Hiring independent contractors in IT & telecoms can appeal for many reasons. For small businesses particularly, being able to hire as-and-when avoids the financial commitment of a permanent employee.
In some situations, such as requiring specialist skills for a short period of time, hiring contractors can be the right option. However, it is not a decision that should be rushed into. The complexity of tax laws governing contract work and risk of fines means taking prior legal advice is highly recommended.
It is important to understand each other’s legal obligations for both client and candidate. Candidates should bear in mind that, although working as a contractor reduce tax liability, it is usually at the expense of foregoing company benefits such as a pension, car allowance, and private health cover. It is important, therefore, to figure this into any salary negotiation.
Being aware of the pros and cons of both employee and contractor options enables companies and candidates to make the right choice.
Pros of Hiring Contractors
Companies that want to grow internationally often contract mid and senior level managers to work as consultants. This allows small businesses to avoid the up-front costs of setting up a physical office or having to set up a legal entity in order to employ staff.
Filling a short-term skill gap
Hiring contractors can benefit businesses who need a specific skill for a short period of time. If the business needs to accomplish something which is not part of everyday operations, then hiring a contractor for a short period can move things forward.
Legal Obligation of the service agreement
When written in a legally binding format, service agreements or statements of work obligate the contractor to deliver what is outlined. This gives the business owner piece of mind that they have legal recourse should the work not be fulfilled as stated in the contract.
Cons of Hiring Contractors
Complex tax laws
In the UK, the IR35, or ‘off-payroll working rules’ have been designed to prevent tax evasion. They are also meant to prevent avoidance of paying benefits to employees such as sick pay.
In theory, businesses shouldn’t get into problems by employing contractors on a project-to-project basis. However, the IR35 law is extremely complex. In the UK, getting it wrong can result in heavy fines if employers are found to contract workers long-term. For this reason, it’s worth talking to a financial or legal advisor to check where your business stands.
Lack of commitment
Although the idea of no-strings help can be appealing, employers need to remember that the lack of commitment cuts both ways. To prevent loss of earnings, contractors are continuously searching for the next opportunity. This means they’re unlikely to be available whenever it’s convenient as they need to be constantly working.
Finding the right person for the job
Just as with permanent employees, it is important to determine whether contractors are the right person for the job.
In the UK, the Statement of Work acts as a legal contract to ensure specific services are performed. However, this doesn’t guarantee that the work will be up to the employers’ standards.
As the interview process for contractors is often very quick, with the intent that the candidate should start in a few days’ time, the risk of contracting the wrong person is greater. A thorough assessment of both the contractors’ skills and personality should be used to avoid dissatisfaction.
Contractors usually cost more
Generally, the shorter the contract, the more expensive the contractor’s daily rate. Contractors balance the lack of employee benefits and the risk of being out of work in between contracts by charging a higher premium for their services.
Contractors are often recruited through agencies which specialise in temporary workers. As the contract is managed by the agency, an additional expense is the agency’s monthly fee to cover payroll and their legal obligations as an employer.
The differences between working with contractors and employees can be challenging for some employers. Being self-employed, contractors are often highly independent and may be reluctant to adapt to a company’s way of doing things. Most contractors also want to stick rigidly to tasks outlined in the contract which can cause frustration for businesses who haven’t made their needs absolutely clear in advance.
All new workers, whether contractors or employees, take a certain amount of time to get up to speed. Human panel found it ‘typically takes from five to eight months for a new employee to reach full productivity.’ This suggests the idea of ‘hitting the ground running’ is a myth, whether the employee is permanent or temporary.
A period of reduced productivity while new employees find their feet is justifiable with employees likely to stay for a long period of time. However, contract workers who stay long enough to adjust to the way a company works are then likely to move on, meaning this investment is wasted.
Pros of Hiring Employees
Permanent staff can be just as cost-effective
Although employers might feel they are saving by not paying contractors employee benefits, this is often cancelled out by having to pay more by the hour. Contractors may demand a higher rate because they offer an in-demand skill set. However, all contractors tend to charge more to factor in the lack of benefits, such as sick and holiday pay, that employees receive.
Return on Investment
Hiring contractors can be a good choice for a skill not required for day-to-day operations. However, if the organization needs this skill set over the long term, investing in a permanent employee offers a better return on investment. Employees tend to adapt better to the culture of the company and, unlike contractors, make up for a period of adjustment by staying longer.
Sometimes companies want to experiment with new technologies and therefore start out with a contractor. However, if these technologies become adopted long-term, recruiting a skilled permanent member of staff is preferable to developing a reliance on contractors who often move on.
Greater Stability and Control
As they have a vested interest, employees tend to be more motivated to improve company performance than contractors, who are usually on focused on money. They also develop a greater knowledge and understanding of the business which helps improve team work and efficiency. Keeping everything in-house by hiring permanent employees also reduces the risks around keeping private information secure.
Cons of Hiring Permanent Staff
Although hiring contractors can be more costly per hour, hiring employees is a bigger commitment not simply because of employee benefits. Onboarding and training, payroll, monitoring performance and management add money and time into the equation when making a permanent hire. However, investing in staff improves not only the stability of the workforce, but according to Forbes, improves business performance and profits long-term.
The importance of hiring the right person
Hiring permanently makes it even more vital to find the right person. As hiring employees is a significant investment, it’s important that the company receives a good return. Hiring mistakes, especially at a management level, can be costly; a Recruitment & Employment Confederation report calculated the price for mis-hiring a mid-management professional on a salary of £42,000 at around £132,000 including recruitment, training and lost productivity.
Current talent shortages and unemployment at a 48 year low in the UK, Europe, Oceania, and North America makes finding people more difficult than ever. Putting effort into refining and speeding up the recruitment process is even more important.
Many companies enlist professional help, especially for hard-to-fill permanent positions like executive leadership in sales and other key business functions.
As well as saving time, a reputable recruiter with industry knowledge can ensure the cost of hiring proves excellent value. Working in partnership with clients, they can shortlist strong, relevant candidates through highly developed and effective selection processes.
Specialist recruiters who deliver candidates that match the job and company culture result in a good, long term ROI. The right candidate can grow and deliver year on year, resulting in an attrition rate well below industry norms.