Employee vs Contractor, what’s best for your company?

As you know, when you are setting up and growing a company, many factors are critical to your success. Of course, your business has to fulfill a market need, get the necessary funding, implement competitive pricing and deliver a good quality standard, regardless of what your product and service is. Most likely, the founding team will be able to get most of these things together, but eventually it’s up to your staff to take your business model to the next level, increasing the capacity and scope of your company.

Hiring talent is among the main priorities of most start-ups, especially as they start growing. And while finding the right fit for your business needs is hard enough, hiring workers involves different kinds of arrangements that eventually determine their relationship to the company and their impact on your success.

In the UK, most workers are either regular employees or self-employed contractors. In this blog we will examine the pros and cons of each option, and which one is more appropriate to the kind of task, commitment and performance that you need from them.

Hiring a regular employee

Regular employees benefit from the widest range of rights and protection but, in return, you get the highest level of control over their work.

Employees are entitled to:

– Be paid at least the national minimum wage

– A specified number of hours of work

– An agreed place of work

– Statutory sick pay

– Paid holiday

– Statutory parental leave and pay

– A minimum notice period

– Not being discriminated against

As an employer, your benefits in hiring an employee include control not just on the outcome of their work, but also on how the work is carried out. Employees are required to adhere to standards set by you. The intellectual property they produce while they are working for your business, usually belongs to the business itself, rather than to the individual. It is easier to prevent an employee using confidential information and engaging in competitive activities by specifying these restrictions in their employment contract.

Employees, especially full-time ones, will most probably only work for your company, which translates to  a stronger relationship of loyalty and results in your business getting all of their effort. Full-time employees can constitute a competitive advantage, as they are unique assets that your competitors cannot easily obtain.

However, employing full-time workers is generally more expensive when compared to independent contractors. In fact, you will need to pay and National Insurance Contribution (NICs) for their earnings, you are required to pay for their equipment and other facilities that employees need to do their job. Additionally, their rate of pay (salary) will stay the same regardless of the amount and quality of the work done.

Legally, in order to hire an employee, you will need to go through the following steps:

1. Check their right to wok in the UK by following these government guidelines.

2. Send them their employment contract, which needs to include this information, within two months from when they start working for you.

3. Agree to pay them at least the national minimum wage.

4. Get employers’ liability insurance, which must cover you for at least £5m and come from an authorised insurance.

5. Register with HMRC as an employer, up to four weeks before you pay your new employee.

6. Under the RTI (Real Time Information) approach, you must report your payments to the HMRC when or before they are made.

7. In order to perform step 6. you will need the basic payroll software from HMRC or from a commercial supplier.

Engaging self-employed contractors

As they are not required to work a fixed amount of hours, independent contractors are a more flexible solution for your business to get work done. However, this kind of flexibility works both ways, allowing self-contractors to choose their hours and place of work. Moreover, they are not obliged to accept the work you offer them. In a nutshell, you are only paying for a task’s completion, but have limited control over how such task is carried out.

Self-employed contractors don’t hold a great deal of rights per se, details of your relationship such as confidentiality, non-compete agreements, restrictions on intellectual property and nature of the work are mostly defined by the type of agreement that you have with them.

Contractors can be very cost-efficient as you only pay an agreed-upon fee or rate once the work is completed. There are no extra employment-related costs as contractor are required to pay their own taxes. Contractors also usually own or provide the equipment needed for their work at their own expense.

While they require relatively little administration and paperwork in order to start working for you, hiring contractors has its downsides. As they often work for different companies at the same time, they might not be available to provide the work that you need when you need it. Coordinating with their other arrangements can be tricky, as well as integrating them with your in-house team – if their tasks involve collaboration.

How do I choose?

The choice ultimately depends on your business model and on the type of work that your employees are required to do. Some companies hire contractors almost exclusively, to keep flexible and adapt to varying demand. Other business prefer to keep all of their team in-house, to foster cooperation and have a closer control on the internal operations.

Many start-ups employ a mix of both, keeping the core operations in-house and outsourcing tasks that require a skillset that is outside of the scope of the company (e.g. Marketing professionals, Copywriters, Bookkeepers…).

While having a committed and loyal in-house team is often crucial to the long-term stability and success of the company, being able to count on external contractors to cope with fluctuating or quickly-growing demand (which scale-ups often face) can be necessary to sustain growth.