Should I hire an employee or a contractor?

Hiring is a big step for any growing business.

Finding the right person for the right job can be a difficult process though; a process that is only exacerbated when you have to decide whether to hire that person as an employee or as a contractor. Deciding whether to hire an employee or a contractor is, however, an important choice to consider. Employees can be invaluable to your business, giving you their time and energy and helping your business grow (tools such as employee time tracking apps can help with this), whilst contractors can save you precious money and the hassle of having to work out many employment-related issues. The decision to hire an employee or a contractor rests with you- to help figure it out, read on!

What is the difference between an employee and a contractor?

It can be difficult at first to understand the difference between an employee and a contractor, and if your business is just starting out it can be tempting to ignore the definitions of both of them and simply rely on only hiring employees- however hiring a balance of employees and contractors and understanding the differences between them can be a great way to save you and your business money and time.

Employment New Zealand defines an employee as “any person employed to do any work for hire or reward under a contract of services” (an employment agreement). This hire or reward is often their wages. Employees additionally all have minimum employment rights under employment laws; these rights include being paid the minimum wage, gaining access to holiday and leave entitlements and having a written employment agreement.

Contractors on the other hand aren’t covered by most employment-related laws, so they have no access to holiday or leave entitlements and have to pay their own tax. Businesses also don’t need to hold contractor records. Contractors work by being engaged by a “principal” to perform services under a contract for services; they are self-employed and earn income by invoicing the principal- tracking a contractors hours can be easy for both contractors and principals by utilizing employee hours trackers.

Deciding whether to hire an employee or a contractor can be a difficult decision, and it is best to take into account your business’s unique situation and needs.

Pros and Cons of hiring an employee

Pro: Supervision

When your business is just starting out and growing, it may be important to supervise the work of your employees as they may have to work across many different areas (e.g. undertaking administration tasks as well as conducting general repairs and selling products). Hiring an employee helps allow you to supervise your employees schedule so that you can ensure all work is being done.

Pro: Loyalty

Loyalty is something that can be hard to come by in the cut-throat business world of today, however it can be an invaluable trait among employees. Loyalty to one’s company means that employees will often go the extra mile to complete tasks, and will stay by your business’s side for many years, making them indispensable assets. If you find the right employee, then loyalty can be easy to induce; treat them well, give them an extra benefit from time to time, and your business will thank you.

Pro: Employment Agreements

An understanding between you and your employee about the exact work that will be done is important. This is often expressed through an employment agreement or contract, which means that both of you are “on the same page” from the start. An employment agreement lets you set out the exact work you want completed, and lets the employee know their bounds and responsibilities, allowing your business’s needs to be met and for the work to be conducted in clear lines.

Pro: Regular hours

An important aspect of employment agreements and contracts is that regular hours can often be specified. If your business offers a service or product then employees with regular rosters are often the only type of people you will hire. Knowing an employees regular hours allows more work to be completed including special tasks and projects, and lets deadlines be set. Regular hours for an employee also means that they know they have enough work to pay their bills, and means that they are likely to stay with your business for a longer time period.

Pro: Generality

Because employees show up for work regularly, they will over time learn a broad set of skills that they can then apply to diverse situations. When an employee is initially hired, they may need training, but as they gain confidence and knowledge they can end up being a valuable asset who can help out in many different areas of the business.

Con: The Financial Cost

There is no real way around it- hiring an employee costs. It costs a lot, and especially costs more than hiring a contractor. Apart from regular wages, you can expect to pay annual leave, days in lieu, benefits, bonuses, insurance, indirect employee costs, KiwiSaver contributions, and a whole host of other costs. An employee will invariably cost you and your business a lot of money; if you’re unsure whether or not you’re in the position to afford this, then it may be worth thinking about hiring an independent contractor instead.

Con: Training

Every employee, no matter how seasoned or skilled they are, had to start somewhere. If your business and just beginning to grow then you may find that you can’t afford to pay for skilled workers, and that you need to start with unskilled workers and train them in their specific areas. The cost of training isn’t just financial; it’s also a time consuming job for both you and the new employee, and because there are many aspects to a business you may find that there are many different areas you’ll have to train employees in.

Con: Employment Agreements

Employment Agreements can be a great pro for you and your employees, but they can be a con as well. Having to write up many different kinds of agreements is time consuming, and employees may want to negotiate and change some parts of the agreements. Making these changes in order to retain or gain the perfect employee may hurt some aspects of your business, or may lead to more money being spent on wages and less being spent on innovation that benefits all.

Con: Recording

It is a legal requirement that an employer keeps all employee records in order and updates them regularly. Records such as the employee’s employment agreement, and wage, time, and holiday leave records must all be kept and filed, which can be a time consuming job.

Con: Payment of benefits and bonuses

Employees form a team, and every team needs its benefits. This includes regular tea and coffee breaks (with the coffee and tea having to be supplied by yourself), staff benefits such as discounts, Christmas functions, etc., and the odd bonus to be paid out to hard working members of staff in order to retain them. Whilst these costs and individually small, when combined they can cost you a fair amount of money- money that you could otherwise use on building your business.

Pros and Cons of hiring a contractor

Pro: Efficiency

Most contractors are bought in for a job because they are highly skilled in that single area; this means that any work completed by them is likely to be completed using less time than it would take for an employee to do the same work. Additionally, the work is likely to be of a higher standard and the contractor will waste less time on related tasks; a higher rate of efficiency finally means greater growth and more money for your business.

Pro: Flexibility

Contractors are usually far more flexible than employees. They set up their own hours, and can start and stop when their task is finished. If a contractor’s work is not satisfactory, then it’s easy to get rid of them and find another; contractors also often work for many employees, giving you the peace of mind that they’re not relying solely on you for their wellbeing.

Pro: Save on costs

Whilst employees have rights regarding annual leave, days in lieu and sick pay, contractors do not; meaning that you can save a fair bit of money through hiring contractors. You won’t have to pay them a salary and can leave company benefits to employees only.

Pro: No worries about the overhead

Record’s don’t need to be kept on contractors, reducing the amount of paperwork you have to deal with. Additionally, contractors pay their own taxes and make their own ACC claims, so you don’t have to worry about this as well. Contractors can be fantastic for administration purposes, saving you precious time and money spent on sorting out employee records.

Pro: Less responsibility is needed on your part

Whilst employees need constant training and supervision, contractors are often already trained and skilled. They may already have a professional license, and will be able to provide references for work that they have already completed for other organisations. Their development is their own responsibility, letting you to focus on parts of the business that you may feel are more important.

Con: They can still be expensive

Whilst you have no obligation to pay your contractor annual leave or a salary, you may find that they charge a higher hourly rate than a normal employee would. This can be because contractors are skilled in the specific areas that they work in and that they build in their annual leave to their hourly rate. However, if a contractor is efficient enough, this higher hourly rate can be well worth paying, and leaves both you and the contractor feeling happy and satisfied.

Con: They work for themselves, not for you

The sense of teamwork, camaraderie and loyalty that comes with a team of employees may not extend to a team of contractors. Company loyalty will mean that they’ll often work for whichever company can offer them the highest pay rate/most convenient hours, which may not be you, especially if your company is just starting out. Getting to know contractors can also be difficult, which means that both of you miss out on a very human aspect of a working environment.

Con: Loss of control

Whilst employees can be supervised, contractors often work remotely. Although you can guide them, you will overall lose control over how they work and what exactly they do; tasks may be completed slightly differently to how they should be, and you may find that you’ll need to employ many different contractors as different projects might require different skill sets. This can all be a drain on time, money, and resources; all things that are important to a business that is just starting out.

Con: They might accidentally be an employee!

Some small companies make the mistake of hiring employees and classing them as contractors: this is an easy mistake to make, especially when you’re just starting out. The courts of New Zealand have developed four legal tests that allow you to work out whether the person you’re hiring should be employed as a contractor or an employee; they are the Intention test, the Control vs Independence test, the Integration test and the Fundamental/economic reality test and can all be found here.

Con: And this can lead to serious costs…

If you have accidentally classed an employee as a contractor because of not really knowing the difference and wanting to save some money, and then realise your mistake, you may have to fork out quite a bit of money. This would include costs such as unpaid PAYE tax, unpaid minimum wages, holiday and leave entitlements, and penalties from the IRD.

So which one should you hire?

Ultimately, the answer to this question rests on the individual and unique situation of your business. If you’re just starting out, you may find it easier to hire just one or two employees and use contractors to complete the rest of the work. As your business grows, you may want to expand the amount of employees you hire; or, as the wants/needs of the business expand, you may realise you need to hire more contractors! Whatever your situation is, it pays to know the difference between them.

After reviewing the differences between an employee and a contractor and working out the pros and cons for both you should hopefully be able to come to the correct conclusion about whether you should hire an employee or a contractor. If you know your businesses needs, then the answer may be clear; if you don’t, then it may well be time to get to know those needs and work out how to make your business grow!

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