When it comes to hiring new workers, whether to bring people on as employees or independent contractors is a conundrum every business should examine. When a business is growing, outsourcing work to an independent contractor is very tempting for the cost-saving aspect, but having an employee has its benefits as well.
This article will help business owners determine the advantages and disadvantages of employees and contractors using a three-step approach:
- Evaluate business needs
- Measure the pros and cons of employees and contractors
- Identify the available resources.
1. Evaluate Your Business Needs
Every business is unique and has a different business culture. The decision to hire an employee or an independent contractor depends on the nature of the work. Ask yourself the following questions:
- What kind of work requirements do you have, and are they ongoing or temporary?
- Does the job require technical skills or expertise in a particular area, or is it manual labour?
- Are there any protocols that require you to do the work in a set format, or you are only concerned with the outcome?
- Do you want people to be dedicated to your business or are you okay with them potentially taking on work from your competitors as well?
- Is the job at hand urgent, or is there some flexibility with the timing?
If any of the above are particularly important to you or your business, this may help to answer the question. For example, if you need a dedicated, full-time person to work on a project or if the work is expected to go on over several months or years, you may want to consider taking on an employee.
2. Consider the Pros and Cons of Independent Contractors and Employees
An employee works exclusively for you, and you have complete control over the work they do and how they do it. But this control comes at a cost. You are responsible to train employees, provide them with the necessary tools, and pay them regularly.
As an employer, you also have obligations under the Employment Standards Act, which requires you to pay for vacation time, overtime, and to provide reasonable notice pay upon termination. The Canada Revenue Agency (CRA) also requires you to withhold income tax, as well as contributions to the Canada Pension Plan (CPP), and Employment Insurance (EI).
The above deductions do not apply to an independent contractor. A contractor is often an expert in their field, uses their own tools, bears all the cost of doing the work, and monitors their own profits and losses. As a client, you assign the work, set a deadline, and pay the invoice once the work is completed. There are not many deductions, and you don’t pay for days not worked.
However, you hold no control over who the contractor hires and how they get the work done. The contractor also has the freedom to work for other companies. You also run the risk of the contractor leaving the work midway or delaying your work for another client.
3. Identify Your Available Resources
Now that you know your business needs and the services and risks contractors bring to the table, you need to evaluate your situation. There is no doubt hiring an employee is expensive. Hence, the concept of independent contractors is attractive as it optimizes cost and frees you of many administrative and financial burdens. But there are some business needs that only employees can fulfill.
For example, let’s say that David runs a small cafe and needs someone to serve the tables and manage customer orders every day. Here, it would make sense to hire a full-time employee to ensure regular availability for a prolonged period of time.
David must then look at whether he can afford a full-time employee. This is where he will identify available resources. Hiring an employee will require David to take on payroll, including managing deductions for CPP, EI, and taxes. Moreover, he will have to train the employee, give them with a uniform, and any other tools that they will need to perform their duties.
David has to now evaluate if he has the time and resources to do the extra work required when taking on an employee. Most small businesses prefer hiring contractors wherever possible. Even large companies outsource their manufacturing and backend work to third-party contractors, especially where the equipment cost is high. The cost/benefit analysis can be complex, and so it’s often advisable to discuss these considerations with a skilled business advisor and financial professional before making the decision.
Contact Sloan Partners LLP for Corporate Financing Advice & Strategy
The decision to hire an employee or an independent contractor has a significant administrative cost involved and needs accounting expertise. Seek advice from your accountant to help you work out the math like cost and taxes.
At Sloan Partners LLP, we offer a team of skilled and exceptionally experienced Chartered Professional Accountants who provide our small and large business clients with a full range of services, including business consulting and financing. No matter your company’s specific needs, we can help. Let us keep an eye on the details so you can focus on the big picture. To schedule a consultation with one of our exceptionally knowledgeable accounting professionals, please reach out to us online or call us at 416-665-7735.