When it comes to staffing an organization, there are more options than the traditional full-time, closely supervised W-2 employee. Many organizations leverage independent contractors, a type of worker that is treated differently for both employment law and tax purposes, and that offers both advantages and disadvantages when compared to traditional workers.
Understanding Independent Contractors
Independent contractors are workers that sell their services to organizations on a generally more limited basis than traditional employees. An independent contractor might work with several organizations over the course of a year, often multiple organizations at once.
Independent contractors essentially manage their own businesses, selling their labor to other businesses. Consequently, they’re responsible for their own taxes, benefits (e.g., healthcare) and equipment.
Employers have much less control over independent contractors than traditional employees. In fact, when employers try to exert too much control over independent contractors, they risk having those contractors classified as actual employees, triggering significant tax and regulatory consequences.
Benefits of Independent Contractors
Companies leverage independent contractors for a number of reasons as an alternative to traditional employees.
“A small business greatly benefits by using trusted contractors in two specific ways,” says Jennifer Cresswell of Thoughtgro. “The first is that it helps to keep costs lower, allowing you to pay for the work that is being done without carrying significant overhead when you are building a business. The second is that you are often able to engage a range of resources, including highly experienced talent whom your company would not have been able to hire if you needed to provide a full compensation package or resources who want to contribute, but have more limited availability.”
Cresswell adds that larger companies can also benefit from independent contractors when they have more work than their team can do, but not enough work to justify hiring a new full-time resource long-term, or when there is a short-term but labor-intensive project that requires some temporary support.
Rob Boyle, Marketing Operations Director at Airswift, argues that flexibility is a key benefit of contract employees. “They allow you to scale your workforce up or down quickly in response to your workload needs, which can be particularly valuable for organizations with seasonal variations in demand, or during periods of expansion or fast growth, when you’re not sure what your long-term workforce needs will be,” Boyle says.
“Cost can be another benefit,” adds Boyle, echoing Cresswell’s feedback. “Contractors typically do not receive benefits like health insurance or paid time off, which reduces the total compensation they receive even if they’re paid at the same rate as an employee. They also don’t require the same extent of training and onboarding as a new hire, and generally will use their own equipment or tools, which adds to these cost savings. There’s also the matter that you only pay them for the work they complete, rather than committing to a salary that you’ll need to pay a full-time employee regardless of whether there is work for them to do.”
Benefits for Independent Contractors
Employers aren’t the only ones who see value in the independent contractor employment structure.
“There are also a variety of benefits that this type of arrangement works well for the contractor,” says Cresswell. “In my personal experience, we worked with a number of high-powered professionals who had their own businesses but still craved a team atmosphere. We were able to provide that ‘team’ that they wanted to be a part of, plus take some of the business development work off them. We also were able to hire a number of mothers, who were the primary caretakers of their young children but still desired to contribute to a company in a meaningful way.”
Challenges with Independent Contractors
Cresswell relied heavily on contract employees as an executive at a previous organization, and she notes there were drawbacks as well when it came to contractors.
“Since they were not employees, there are limits to what we could require them to do,” she recalls. “For example, we could require them to attend client meetings—as outlined in their scope agreements—but we could not require them to participate in non-client-based activities, which are often key to creating a cohesive culture and high-performing team.”
“The primary benefit of employees over contractors is that they’re fully a part of your organization,” agrees Boyle. “This means they often develop a deeper understanding of your brand identity and mission and contribute to the company culture. These aren’t things you can expect from a contractor, even if you work with them on a long-term basis.”
Boyle adds that employers also get more control to direct employees’ work. “Contractors generally set their own hours, and also retain full control over where and how they work, as opposed to employees that can be scheduled to work in a specific place during designated hours or required to use specific tools or methods to complete their projects.”
Independent contractors offer a flexible, cost-effective alternative to traditional full-time employees, allowing organizations to scale quickly, manage costs, and tap into specialized talent without the long-term commitments of full-time employment. However, the contractor model also comes with trade-offs, particularly regarding the level of control employers have and the challenges in fostering a cohesive company culture with a largely autonomous workforce. Understanding the unique advantages and limitations of independent contractors enables organizations to strategically integrate them, meeting both short-term and long-term workforce needs in a competitive, dynamic market.
Lin Grensing-Pophal is a Contributing Editor at HR Daily Advisor.