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Pros and Cons of Hiring an Employee or an Independent Contractor: Harsh Penalties for Misclassification

March 2, 2010

Hiring is good news for your business.  It is growing and more help is needed.  However, should you hire a new employee or an independent contractor?  Consider the pros and cons of hiring an employee or an independent contractor:

Pros of Hiring An Independent Contractor

  • Reduced Costs:  Payroll, benefits, and other overhead are reduced.  Such reduction in overhead can mean less pressure to bring in new business revenue to cover the costs of the added labor.
  • No Health Benefits:  Deserving of specific mention is the huge burden on small businesses is the ever increasing costs of employee health benefits.
  • Use as Needed:  Independent contractors may agree to work inconsistent numbers of hours based on your small business’s changing needs.
  • Specific Expertise:  Your small business can select someone who already has the specific expertise that you require for a particular project.

Pros of Hiring An Employee

  • Flexibility: Employees can be much more flexible in different areas and as changes in tasks require. 
  • Single Minded Loyalty: An employee is likely to have a much stronger loyalty, which can mean more productivity as well as a long term investment in the growth of the business.
  • Knowledge of Business:  There is greater knowledge of your small business as a whole and see it in operation on a consistent basis.

Cons of Hiring An Employee

  • Burden of Payroll:  The burden of having to make payroll often means that your ability to count on your own paycheck is less consistent.
  • Additional Overhead:  In addition to the costs of employee benefits and payroll often comes the need for bigger space and more equipment.
  • Management Role:  As your small business grows in size, there comes with it the burden of training and supervising employees.  This can divert your attention from the business operations.
  • Legal Issues:  Your small business becomes exposed to worker-related lawsuits. There are many laws that must be addressed and complied with.

Cons of Hiring An Independent Contractor

  • Loss of Control:  Part of what makes a contractor independent is their ability to choose the projects they take and how they perform them.  Contractors may have outside projects and less commitment than an employee.
  • Rates Can Vary:  An independent contractor may charge different rates based on varying projects.  This unpredictability can may it difficult to ascertain the cost of a prospective project. 
  • Harsh Penalties for Misclassification:  If you make an error in classifying an employee as an independent contractor, you can be held liable for many penalties, including with respect to employment taxes, interest charges, and penalties. 

Given the severe costs of misclassifying an employee as an independent contractor, the rules should be carefully reviewed with an attorney prior to hiring. 

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