As a growing business, choosing the right model of remote workforce engagement is crucial to your success. Building a full in-house workforce might not always be financially viable, and hiring qualified expertise can be difficult and time consuming. More importantly, when hiring across multiple geographical locations, employers are required to adhere to a greater set of legal and regulatory requirements in the form of employment contracts and payrolls, taxation, compensation and benefits, etc.
This is where contract workers step in. By removing the barriers of location, remote work has enabled enterprises to try out more flexible work arrangements and include contract workers and freelancers within their teams in a seamless fashion. Additionally, this route enables companies to work with highly skilled individuals without having to pay hefty salaries by engaging them as contractors for a single project.
Before we jump into a comparison of the two work models, let’s first understand the difference between them.
Contract workers vs full time employees
A contract worker, also known as an independent contractor, is a self-employed worker who operates independently on a contract basis. Contract workers are not employees on the payrolls of the company, and hence do not usually receive any employment benefits. In many cases, contractors may register their own legal entities like a sole proprietorship, a limited liability company or a limited liability partnership. Contract workers are usually employed by companies on a project to project basis, or for certain highly specific niche roles. Their entire employment is regulated by their contract, and the duration of their engagement can be long-term or short term. They can also work for multiple companies at one time if their contract permits the same.
Full time employees
As suggested by the term, full time employees are employees that are on the payrolls of the company. They receive access to a wide range of perks and benefits like health, accidental and life insurance, as well as employer’s contribution towards a pension fund or savings of a similar nature. Employers are also responsible for withholding the appropriate amount of income tax for their employees, and ensuring that it is according to the necessary regulations. Companies often choose to hire full time employees for long term roles and projects, as it requires a substantial amount of investment in terms of time and capital.
Contract workers vs full time employees – making the right choice
Now that we know the major differences between full time employees and contract workers, let’s examine a few areas that will help determine which workforce model is the best fit for your organisation.
Management of payrolls
One of the biggest differences between the full time employees and contractors is the way they are paid. When hiring a full time employee, companies are required to set up a legal entity and local bank account in order to pay salaries, resulting in a sizable chunk of investment. Today, an increasing number of enterprises are choosing to avail the services of an employer of record (EOR) to solve this problem. The EOR already has a local presence in the country of the talent, and is thus able to pay them through its own bank accounts. In the case of contractors, employers only pay the mutually agreed contract fee, without the requirement of setting up a local entity or bank account.
For full time employees, companies must comply with the taxation regime of the employee’s country of residence. We know that Income tax is a common deduction across all nations, and employers must hold back this amount from the employee’s salary. The percentage can differ anywhere between 5% to 40%, depending on the country’s laws. For example, employers in Brazil are responsible for paying a portion of employees’ social security and unemployment tax, and in Germany, employers pay taxes toward employees’ social security (unemployment, accidental and health care insurance). On the other hand, contractors are responsible for paying their own taxes, and employers have zero liability.
In case of full time employees, employers are responsible for making provisions for certain statutory benefits along the lines of health, accidental and disability insurance in most countries. In most cases, employers hold a portion of the salaries back in order to make contributions towards these statutory benefits. For example, Indian employment law requires all companies with over 20 employees to contribute 12% of the employee’s salary towards their provident fund under the EPF Act. For contractors, employers are generally not legally obligated to make provisions for any such employment benefits. Exceptions to this may include benefits like maternity leave.
Control and autonomy
Another major difference between an employee and a contractor exists with respect to the control and autonomy residing with the employee. Independent contractors are generally hired to complete a specific task or project independently, and thus experience limited accountability and increased autonomy. As an employer, if you would like to experience greater control over the daily working of your employees, hiring full time employees is a better choice.
When choosing between contractors and full time employees, the factor that should be given the most weightage is the nature and duration of their contribution to your business. If your goal behind hiring is to scale your business in the long run, or diversify into a new location or vertical permanently, then hiring a full time employee will justify the time and effort spent in recruiting and onboarding them. However, if your goal behind hiring is the completion of a short term project or development of a single product or service, then hiring a contractor would be a better decision.
Another factor to consider when deciding between contract workers and employees is the exclusivity factor. Full time employees usually work with a single company, and must serve a notice period ranging from two weeks to ninety days before terminating their employment. Thus, it is preferable to hire employees for roles that are critical to the functioning of your business and require dealing with sensitive data. On the other hand, independent contractors have the right to terminate their employment with negligible or no notice period, and hence might not be suitable for such roles. However, this also means that contractors would be more suitable for jobs that you need to hire for immediately.
When creating your investment portfolio, it is often advised to diversify your investment in order to reap the best benefits; we recommend following the same approach when building your global team. An increasing number of companies are choosing to hire contract workers in order to get access to highly skilled talent with niche skills. The right balance of full time employees and contract workers helps companies extract the complete potential of their talent without having to pay a fortune in salaries and benefits.
The removal of the barriers of location and distance means that product companies in Singapore can hire DevOps professionals from Nairobi. Leveraging the services of the right EOR enables companies to build their distributed teams within weeks, without worrying about the hassle of legal compliance and paperwork in a foreign country.
At Talent500, we are helping global companies hire, build and manage global teams in 50+ countries by acting as their Employers of Record. We aim to transform high-impact companies by giving them access to a worldwide community of highly skilled professionals transcending geographical boundaries. Sign up here to take your first step towards global expansion.