After years of economic upheaval, we face a serious talent crunch. A historically low unemployment rate has given employees the upper hand in recruiting, and they now have many more options in their choice of work.
Increasingly, many workers have turned away from the traditional mold of full time employees and work as contractors.
Contract workers offer specialized skills and expertise to companies and organizations for specific projects or set timeframes to meet a company’s needs.
Contract workers and contract employment are now so common that the trend has a specific name – the gig economy. The gig economy has been great for companies because it keeps them agile and responsive to changes in the industry.
Contract workers are known by many names – contractors, independent contractors, freelancers, and even work-for-hire staffers. Whatever they’re called, they’re found in every sector in every industry, not just technology. Contract employees work in design, marketing, and even healthcare and education.
Working with a contract employee makes sense for many companies. An employer can use specialized talent without finding and hiring a full-time employee.
By using contact employees, companies have more flexibility and can save a great deal of money. But there are also potential problems, such as potential legal liabilities and a changing workplace dynamic.
A contract employee is hired for a specific project or a certain timeframe for a set fee. They’re often hired due to their expertise in a particular area, like writing or illustration. It’s important to understand the key takeaways when dealing with contract employees:
- Legal and Taxation Differences
Contract employees are paid differently from full time employees and receive a different tax form. Instead of a W-2 form, they receive a Form 1099-MISC for compensation. This form is essentially a receipt. The contractors use this form to calculate and pay federal income tax because their clients aren’t required to pay taxes on their behalf. This distinction impacts the responsibilities of both the employer and the contract employee when it comes to taxation and legal obligations.
- Benefits and Time Off
Contractors don’t receive the same benefits as full time employees. They also don’t receive paid time off. Companies aren’t required to provide contract employees with holidays, sick days, or personal or vacation time. This makes their income directly reliant on the hours worked and accessibility to new contracts upon completing projects.
- Employment Contracts
A contract employee is taxed like a business, and as a business, it’s important to give them an SOW or Statement of Work. For contract employees, this will be a contract outlining the terms and conditions for their role. This document should clearly state the business name, the name of the employee, and any other obligations or expectations the business owner or employer has for the contract worker’s status.
- Expertise and Flexibility
Hiring a contract employee can be a great option for companies seeking specific skills or expertise that may not be available in-house or that they will only need occasionally. There are several ways contractors can be paid. The pay method depends largely on the nature of their work.
Understanding these key takeaways can help both employers and contract employees navigate the unique aspects of contract employment and make informed decisions regarding its benefits and potential challenges.
Defining contract employees
A contract employee is a type of worker who is hired for a specific project or a definite timeframe, typically with a set fee.
A contract worker is often an expert in a particular area, such as writing or illustration, and is brought in to provide skills that may not be available to the organization’s internal employees. These workers are also called independent contractors, freelancers, or work-for-hire staffers.
Contract workers don’t have job security, health insurance, and other benefits as full time employees. They are also responsible for managing their own pay payroll taxes and benefits because they are considered self-employed.
However, contractors generally receive more pay and autonomy than a full time person.
Full time employees are usually paid a salary, which is taxed. They may also have health insurance, retirement benefits, and bonuses from their employers. These benefits are part of their commitment to work for the company exclusively.
Independent contractors and freelancers are similar to contract employees and often interchangeably used. They decide their own hours and work schedules, work independently, and are paid based on the completion of specific projects or tasks.
Independent contractors and freelancers are considered self-employed. The company they provide services for is considered a client, and they are responsible for paying their own taxes directly to the government.
A contract employee is usually directly hired by a company for a specific task or project, while a self-employed individual operates their own business, seeking clients and customers.
Pros and cons of using contract employees
There are benefits and potential negatives when hiring contract employees.
Pros of using contract employees:
- Flexibility—Contract employees are hired for a specific project or a specific time period, which gives businesses more flexibility than hiring full time employees.
- Cost savings—Contract employees don’t have benefits or payroll taxes deducted, which means they often cost less than full-time employees, which can save businesses money.
- Access to specialized skills—Contract employees can often bring specialized skills and experience to a business, which can be helpful for completing specific projects or tasks.
- Reduced risk—Businesses are not as exposed to risk when they hire contract employees, as they are not responsible for providing benefits or severance pay.
Cons of using contract employees:
- Lack of commitment—Because they aren’t full time employees, contract employees are unlikely to be committed to the business.
- Communication challenges—Contract employees are unfamiliar with the company’s culture and procedures and often may not be from the same country as their clients.
- Legal risks—Companies should be careful when using contract employees due to potential liabilities that don’t occur with full time employees.
Deciding whether to use contract employees should be based on a company’s circumstances. Using contract employees comes with potential benefits and risks, and the best decision for a business will depend on its specific needs.
There are s things to keep in mind when deciding to use contract employees:
- The nature of the work—Some types of work are better suited for contract employees, such as short-term projects that require specialized skills.
- The company’s culture—Some companies have a culture that is more conducive to working with contract employees than others. For example, more flexible and less bureaucratic companies may be more open to using contract employees.
- The cost savings—Businesses need to carefully consider the cost savings of using contract employees before making a decision.
How to find contract employees
Finding contract employees involves many of the same strategies used to attract qualified candidates for full time employment. Companies must create clear and detailed job descriptions for contract positions, outlining the required skills, responsibilities, and project duration.
Companies should be prepared to respond to potential candidates’ inquiries and applications and conduct thorough interviews and assessments to ensure the best fit for their contract roles.
Casting a wide net through multiple channels, screening carefully, and defining the arrangement in detail will help secure the best contract employees for your needs.
General job boards
Many companies use the same general job boards to find suitable contract employees as they use to find full time employees. These job boards, such as Indeed or Monster, are easy to access and provide a wide range of opportunities.
Employers who use general job boards should indicate whether they are looking for a contractor in their ads.
People looking for work on a contract basis can search by using specific keywords and refining their search based on location, experience level, and industry.
Contractor job boards
While general job boards are useful, contractor-specific job boards offer more tailored opportunities for freelancers and independent contractors.
These niche platforms host contract positions exclusively, so they can often provide more targeted results for job seekers looking for contract work.
Job boards like Upwork, Freelancer, and Guru are created for contractors and employers who are looking for them. These platforms allow employers to post contract opportunities and review candidate profiles to find the perfect fit.
Social media platforms like LinkedIn can also be excellent resources for finding contract employees.
Employers should also post job listings on their company pages. It’s also a good idea to share updates with relevant industry groups.
Personal and professional networks can be an invaluable source for finding contract employees. Networking events, industry conferences, and professional organizations can provide opportunities to meet potential contract workers in person or through online platforms.
Referrals from trusted colleagues or industry associates are often more reliable than recruiting through traditional methods.
How to choose the right contract employee
You may have many contract employees to choose from. Fortunately, a few key differences in criteria can help you find the right contractor.
Portfolio and work examples
Professional contractors generally have portfolios and work examples showing their skills, creativity, and work experience.
Look for contractors who have done similar work to the position you’re hiring for. Remember to focus on the contractor’s specific role in each project as well.
References and recommendations
Your next step should be obtaining references and recommendations for the contractors you’re considering. Contact previous clients for first-hand information on their work ethic, professionalism, and delivery.
Be sure to search for online reviews and testimonials on platforms like LinkedIn or other professional websites.
Taking the time to screen candidates, evaluate skills, and check references carefully increases the chances of finding the right contract employee for your gig.
One of the most effective ways of selecting a contractor is to use testing to measure the contractor’s abilities. The best, most efficient way to do this is by using a performance based assessment by a good, reputable firm like TrueAbility.
Performance-based assessment puts potential employees and candidates in the position to show their work abilities in real-world situations. This gives companies the truest sense of what a candidate can bring to a job, whether as a full time worker or a contracted employee.
Adding a contract employee to your team
Adding a contractor to your team can promote a more collaborative work environment. When done right, this makes it more likely that a project will succeed.
The preboarding phase is crucial for contract employees. During this time, the employer and contractor should exchange signed agreements outlining their collaboration’s terms, including payment terms, project scope, and termination clauses.
Onboarding for contract employees may be a condensed version of the standard process for full-time employees. It often focuses on specific job-oriented tasks and familiarization with the company culture.
Companies should provide contract employees access to all the necessary tools, information, and resources. This can include providing access to internal employee communication channels, relevant business software used, and attending team meetings.
Legal compliance with contract employees
Contract employees have different administrative duties and concerns than full time employees.
By addressing these administrative concerns proactively, organizations can effectively manage their contract employees and maintain a positive and productive working relationship throughout the contract duration. It is essential to have clear policies and procedures to handle contract employee management efficiently and in compliance with the law.
When classifying workers, it’s important to understand the difference between contract employees and traditional employees. One major difference is the amount of autonomy a contractor has versus permanent employees.
The Internal Revenue Service defines a contractor as having more independence and control over their work than full time employees and a higher degree of control over work conditions and hours.
Often, contract employees provide their own equipment and resources. On the other hand, full-time employees are expected to use company resources.
Taxation is another significant consideration for contract employees. Unlike traditional employees, contract workers do not have their taxes withheld by the employer.
This means contract employees are responsible for withholding their own taxes and paying both the employer and employee portions of Medicare and Social Security tax at a self-employment tax rate of 15.3%.
For tax purposes, contract employees receive a 1099 tax form from their clients, while traditional employees receive a W2 tax form from their employer. Contract workers should be prepared to pay quarterly estimated payroll taxes to avoid penalties and fulfill their tax obligations.
Paying contract workers
Contractors are typically paid differently from a regular employee, as they are not considered permanent members of the organization. The contractor’s payment method can vary depending on factors such as the nature of the contract, the contractor’s preference, and legal regulations.
Methods of compensation
The best payment method for contract workers will depend on the specific project or task. If the project is time-sensitive, hourly payment may be the best option. Project-based payment may be a better option if the project is more complex. If you want to ensure that the contract worker is motivated to generate sales, commission-based payment may be the best option.
- Hourly—This is the most common method of payment for contract workers. Companies pay them an hourly rate for the time they work.
- Project-based—Contract employees can also be compensated based on project completion. Companies agree on a fixed price for the project and pay the contract worker when the project is complete.
- Salary—This payment method is similar to how a full-time employee is paid. Companies agree on a salary for the contract worker, and you pay them that salary regularly.
- Commission—Contactors in sales are often paid a commission based on the revenue the contract worker generates. Companies agree on a commission rate, and you pay the contract worker a percentage of the sales they generate.
Unlike full-time employees, contract employees are not covered by minimum wage and overtime regulations. This means that business owners have more flexibility in determining the pay rate for contract employees, which can be particularly advantageous for small businesses with tight budgets.
However, ensuring that the agreed-upon compensation is fair and competitive is important to attract and retain quality contractors.
The primary purpose of an employment contract is to define the rights, responsibilities, and rules of engagement for the business relationship between both parties, including compensation, benefits, and job requirements.
This type of agreement may also be used for hiring independent contractors, contract employees, or work-for-hire staffers.
Severability and jurisdiction clauses
Severability clauses are provisions within an employment contract stating that if any part of the agreement is found invalid or unenforceable, the remaining sections will continue to be effective. This ensures that the entire contract is not deemed void due to one problematic section.
Jurisdiction clauses, on the other hand, outline which area’s laws will govern the contract, resolving any conflicts that may arise in interpretation or enforcement.
Although employment contracts may vary in their specific components and provisions, they serve as a critical way to protect both employers and employees by establishing clear expectations and guidelines for their working relationship. In addition to standard employee agreements, independent contractors typically use their own version of a contract called an independent contractor agreement. When hiring contract workers, ensure that both parties are in compliance with relevant labor regulations and tax obligations, such as form SS-8 and workers’ compensation requirements.
Frequently Asked Questions
What is a contract employee?
A contract employee is hired for a specific project or a certain timeframe for a set fee based on hours worked, project completion, or revenues generated. They often possess expertise in a particular area, such as writing or illustration, and contracted employees are usually hired to do particular projects or meet specific needs within a company or organization.
What are some of the benefits of working on a contract?
Working as a contractor has many benefits. Contractor with multiple clients has more opportunity to develop their skills and is often more likely to become highly skilled worker than they might have been if they had continued as a long-term employee. Other benefits include greater flexibility in work hours and location, higher hourly rates, and the ability to choose or not choose which projects they would like to work on.
Why do companies hire contract employees?
Many companies hire contractors because they can be found and hired more quickly than full time employees. Contractors often have specialized capabilities that offer advantages that work well with a traditional, permanent workforce but which aren’t going to be needed for other than a specific project for a set time. By working with contract employees, companies can complete projects quickly and save money by not adding additional headcount with additional expenses such as employee benefits.
Can companies give contractors access to internal systems and tools?
It’s important to remember that contractors are external individuals or entities, and granting them access to internal systems requires careful consideration of security, confidentiality, and compliance matters. By implementing proper controls and security measures, you can reduce the potential risks associated with providing access to contractors while still benefiting from their contributions to your projects.
Contract employees are valuable business partners who can help companies bridge the gaps that can come up during regular business. Contractors have specialized skills and backgrounds that make them very useful in certain circumstances, but their skills and abilities are often only needed on a part time basis.
Bottom line – contract employees save money and secure revenue by helping complete projects successfully.
Jodi Mai began her career as a recruiter after college. She moved into an HR Generalist role and later, into HR management, working on such topics as employee relations, benefit administration, and payroll. Over the last 15 years, she has worked in the talent acquisition and management industry, and since 2018, Jodi has expanded to HR consulting and writing on HR and recruitment topics.
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