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Hiring an employee vs contractor: Which is better?

Published 22 Jul 2022
Updated 8 Nov 2023
8min read
Contracting vs. full-time employment: which is best?

Selecting the right employee is a serious choice, but deciding what type of employee to hire is another thing entirely.

For some businesses, the flexibility of contractors is a perfect fit. However, many prefer the loyalty and connection of having a full-time team member. Whichever you choose will depend on multiple factors; business needs, the role itself, legislative parameters, your future goals… There’s a lot to consider!

Whatever’s best for your business – it’s incredibly important to have made this decision prior to starting your recruitment process, so that your candidates are fully informed about what they’re applying for. With recruitment so tough right now, it definitely pays to be organised!

To make it easy, let’s define these two types of employment and look at some of the benefits and pitfalls of each.

But first… The views expressed in this article are general information only, and should not be relied on as professional advice. Please consult an employment lawyer for advice on your specific situation.Create a free Hiring Essentials account

What is the difference between a full-time employee and a contractor?

So what are the key differences between these two types of employment? While the definitions differ from country to country, there are a few elements that are generally common. Remember, there will be various employment and contractor rights applicable depending on where you are based.

These are just two types of employment. There may be many more available to you and your future team-member, including part-time or casual work.

What is full-time employment?

Full-time employment is when employees are on a permanent contract where they work for a minimum amount of hours per week (usually 38). Full-time employees are generally entitled to paid leave and a written notice or payment on termination.

What is independent contractor work?

Independent contracting is employment undertaken on an agreed short term basis. The period of work can vary between days or months.

Contracts vary depending on the agreed working arrangements between employee and employer but usually take form as either a fixed-term (specific time only) or renewable (can be continued for a longer period if both parties agree).

What is the role of employment contracts?

Whichever type of agreement you and your employee come to, it should be clearly outlined in a contract. Contracts are crucial documents that outline all the essential details of an employment engagement, including working hours, ensuring transparency and understanding between two parties.

Did you know that you can easily issue and sign electronic contracts? Learn how using electronic contracts can make your life a whole lot easier. 

A woman smiling happily on her desk
Make sure any terms of employment are included in a contract.

Is it cheaper to hire an employee or contractor?

If you’re confused about the ongoing engagement or recruitment costs between hiring an employee or contractor, we’re here to tell you that it’s not definitive either way.

It generally comes back to the work that you want to be done. If you have a short-term project that you need assistance with, a contract worker could give you the help you need only when required and without the commitment of a full time schedule. However, if your business is taking on longer-term projects, the costs of a contract worker will quickly add up.

And that’s just scratching the surface of the economics of employment types.

Have you considered hiring overseas? Here is the breakdown of the hiring costs in:

Why do contractors get paid more?

A contractor’s hourly rate will generally be higher than that of a full-time employee for a number of reasons, but primarily to supplement the lost benefits that an employed worker is entitled to.

Contract workers do not have access to annual or sick leave. They also may not be entitled to retirement benefits or other perks or bonuses which a permanent employee might enjoy.

Contract workers also have more flexibility in setting their rate. While a full-time employee may have an annual performance review and salary adjustment, a contract worker can generally adjust their rate based on client type and demand.

Should you hire an independent contractor or full-time employee?

Benefits of hiring independent contractors

1. Flexibility

A key positive of contract work is that the number of hours worked is agreed upon beforehand, so employers can select the time and money spent on the specific project.

2. They will likely provide their own equipment

Contractors have to provide their own tools and equipment (unless otherwise agreed), therefore less organisational assets are used. For example, if you are hiring a freelance writer – they will use their personal device to complete the work.

3. There’s less commitment

Some contract workers can be engaged for as little as one day, meaning that if you don’t like working with a contractor, you’re not obliged to stay with them longer than the agreed period.

4. Access new perspectives

Working with professionals outside of the business gives your company a fresh set of eyes to help you stay competitive.

5. Less payroll administration

While it varies by country, generally contractors will manage their own tax and retirement contributions. As contractors are their own business, they pay their own tax (rather than it being deducted from payslips). They essentially work for themselves—meaning less expenses for the company.

Woman seated on her bed, working from home with the laptop on her lap
A contract worker could be a great choice for short-term projects.

Drawbacks of hiring independent contractors

1. They can be time-intensive

There is a risk of hiring an external contractor to work with your organisation as they’re not familiar with the company’s goals, values and culture, potentially causing issues within the business. The time spent showing them the ropes and aligning them with your company’s culture is all for nothing when they move on.

2. You may lose them to another job

Contracting is on a term-by-term basis, so there is the risk of the contractor not returning to work for you again as they have other commitments or have been offered a permanent contract elsewhere. If you’re scared of losing a contractor, consider offering them full-time employment.

3. You have to adjust your employment relationship

As contractors have a high level of control and autonomy over their projects, it is hard to maintain an employee/contractor relationship. While you can provide feedback as a client, you cannot interfere with their work. As they also will likely be working with more than one client at a time, you will also not be their top professional priority as you would be to full-time staff.

4. They are not covered by your insurance

Contractors generally aren’t covered under your company’s insurance, making you liable for any injury sustained on the job. Ensure you include necessary insurance requirements into the contract before they start to avoid this.

5. Wages

For the reasons we outlined above, contractors’ wages usually cost organisations around 15-20% more than permanent staff.

Benefits of hiring employees

1. Productivity

Full-time employees are always focusing on the business as they have a schedule and can get more quality work done as they are not restricted to a short term contract. Unlike independent workers, the company manages their employment administration (think paying taxes, contributions and retirement), giving them more time in the day.

2. They have company loyalty

Full-time employees have a sense of connection to their organisation and are always readily available to help. Through employee engagement and positive culture, full-time employees feel a sense of belonging to an organisation as a vital team member.

3. Consistency

As full-time employees are committed to the business, they have their routine and know the organisation in depth they will perform tasks consistently and on an ongoing basis.

4. They can be cost effective

Contractors generally cost more per hour than a full-time employee. If you need work done over a long period of time, having a permanent staff member is definitely the most economic way to do it.

5. They can be time efficient

Unlike having to go through onboarding procedures each time you hire a new contractor, you only have to onboard new hires once.

6. You can give them greater direction

Full-time employees perform tasks under the guidance and direction of their employer giving you more control over how things are done and what the final project looks like.

Team members seated on the couch, smiling
Having a great team culture can be invaluable for a business.

Drawbacks of hiring permanent employees

1. You have to effectively manage their admin

Payroll, policies, insurance, leave – all of these employee entitlements fall to you as an employer to manage! However, with tools like Employment Hero’s HR and Payroll tools, these don’t have to be the time-consuming task they once were.

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The essential guide to HR compliance

2. In-flexibility

When you hire a permanent employee, you do so for the low and high periods for your business – which could be somewhat of a financial risk. They will be with you regardless of how busy or quiet company activities are. This can, however, also be a good thing. During slower times your team will be able to complete organisational or strategic tasks.

3. You need to provide all equipment

Employees of your company will need to be provided with all the tools and equipment they need to complete their jobs. You may also need to manage an office space. However, a remote-first culture is always an option.

4. You need to manage team strategy

Permanent employees require long-term thinking around development, team-building, employee wellness and more. Even though there can be great benefits to managing these things, it is a big commitment.

What’s the difference between a contractor vs subcontractor?

A subcontractor is someone that your contractor will hire to help them perform different tasks and duties. Instead of an employer having to source a whole team of independent workers, a contractor will source and manage subcontractor talent.

In what kind of context would this be necessary? Think about a building and construction crew. A homeowner would hire the contractor to complete a renovation, then the contractor – with their contacts and knowledge of the building industry – would source subcontractors to help them complete the project.

Man in a construction site with his drilling tools
Subcontractors are commonly used in the construction biz. Image via Unsplash

Can’t decide? Seek professional advice

To keep on the theme of construction, let’s hammer one point home. There are many factors to consider in making this decision, and you should consider the laws and regulations in your country to make sure you are hiring compliantly.

Look internally and see what the best option is for your business and remember, you can always offer a contractor full-time employment if you like what they do.

We hope you found this article helpful. To master your hiring strategy, download our free Recruitment Guide now.

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Disclaimer: The information in this article is current as at 1 August 2022, and has been prepared by Employment Hero Pty Ltd (ABN 11 160 047 709) and its related bodies corporate (Employment Hero). The views expressed in this article are general information only, are provided in good faith to assist employers and their employees, and should not be relied on as professional advice. The Information is based on data supplied by third parties. While such data is believed to be accurate, it has not been independently verified and no warranties are given that it is complete, accurate, up to date or fit for the purpose for which it is required. Employment Hero does not accept responsibility for any inaccuracy in such data and is not liable for any loss or damages arising either directly or indirectly as a result of reliance on, use of or inability to use any information provided in this article.You should undertake your own research and to seek professional advice before making any decisions or relying on the information in this article.

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