Contractors vs. Employees - When to Hire Which?

Hiring and Growth

Let's start with the most basic way to think about business - running one successfully boils down to smart resource management, especially who you hire and how.

You’re always deciding how you spend time and money - your basic resources - and your aim is the right combination of the two. And the right combination returns more time and money than you had invested.

The majority of your money goes to labour costs, whether you’re a one-person show or have hundreds of people on payroll. So it’s worth spending some time to consider how you’ll allocate the majority of these resources.

Which situation calls for contractors, and which for employees?

Need more information? Check Out: "Setting Up Payroll: The Ultimate Guide"

The Old Formula

There’s a “traditional” way to distinguish employees from contractors. It’s very useful for determining how to classify them for payroll purposes.

Here’s a handy chart for you to follow:

Employees Contractors
You pay employees a regular salary at a standard rate and on a set schedule. Your contractors invoice you - either for hours worked, or on a per-project basis.
You withhold and remit employee taxes, El, and CPP to the CRA on their behalf. You are not responsible for any taxes on the contractor's behalf.
You employ them, and must uphold legal and financial obligations dictated by employment law. You buy a service or a product from contractors, and your obligations only fall under what's in the contract.
You set your employee's work hours, and you're most likely their only employer(unless they work part-time). You have no direct control over exactly when contractors work, and you are likely not their only client.
You provide your employees with the tools and equipment to complete the work. Your contractors source their own tools and equipment to complete assigned jobs.
You can compensate employees with taxable income other than their regular pay(i.e.: bonuses, overtime, benefits). You are not obligated to pay overtime, but contractors may charge more if projects take longer.

While this is a great starting point, it won’t always help you decide which option works best in your particular case. To do that, it’s important to consider other factors.

The Four Bs of Getting Things Done

If you want to think clearly about the type of help you’ll employ, you can use The Four Bs to figure out exactly how a hire will impact your business: Brand, Bonds, Bend, and Budget.

Employees Impact Your Brand

Defined briefly - your brand is the sum total of experiences, thoughts, and feelings that your customers and prospects associate with your business.

So needless to say, it makes a big difference who carries out the various functions at your company.

Hiring employees gives you much greater control over exactly how various jobs get done (and often empowers the employee to optimize this process more so than a contractor). This is why companies often refrain from outsourcing client-facing roles like support or sales people. Having an in-house team it lets you hire for culture fit and tailor the client experience.

Employees and Contractors Forge Different Bonds

Businesses that build strong relationships are more resilient. Employees are key to building those relationships both internally and externally.

While nothing prevents you from developing a great relationship with contractors, these bonds are by nature more prone to impact from external factors.

Employees may come and go, but they will usually join an organization with a long-term view in mind. They will impact not just the bottom line, but your day-to-day, your decisions, and ultimately your company’s culture. After all, they have a vested interest to do so when they spend a significant part of their day at work.

Do You Need to Have a Lot of Bend?

Think of this as flexibility. Are you hiring for a recurring job function that has a lot of repetitive process in place? Are you rolling out a small, one-time project? Contracting this work will likely be in your advantage.

However, if the shoes you need filled are much more broad - i.e.: “coordinating marketing” - you’ll want someone taking care of it in-house. Employees will carry in-depth knowledge about your organization, which lets you pivot directions much faster.

What Does Your Budget Look Like?

Ultimately, your budget must also guide your decision. Hiring an employee means having enough revenue to pay them in the long-term.

Contractor quotes may come with more up-front costs meant to cover overhead and equipment. However, the upside of these costs is they let you be more flexible with budget. Moreover, competent contractors charge a premium because they can get specific, time-sensitive things done right and on time.

Think of employees as a long-term investment that starts generating compounding returns over time. Here you can flip the old interview question - “Where do you see yourself in 5-years time?” - and instead ask yourself where you see them down the road. If you can answer with a clear vision in mind, investing in an employee might be a better bet than a contractor.

The 4 Questions

If you want more clarity about whether contractors or employees are a better fit for your needs, rate the following questions on a 5-point scale (5 standing for very much, and 1 for very little):

How Much Does This Job Impact Our Brand?

How Essential Are Strong Relationship Bonds To This Job?

How Much Bend (Or Flexibility) Does This Job Demand?

How Much Long-Term Budget Can I Allocate To This Job?

The score out of 20 represents how likely you’ll be better served by hiring an employee.