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Employees versus Contractors

Provided by Visa, Content Partner for the SME Toolkit


When it comes to workers, one of the first questions to be considered is whether a business saves more money hiring an employee or an independent contractor.

Test yourself by considering the following case study:

You want to bring a retail business online. You need someone to create and manage a website and you determine the work will take 120 hours a month. You don't know whether to hire an employee to do this at $12 an hour (for a total of $1440 in wages per month), or to hire an independent contractor who will charge $2000 a month for the job. What are the variables that need to be considered?

Review of case study.

The advice you may hear is hire the contractor. First put together a job description—that is, what you want the worker to do, what type of site is needed with what functions. Then ask questions—for example, does the $12 an hour employee have the expertise to do what has to be done. It's not just development of a site, because there are millions of websites that are no good – they're hard to open, too tough to navigate—but it's developing a website that meets all of your requirements.


Next question to ask, are you going to direct this person? And if so, what level of expertise do you have to direct this? Third question, if you hire the $12 an hour employee, do you have any idea what it costs to bring them up to speed? Some companies have found that it costs up to $25,000 to bring an employee up to speed. The fourth question: What really goes into the employee's paycheck? It's not just the $12. The benefit package – even the minimum may be around 8% of salary. The average will be 15% or actually $13.80 per hour. The benefits could even go as high as 25% which makes it $15 an hour. In other words, even if you stuck to the 120 hours with your employee, the salary costs alone could be between $1800 and $2400. In this situation, hiring the experienced outside independent contractor makes much more sense.

As the hypothetical demonstrates, there are many variables at play when choosing what type of worker to hire and the associated costs.

Most experts agree that it's best to pay employees based on their value to your business not based on a set rate for all employees.

Lowering Staff Expenses

Here are some things to consider if you're trying to lower staffing expenses.

  • Examine sales and productivity on an hour by hour basis.
    Track productivity over a period of weeks (or months) to discern a pattern of when the business is slow. Comparing the activity during the slow times with the periods of higher activity would give the owner a good basis to determine staffing.
  • Wages should be based on value.
    Most experts agree that it's best to pay employees based on their value to your business not based on a set rate for all employees. In other words, always reward the most productive, valuable employees.
  • Calculate the “up and running” time.
    Unlike an employee, who may need training and guidance from you, an IC is likely to have enough experience to jump right into a difficult project.
  • Consider the paperwork.
    If you have a fear of bureaucratic paperwork, avoid hiring employees when possible. With contractors, you won't have to worry about all of the laws that apply to employees, from overtime to rest breaks to anti-discrimination rules to providing time off.
  • Consider mixing temps and full-timers.
    Sometimes the best approach may be to mix temporary and full-time employees. The key to doing that is to identify your potential stars and make sure you're promoting and giving them more responsibility. Focus on keeping those high potential individuals. Then you can keep costs down by bringing in temp people for much of the other work. In my experience hiring a temp worker doesn't mean that the people are not as qualified or as good. Sometimes the temp people are highly qualified people who only want to work 20 or 30 hours. Often temps turn out be really quite dependable and reliable. They just want to work less hours.

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