In the current economic climate, due to the challenges and uncertainties around COVID-19, many businesses are looking to cut costs. Redundancies, pay reductions and terminating external contracts are some of the most common methods we’ve seen.
As the economy improves, and businesses need to increase productivity, should they begin hiring employees or are “expensive” contractors a smarter choice? This post covers five reasons to consider contractors over employees. First we’ll look at the distinction between contractors and employees.
Is someone a Contractor or an Employee?
This is a basic outline of some differences, which are applicable to New Zealand but may not apply in the rest of the world. It is based on the IRD’s IR336 Guide
In general, an employee:
- Works set hours at a set rate
- Must perform their work themselves and can not subcontract their work to someone else
- Has holidays and sick leave arranged and provided by the employer
- Is provided tools, equipment, training and development by the employer
- Has their PAYE and KiwiSaver deducted from their pay automatically by the employer
Whereas a contractor (again, in general):
- Decides how and when they work, including when they will take holidays
- May subcontract their work
- Is not paid for holidays or sick leave
- Provides their own tools and equipment
- Is responsible for paying their own taxes and making KiwiSaver contributions
Why would a company choose to use a contractor instead of employing someone?
Here’s five reasons why you might want to use a contractor.
1. Contractors are great for short term projects
Your business may have a project that it needs to take on short term. This may be the development or implementation of a new system.
For example, as businesses return from lockdown they are looking to be more prepared for business continuity events in the future. A contractor would be perfect to get such a system up and running, and then handing over to someone in house for day-to-day operation.
Using contractors also allows for more flexibility in their work hours. Perhaps they are required full-time for the start of a project but then for only a few hours a week as the project moves to a BAU status. Their notice periods are often shorter, too, so if a project winds up completing early you can easily finish contracts early if necessary.
2. Less compliance work
Even with great processes, it still takes time to manage the administration around an employee, such as keeping track of holiday pay that has accrued and how much sick leave is approved.
PAYE and KiwiSaver must be tracked and filed for employees. Contractors just bill for their work (by hour, day, or project) and make their own PAYE and KiwiSaver contributions. This removes that administration overhead from your business.
Note that in some industries the contractor’s “employer” is required to file withholding tax for the contractor, so make sure to check with your accountant if this is the case.
3. Get higher skills, for less cost
As a business, your budget might not allow for a particular highly-skilled person to be employed full time. For instance, many small businesses can’t justify having a full time Web content manager on staff. Having one contracted for a few hours a week could cover all the website updates you need, without having an employee sitting around when there’s no changes to be made.
The contractor is also able to take on other opportunities while not working for you, so they will be growing their skills and bringing their experience from other companies to your business too.
4. Reduced equipment and office space costs
Using contractors can reduce the cost of equipment for your business. Software contractors usually have their own preference for a development environment, and enjoy their own grunty machines. Rather than having to pay for a fancy workstation for each employee, and manage a number of different software licenses to keep each developer happy, a contractor can bring in their own computer to work on.
A contractor may also be able to work from their own premises, which reduces office costs and space for your business. One positive aspect that may have come from the COVID-19 lockdown is that more businesses are opening up to the advantages of remote work, and contractors are usually already set up for this.
5. No need to worry about personal development, training or reviews
As mentioned earlier, contractors are responsible for their own development and training to stay up to speed. It’s in a contractor’s best interests to keep up to date with the latest developments in their industry in order to stay competitive in the market. This means a business can reap these benefits without having to invest their own capital into upskilling an employee – especially bearing in mind that, with no guarantee of loyalty, this may never pay dividends.
Contractors also don’t require performance reviews, KPI targets, or other things which take up HR and management time. Contractors set their own high standards of work to stay competitive. If they don’t, businesses can more easily end their contract without the same level of due-process as an employee would require.
Caveats to Consider with Contractors
When going with a contractor, there is often the worry that they will up and leave and no one else will be able to take over. That same risk does exist with employees too, to a lesser degree. It’s rare these days that employees will stay at a single company for an extended period of time.
You can reduce the risk though. Any good worker, be they contractor or employee, should be committed to documenting their work.
This includes code, processes and decisions. Good documentation will allow others to more easily take over when they are gone.
Why would you want to consider an employee instead of a contractor?
For longer term work, it can be better to have an employee who is able to be fully trained up on your systems and processes. They can then be relied upon to understand whatever solution they are implementing, and how it affects not just the product but the business as a whole. Contractors are highly skilled in their domain, what normally takes the most time when they onboard is not understanding your technical stack but the business logic it implements.
One of the best aspects of running a company is to provide opportunities for growth to your employees, and watching them achieve their potential. There is not really such a relationship possible with contractors.
Hopefully by doing this you bring loyalty into your organisation, but unfortunately even the most loyal of employees can be poached if the right opportunity is presented.
Building a team
Sometimes you want to put together the best team to build your product, and that can mean that it takes a while to get off the ground as you find the right talent with the best dynamic. Everyone working together for an extended period can really make the team gel, and provide exceptional results. By the same token, we know the old saying “familiarity breeds contempt”, and it can also be good to rotate talent to get a fresh perspective.
In times of business uncertainty, going with a contractor can be a good alternative to having to commit to a full time salaried employee.
The notion that contractors are expensive and unreliable may not be accurate. As well as the skills they bring to your business, when utilised properly they can reduce the total staffing costs too. They can have less administration overheads as well
Just make sure they document well, so you’re not left in the lurch when they’re gone (although this rule applies to employees too!).