Scroll Top

Contract Workers vs. Employees: What Your Business Needs to Know

Contract workers vs. employees differ in their employment status, relationship with the employer, and the nature of their work. Understanding the difference is crucial for proper workforce management due to legal, financial, and operational implications.

In this article, we’ll explain the differences between the two categories, discuss the pros and cons of each, and understand the legal and compliance considerations. We’ll also provide guidance on determining the right fit for your business, helping you effectively manage your growing workforce.

What Is the Difference Between Contract Workers and Employees?

A contract worker is an individual or entity hired to perform a specific task or project for a specified period. They are responsible for managing their own taxes, benefits, and other business-related aspects.

An employee, on the other hand, is hired by an employer to perform ongoing work under the employer’s direction and control. Employees are usually subject to more regulations and protections under employment laws, and employers are responsible for withholding taxes, providing benefits, and complying with various labor laws.

Though they’re often used interchangeably, the terms “contract worker” and “temp worker” have definite distinctions. A contract worker is generally hired for a specific project or task, and the duration of the engagement may vary. A temp worker is typically hired to fill a short-term need, such as covering for an absent employee or during peak work periods. Temp workers may be employed directly by a company or through a staffing agency.

Having staffing options that vary in type and commitment level can be a major benefit to an organization, and it’s one that not enough companies take full advantage of. Let’s go into more detail so you can benefit from a strategic workforce!

Pros and Cons of Hiring Contract Workers

Hiring a contract worker has both advantages and disadvantages. Here are some pros and cons to consider:

Pros of Hiring a Contract Worker:

  • Flexibility in terms of work hours and project duration.
  • Cost savings related to benefits packages from healthcare to perks.
  • Contractors often have specialized skills and expertise.
  • It’s easier to scale your workforce up or down based on project requirements. More on flexible staffing here.
  • Hiring contract workers typically involves fewer administrative tasks compared to employees.

Cons of Hiring a Contract Worker:

  • Contractors may not have the same level of loyalty as employees since they are not part of the company long-term.
  • Since contractors are not on-site permanently, communication can be challenging.
  • Relying heavily on individual contractors can be risky, especially if they are crucial to your projects. If they become unavailable, it could disrupt your workflow.
  • Employers have less control over the work habits and processes of contractors compared to full-time employees. Contractors may have their own ways of working that differ from the company’s expectations. 

Pros and Cons of Hiring Employees

Just like contract workers, hiring employees has pluses and minuses. Here are the pros and cons:

Pros of Hiring an Employee

  • There’s an increased sense of loyalty when an employee is fully supported by a dedicated employer.
  • An organization can exude greater control over the workload of an employee. They dedicate the entirety of their working hours to one company.
  • There are benefits to a salary-based pay structure versus the hourly rate a contractor requires. You won’t be surprised by unexpected overtime fees.

Cons of Hiring an Employee

  • The comprehensive compensation costs are much higher for an employee. Depending on requirements, you may have to account for a benefits package and Social Security and Medicare contributions.
  • You have less flexibility to adjust your workforce. Salaried employees can’t shift in pay structure, so there may be times you’re overstaffed with continually paid employees who don’t have enough pertinent work to perform.


Legal and Compliance Considerations

The legal and compliance requirements related to contract workers vs. employees can vary significantly depending on your location and specific industry niche. Here is a general overview, but you should consult with a legal specialist as you move forward with your staffing strategy.

  • Taxation:
    • Contract workers are responsible for their own taxes, including income tax and self-employment tax.
    • Employees have taxes withheld by their employers. Employers also contribute to Social Security and Medicare on behalf of employees.
  • Benefits:
    • Contract workers generally do not receive traditional employee benefits such as health insurance, retirement plans, or paid time off.
    • Employees may be eligible for those benefits provided by their employers.
  • Labor Laws:
    • Contract workers have fewer protections under labor laws, and their working arrangements are governed by the terms of their contract. They are generally considered independent entities.
    • Employees are protected by various labor laws, including minimum wage laws, overtime pay, and workplace safety regulations. Employers must comply with these laws.

How To Determine The Right Fit For You

Your organization might benefit from primarily employees, contract workers, or a mix of both—it comes down to your business structure and goals. Here are some things to consider as you plan your workforce growth:

  1. Nature of Your Work: Evaluate whether the work is project-based, temporary, or requires a long-term commitment.
  2. Your Budget and Cost: Consider the financial implications of benefits, taxes, and administrative costs associated with full-time employees.
  3. Your Skill Requirements: Assess whether the work requires specialized skills for a short duration or ongoing, consistent expertise.
  4. Your Scalability Needs: Determine if the business needs to scale quickly or has a stable, predictable workload.
  5. Your Company Culture: Consider the importance of integrating workers into the company culture and fostering long-term relationships.

If, like many companies, you find yourself answering, “It depends!” to many of these considerations, you may benefit from a diverse blend of contract workers and employees. If that’s the case, here are some strategies for managing the mix.

  • Ensure clear communication and expectations of roles and responsibilities.
  • Implement a comprehensive onboarding for both full-time and contract workers. Ensure everyone feels aligned with the company culture.
  • Provide equal access to information and use collaboration tools to facilitate seamless communication.
  • Establish clear performance metrics and expectations for all team members, regardless of employment status.
  • Include both full-time employees and contract workers in team meetings and decision-making processes.
  • Recognize and reward both full-time and contract workers for their contributions to the team and the organization.

Manage Your Optimized Workforce With ITAC By Your Side

Are you feeling ready to tackle figuring out the ideal workforce for your specific business needs? Read our guide to finding the best tech recruiter, or talk to our sales team today to partner with ITAC Solutions for strategic staffing solutions that fit your business needs and goals.[/vc_column_text][/vc_column][/vc_row]