Contract vs. Full-Time Employees: How to Make the Right Decision
Skip to content

Contract vs. Full-Time Employees: How to Make the Right Decision

Post Author - Joe Neely Joe Neely Last Updated:

Today’s business leaders eventually all end up facing the contractor vs. full-time employee dilemma.

Experts anticipate the U.S. workforce will be 40% contract workers and freelancers by 2020. If you only hire one type of employee, you could be missing out on some valuable opportunities.

If you only hire contractors, ask yourself: “What’s full time got to do with it? In fact, what is a full-time employee, really? Would hiring a stable staff help my business expand?”

If you only hire full-time employees, you may be wondering: “What is a contractor job? Are these employees right for my company? Can they help fill in key gaps? Should I hire contractors during high-volume times of year?”

To determine which employment structure best suits your business, you need to understand the nuances of these employment structures. Like everything else, the devil is in the details.

Contractor Salary Pros/Cons

In today’s low-minimum-wage environment, many people use contract work to earn higher hourly wages – at least for some of their work hours.

Businesses benefit by hiring employees only when they need them; Contractors (including temps, freelancers, etc.) benefit by gaining better pay, at least in the short-term.

A simple way to determine if someone is a contractor is to ask, “How many people employ this person?” If they have over three employers, they’re probably a freelancer.

Hiring a contract employee requires a far different pay structure than bringing someone on full-time, meaning you need to embrace a unique set of trade-offs.

Because freelance employees handle their own taxes, benefits, and marketing costs – they typically charge more than in-house employees. Also, the short-term nature of their employment doesn’t create loyalty.

If your competitors offer your freelancers higher wages or better job security, you could find yourself looking for new talent on a regular basis.

Freelancers and contractors typically show the same dedication to quality of work as employees. However, they don’t have the same level of loyalty to one employer.

These workers want to do an excellent job, impress their temporary employers, and move on to serve other clients.

For many companies, the ease of not providing benefits, withholding income taxes (which still must be reported), or paying unemployment taxes/Social Security greatly outweighs the higher flat-rate and hourly rates freelancers and contractors charge.

Freelancers and contractors offer one unique quality that few full-time employees can: diverse work experiences.

Sure, you can hire older workers with a wealth of knowledge in your industry – but do they really understand recent trends and technologies?

Freelancers and contractors who work with your competitors can give you insights into best practices (within ethical boundaries, of course).

If they serve businesses in other niches, they can hip you to innovations that may be entirely new to your industry – giving you a serious competitive advantage!

Full-Time Salary Pros/Cons

Conversely, if you operate a small business and only hire contractors, you may be wondering, “What is full-time employment? Is it right for my business?”

Unlike contract employees, full-time employees depend more heavily on their employers. For this reason, they enjoy more legal protections.

Putting a person on your payroll makes them an employee, not an outside contractor. If you work with someone in the long-term, oversee their work methods, and report their taxes, they’re an employee.

Full-time workers trade off less flexibility for greater job security (though employers can provide certain perks like 9-80 scheduling).

They often show dedication to their employers, advocate for them in their social circles, and work for the long-term benefit of these businesses.

Not only do full-time employees show a greater level of dedication to one employer than contractors, they also tend to stick around.

If you find yourself hiring people for the same tasks on a regular basis, ask yourself if you could benefit from the lower turnover (and hourly rates) of regular employees.

Of course, one of the less-obvious (but very important) benefits of long-term employees is a sense of family and community.

If you run a local business that serves a local market, this can be crucial to your success. Your long-term, dedicated employees have a stake in your company and attract their friends and family members to your business.

In short, full-time employees are a marketing investment.

Contract vs. Full-Time: The Legal Framework

The IRS levies severe penalties against businesses that misclassify employees. Know the law in your particular industry and consider these common IRS tests for employee status:

  • Employees typically don’t set their work hours; contractors usually do.
  • Contractors comply with many fewer (and less precise) work instructions than employees.
  • Employees often receive training; contractors typically do not.
  • Contractors typically receive flat-rate payments or hourly on an as-needed basis. Employees work more-regular hours for hourly pay.
  • Contractors often work seasonally and when their particular services are needed. Employees usually work regular schedules with less sensitivity to market trends.
  • Employers usually determine the sequence/order of tasks to be completed by employees. Freelancers have greater flexibility in this regard.
  • Freelancers and contractors have a higher exposure to profit/loss than employees.
  • Contractors typically invest heavily in the tools they need to conduct their business. Employees rely on employers to foot the bill for their workstations, equipment, etc.
  • Employees usually receive payment on a regular basis (weekly, bi-weekly, monthly). Freelancers receive payment after the delivery of services.
  • Contractors and freelancers can usually offer their skills to the general public (though some freelance agreements involve non-disclosure agreements (NDAs). Employees are expected not to engage with the competition.
  • Contractors can hire assistants; employees typically cannot.
  • Likewise, employers typically provide the physical facilities for employees. Freelancers and contractors often maintain their own offices, workshops, studios, etc.

Contract vs. Full-Time: The Differences between Contractors and Consultants

The contractor vs. consultant issue involves more than just semantics. Due to the overlap between these roles, it’s important to study the relevant law (and ask a lawyer) before making hiring decisions.

In general, consultants only determine client needs; they don’t actually do the work. Contractors typically provide both consulting and services.

However, consultants could be paid by consulting companies as full-time employees of those businesses.

Not all consultants are contractors; some contractors are consultants. Simply follow the money – if you’re paying a person directly for their expertise and their work, they’re a contractor.

How Long Can You Employ a Temporary Employee?

Contractors can only work 1,040 hours (roughly 4 months) for any one employer each year. If you find a freelancer indispensable to your operations, consider offering them full-time or contract-to-hire employment.

Part-Time Employees

U.S. lawmakers haven’t created many distinctions between full- and part-time workers (hence, my use of “full-time” throughout this article). The Fair Standards Labor Act (FSLA) protects both groups equally.

The differences between these types of employees typically lie in the additional benefits employers provide.

All workers are entitled to overtime pay. However, not all employees get a guaranteed number of hours per week. Of course, full-time employees often have greater access to health benefits, profit-sharing, vacation time, and other perks.

The Contract-to-Hire Option

Consider the hybrid option: what could the contract-to-hire model mean for your organization?

The freelance designer who updated your website may enjoy the flexibility of their contractor position. They may plan to work this way for many years.

However, they may want the stability of a full-time (or even part-time) position with your company.

Not everyone will want to commit to your organization over the long-term – but many will. Providing a contract-to-hire path to your favorite freelancers gives these contractors an added incentive to remain loyal.

The contract-to-hire model gives you a massive hiring advantage over your competition.

If you engage in a traditional hiring process, you can only hope for the best. Will your applicants/new hires live up to their first impressions? Contract-to-hire employees prove themselves long before you have to make a long-term commitment.

Hiring from your contractor pool may be the best way to grow and develop your team!

The Bottom Line: Making the Contract vs. Full-Time Decision

If you run a small business and have finally realized you can’t do everything (at least not very well), hire contract workers.

As your business grows, offer more and more hours to your favorite freelancers. Eventually, these people can become your full-time staff (especially if you offer remote work options).

If you hire temporary employees who prove themselves invaluable assets, bring them on board as full-time or contract-to-hire workers.

Conversely, if you don’t have any contract employees, ask yourself whether maintaining a staff of full-timers is in your company’s best interest. Analyze your team’s work hours (and how frequently you hire contractors) with Toggl’s powerful (and free) software.

American (and global) workplaces are trending toward greater flexibility. In this climate, your business will probably find that a hybrid approach works best.

You can maintain a low overhead by only providing workstations, benefits, and job security to key employees. You can attract young, mobile talent by offering temporary (and even off-site) employment opportunities.

Just remember to keep your best contractors from joining up with the competition by offering contract-to-hire enticements!

Join 30,000+ subscribers getting the best tips on productivity, work management, hiring and more!

We promise we won't spam you and you can unsubscribe anytime.