospective candidate tells you they are an independent contractor, it doesn’t necessarily mean they comply with the legal requirements of the employment designation. The laws in this case are the Fair Labor Standards Act, administered by the IRS and the U.S. Department of Labor, and the Affordable Care Act, administered by the Department of Health and Human Services. The federal government has strict guidelines when it comes to ‘employee’ classification which can be confusing and a source of compliance trouble for employers.

By contrast, direct hires are permanent, full-time employees (FTEs) that are added to the company payroll and subject to company control over how they perform their work. Unlike, independent contractors, FTEs are eligible for company benefits and warrant an investment in training and other onboarding efforts. In addition to paying FTEs’ wages, companies are also responsible for all related payroll taxes, social security and benefits, such as health insurance and paid-time off.

Contract Hire or Full-time Employee: Key Considerations

In addition to the logistical and legal issues outlined above, a cost-benefit analysis is helpful for companies deciding between a contract worker and a direct hire.

Full-time employees generally cost more than contract hires. In addition to the full-time employee’s salary, they pay on average an additional 50 percent for benefits, social security, and payroll taxes. So, a $50,000 salary actually costs a company close to $75,000. And, companies must also factor in the rising costs of benefits and salary increases over time.

In addition to the relatively high cost of hiring full-time employees, interviewing, onboarding and training a new hire can take weeks or months—which may not be practical for a pressing project deadline. In fast turnaround situations, contract or contract-to-hire is often the best route. Here are other key benefits of adding contract or contract-to-hire employees:

  • Contractors offer specialized expertise to complement your workforce which can reduce your risk on large projects or they can help you meet a spike in your workload.
  • Contractors make sense in a rapidly-changing business environment or industry.
  • Contract-to-hire is a good way to “try out” a contractor to be sure they perform well and are a cultural fit before offering them a full time job.
  • If the economy is sluggish, or your business outlook is mixed and there’s a threat you might have to lay off employees. It’s easier to terminate a contractor than a full-time employee.
  • To reduce the expense of employee turnover.
  • To minimize the impact of bad hiring decisions.
  • To keep company headcount at a minimum which may be important to investors.

But, there are decided disadvantages of hiring independent contractors over full-time employees:

  • Employers have less control over the workers and their work.
  • Contract workers can make it difficult to foster team and company loyalty.
  • Using contract workers results in high turnover, which negatively affects culture.
  • You may not own the copyrights to the contractor’s work.
  • You risk running afoul of employee classification labor and tax laws when using contractors, if you aren’t up to speed on regulations and don’t vet them carefully.
  • The flip side of being able to terminate a contract worker at will is that they can move on to the next job at any time (and given the nature of their work, they’re likely always to be on the lookout for the next gig).

The advantages of hiring permanent, full-time employees include:

  • They’re likely to be more stable, engaged, committed and loyal to the company, resulting in lower turnover.
  • They’re more likely to be team players.
  • Management can impose more control over how, when, and where employees do their work.
  • Direct hires allow companies to avoid employee-contractor classification compliance issues.

The Benefits of Working with a Recruiting Firm

These are challenging times for companies trying to find needed talent—whether it’s a direct hire or an independent contractor. Working with a good recruitment agency can streamline the process, keep turnover rates to a minimum by reducing the chance of bad hires, and ensure your company doesn’t run afoul of complex employment law.

LINK can help with your contract, direct, or contract-to-hire workforce needs. Contact us.