Small businesses are relying on independent contractors more each year. In fact, the growth rate of independent contractors significantly outpaces that of small business hiring, meaning employers seemingly prefer to bring in outside consultants and freelancers rather than hire full-time employees.
According to Paychex, the growth rate of independent contractors peaked in August 2017 at 11 percent growth year over year. That number has since declined to 5 percent year-over-year growth in August 2018, but still far exceeds the less than 1 percent year-over-year growth small business hiring has seen since 2013.
Much has been made about the growth of the gig economy, a colloquial term for the rise of temporary and freelance workers. Independent contractors clearly have capitalized on the shifting marketplace and the new normal of temporary work arrangements, but are they right for your small business?
Here’s a look at the advantages and disadvantages of working with independent contractors as well as what you should consider before deciding to work with one.
The advantages of hiring independent contractors
Why are independent contractors so popular amongst small businesses? They offer a few unique advantages over full-time employees that make them attractive to business owners. These include the flexibility an independent contractor offers to the business as well as the reduced overhead costs of working with a contractor compared to hiring a full-time employee.
One of the biggest advantages of working with independent contractors is the flexibility they offer to your business. You can contract with them as needed and only repeatedly use the contractors that deliver quality work. They offer small businesses access to top talent that might otherwise be inaccessible to them in a competitive labor market.
“Independent contractors can be a more flexible resource option for new and evolving businesses,” said Nicholas Daukas, managing partner of KardasLarson.
In a fast-paced environment, it pays to have a stable of people on call for one-off projects or short-term work arrangements. If business picks up, independent contractors can pick up the slack. If you sign a big client, you can bring on trusted independent contractors to help.
“As the pace of change has accelerated due to [technological development], companies have seen the need to have more dynamic and flexible work models,” said Carlos Castelán, managing director of The Navio Group. “Independent contractors have grown in popularity as a response to the dynamic market needs and the need for companies to access top talent on a project or short-term basis.”
Reduced labor costs
One of the biggest appeals of working with independent contractors is the reduction in labor costs it affords a small business. When budgets are tight but work still needs to be done, expanding the full-time team could be a costly proposition. Independent contractors can fill the void without demanding an excessive and repeated cost to the business.
“Hiring independent contractors over full-time employees means reduced overhead costs,” said Gary Nealon, serial entrepreneur and president of Nealon Solutions.
Full-time employees naturally cost more in wages week in and week out, whereas independent contractors require a one-time cost per project. Employers also must cover their share of the Social Security and Medicare taxes for a full-time employee, whereas they do not for independent contractors.
For many small businesses, full-time employees also represent benefits costs, including pricey healthcare insurance benefits. For small businesses working on a tight budget, avoiding these costs and parting ways once the project is finished make independent contractors an attractive option.
The drawbacks of hiring independent contractors
Independent contractors also come with certain risks of which employers should be wary. Independent contractors represent themselves at the end of the day, so you need to be sure they are reliable, trustworthy and effective, especially when they are working remotely.
Managing remote workers
You might already have some remote full-time workers that either come into the office occasionally or telecommute entirely. However, managing a remote independent contractor is a bit different. With full-time employees, the odds are high that they are focused only on the work you’ve assigned them. Independent contractors, on the other hand, almost certainly have other clients.
“Most contractors will work remotely, and you may not have their full attention, as they are more than likely working with other clients and companies,” Nealon said.
Consider requesting that independent contractors install some sort of employee monitoring software, which typically has a freelance mode suitable for remote contracted workers. That way, you can accurately measure time and hold independent contractors accountable for the work they perform for your business.
Editor’s note: Looking for employee monitoring software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.
Loss of workplace culture
Workplace culture is often seen as an intangible and, as such, is easily put on the back burner in favor of the balance sheet. However, workplace culture and a reliable core team are essential elements in a successful small business.
“Although costs are greater, employees are important culturally for an organization,” Daukas said. “[They] promote retention and teamwork.”
Not only do you lose the benefits of establishing a positive workplace culture and developing the loyalty of a cohesive team, but you also risk the sudden loss of an independent contractor. That can spell disaster if you rely on them for a large amount of work.
“There is always the potential for them to jump ship easily for another company,” Nealon said.
A new contract or changing circumstances can end a contractor’s availability forever. You don’t want to put yourself in a situation where you have no regular team to fall back on in the event a contractor cuts ties or becomes unavailable for an extended period. A reliable base of employees that are always available to perform is critical to your business’s continued success.
Varying degrees of quality in work
If you are not highly familiar with an independent contractor’s work, you could find yourself with lower-quality results than you expect. Moreover, you must trust independent contractors to deliver their work in a timely manner; otherwise, you’ll be on the hook for missing clients’ deadlines.
“One key thing to do to avoid a potential downside is to be clear on expectations in terms of the deliverables,” Castelán said. “Communication and check-ins with the contractor will minimize the potential downside risk.”
In addition to clearly articulating (ideally in writing) your expectations for an independent contractor, you should require them to produce examples of their previous work. While these are likely going to be cherry-picked examples that showcase the best of their portfolio, it will at least give you an idea of the contractor’s capabilities.
Once you develop a working relationship with an independent contractor that you trust, it’s important to keep them engaged by periodically offering them additional work. That way, you won’t have to forge new relationships every time you need to bring in an outside worker.
What to consider before hiring an independent contractor
Before deciding whether to partner with an independent contractor or to hire a full-time employee, you should ask yourself several questions. Understanding the advantages and disadvantages of an independent contractor, as well as your business’s unique situation, is key to making the right decision. Before bringing on an independent contractor, ask yourself:
- Is this role a vital part of my company?
- Could my business meet demand if this worker left suddenly?
- Am I comfortable managing a remote worker?
- Does this worker fit the regulatory definition of an independent contractor?
- Can I trust a contractor to deliver quality work in a timely manner?
Working with independent contractors requires a great deal of trust. Ideally, you have seen examples of a contractor’s work if you’ve not already worked with them firsthand. For certain projects or busy seasons, independent contractors could offer a huge benefit to small businesses at a manageable cost.
However, entrepreneurs should not so readily shirk the benefits that come with a stable of reliable and loyal full-time employees. Every business is different, but finding the right blend of contractors and full-time employees for your company can help balance the pros and cons of both, and make your business nimble and effective in an evermore fast-paced environment.