Pros and Cons of Hiring Employees vs. Contractors
If you’re a small or medium sized business owner, and you find your business has grown to the point that you decide you want extra help, then you're going to face the decision of whether to hire employees or independent contractors. This article will go over the pros and cons for hiring employees and independent contractors, helping you make an informed decision about what is best for your business.
Why does it matter whether a person is an employee or independent contractor?
In Canada, a person’s employment status is directly related to a person’s entitlements under the Employment Insurance Act. It can also impact their rights as a worker in other legislation such as the Canadian Pension Plan and the Income Tax Act. A business owner’s legal obligations vary depending on whether they are paying an employee or independent contractor.
An employee is someone you hire to work for you for an extended amount of time. They can be part-time or full-time. An employee works for a business, rather than having their own business, like an independent contractor does.
Benefits of Hiring Employees
You can oversee the work that an employee does, allowing for you to control how certain tasks are complete. You also have the control to arrange their schedule and the tasks that they work on.
(Full-time) employees work only for you. All their time spent working is devoted to your business. This can lead to them developing an interest in the business and genuinely caring about it’s success. They might end up not just completing their job, but caring that they do their work in a way that will contribute towards the success of your business.
If an employee is given at least two weeks written notice, as an employer you only have to pay the wages that are due to them for the work they have completed. In contrast, terminating an independent contractor requires you to pay out the rest of the contract. In sum, terminating an employee with two weeks written notice means you only have to pay them for the work they have done, not the work that they were supposed to do.
Cons of Hiring Employees
Tax & Insurance Responsibilities
In Canada, employers are responsible for deducting Canada Pension Plan (CPP) contributions, EI premiums, and income tax from remuneration or other amounts they pay to their employees. These deductions must be reported by the employer to the Canadian Revenue Agency, along with the employer's share of CPP contributions and EI premiums. Failure to do so results in the employer having to pay both the their share and the employee's share of any contributions and premiums owing, plus penalties and interest. This page by the Government of Canada can help you figure out if you need to make payroll deductions.
Employees might not have any experience or limited experience performing the tasks that pertain to their job position. They may require training to know how to perform tasks, not only properly, but according to how your specific business operates. Training a new employee can take time away from you or another employee. This is mostly a disadvantage when someone is hired who doesn’t stay in their position for long - making it very important to make the right hiring decision when you are recruiting. Hiring and training a new employee can be very costly for your business, so make sure to do your due diligence during the hiring process, so you can get it RIGHT the first time. Even after the training process, keep in mind that on average it takes 6 months for the new hire to be fully productive.
An independent contractor is someone you hire on a project basis. They are also referred to as self-employed. In Canada, for a person to be self employed, they must operate their own business and be in a business relationship with a payer. Rather than doing all their work for one business like a full-time employee does, they hire themselves out to do projects for different businesses on a timeline.
Benefits of Independent Contractors
Lack of tax/insurance responsibilities
A business owner who hires an independent contractor through a contractual agreement does not have to deduct CPP contributions, EI premiums, or income tax since the worker is self-employed.
Since an independent contractor is hired on a project or timeline basis, they do not need to be trained on how to complete their job like an employee might be. They already have experience doing whatever project they were hired to complete.
Cons of Hiring Independent Contractors
The lack of training needed for independent contractors can be a disadvantage. It can result in them completing tasks with minimal oversight, so the business owner they are working for has less control over how they operate. An independent contractor’s schedule is controlled by them, not the people they complete projects for.
Lack of loyalty
Unlike an employee, an independent contractor doesn’t necessarily work for one business at a time. You don’t have the privilege of knowing who else or what other jobs they are doing while also working for you. This means that all the time they spend working might not be entirely devoted to you, whereas an employee's time would be. Not to mention, while they are working for you, they also have their sights set on what they are going to do for their next gig. They aren’t invested in the long-term success of your business in the way an employee might be.
If, for whatever reason, an independent contractor is terminated, it is costly. Unlike when terminating an employee, who only has to be for the work they have completed, an independent contract has to be paid whatever amount of payment was agreed upon in your contract with them. You can end up paying for work they didn’t even end up doing. For example, let’s say you sign a contract with someone to paint your office, which has four rooms. If you end up terminating them when they’ve only finished painting two rooms, you still have to pay them as if they had painted all four.
Employees are good for:
Projects that require oversight
Tasks essential to business
Contractors are good for:
Projects without need for oversight
Lightning HR provides recruiting services for small and medium sized businesses. Contact us at firstname.lastname@example.org for further inquiries.