Contractor vs Full-time Employee: Key Differences Explained
The job market has been slowly welcoming workers to work more flexibly, and traditional full-time employees have increasingly been working in tandem with workers with open-ended, adaptable, contract arrangements. As businesses adjust to this new way of doing things, it's important to know the difference between contractors and people who work full-time. This simplifies how organizations make better decisions about workforce design that match their strategic goals and operational needs.
In this guide, we’ll take an in-depth look into the key differences in compensation, benefits, legal obligations, and operational considerations of both work arrangements. It will be a contractor vs. full-time employee guide. Our goal is to equip you with the necessary information to choose the most suitable hiring strategy for your business, in terms of cost-effectiveness and productivity.
What is a Contractor?
A contractor, also known as an independent contractor or freelancer, is a self-employed individual who provides services to clients on a project-by-project basis. Unlike traditional employees, contractors are not considered part of the hiring organization's workforce. They are responsible for their own taxes, insurance, and other business expenses.
Contractors typically work on specific projects with defined start and end dates. This model offers a flexibility that allows them to set their own schedules. Contractors often work remotely and can be based anywhere in the world. On the downside, they don’t receive employer-provided benefits such as health insurance, retirement plans, or paid time off. They more often than not don't receive a laptop, for example, because having equipment could mean they're employees masquerading as self-employed individuals. But some companies have started handing out laptops to contract workers, so it's not a standard anymore.
Contract workers usually work for plenty of companies at the same time. They can even be a full-time employee at a company and work as contractors for a different company.
What is a Full-time Employee?
A full-time employee, on the other hand, is a person who works a specific number of hours per week for a particular employer. This arrangement involves a long-term commitment, and the employer-employee relationship is limited by employment laws and regulations.
As an employee, the organization is responsible for withholding taxes, providing benefits, and complying with labor laws. Full-time employees typically work a fixed schedule, often a traditional 9-to-5. Employers often offer a comprehensive benefits package, including health insurance, retirement plans, paid time off, and other perks. Plus, this model often provides greater job security and stability for employees compared to contract work. Typically, and especially in contrast to around-the-world contractors, full-time employees in a U.S. company also live in the U.S. Full-time employees from U.S. multinational companies are usually hired by a separate legal entity registered in their home country.
Also, and tacitly, full-time employees are expected to work only one job. This was a given before the work-from-home era, because no-one could have two jobs if they were expected to show up to the office. It has recently changed—it's known as overemployment—but the norm is still that each full-time employee works for one employer only.
Compensation and Benefits: Independent Contractor vs. Full-time Employee
Compensation and employee benefits are key factors to consider when thinking about the financial aspects of employment. Both contractors and full-time employees have their own approaches to these variables, and we’ll break them down in this section.
Compensation
When it comes to compensation, contractors and full-time employees are quite different. Contractors typically negotiate their own rates and pay for their taxes. Companies request a W-9 or W-8 form from these contractors, and sometimes they might not need to withhold any taxes when the year ends. They might just need to file a 1099 Form.
Full-time employees, on the other hand, receive a fixed salary or hourly wage, often supplemented by additional benefits like overtime pay, bonuses, and stock options. Full-time employees have taxes withheld—deducted—from their salaries. As the IRS puts it, “employers generally must withhold federal income tax from employees' wages.”
So, are contract workers cheaper than employees? It depends. For a short-term project, it'll be cheaper to pay for an expensive contractor instead of hiring a full-time employee. But in the long-run, a loyal employee will likely offer greater value at a lower cost.
Benefits
One of the most significant differences between contractors and full-time employees has to do with benefits. Contractors are responsible for securing their own benefits, like health insurance and retirement savings—which can be a considerable expense.
Full-time employees, however, often receive a comprehensive benefits package provided by their employer. This typically includes health insurance, retirement plans, paid vacation time, sick leave, and disability insurance. The U.S. Labor Department recently reported that, on top of the wages, companies will have to pay at least an extra 50% (on top of the salary) to cover benefits. This figure includes employee benefits like PTO or Social Security benefits.
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Operational Differences: Full-time Employee vs. Contractor
The operational differences between contractors and full-time employees go beyond compensation and benefits. Let’s now see how this contrast benefits or impacts businesses.
Autonomy and Control
Contract workers enjoy greater autonomy in managing their work. They have the flexibility to set their own schedules, choose their clients, and determine their work methods. It obviously also comes with responsibilities, including project management, time management, and client relations. This is what companies care for. Contractors, who usually don't have a company email address, can be great for async work, but if a task requires constant meetings, this autonomy can backfire.
Full-time employees, on the other hand, typically have less autonomy. They are expected to do their jobs according to company policies, procedures, and schedules. This sounds like a troublesome attribute, but these boundaries are what makes them so compelling for a company and are what employees can leverage to succeed.
Onboarding and Training
The onboarding and training process for contractors and full-time employees is also different for companies. Contractors often have a more simple onboarding process, as they are typically expected to possess the necessary skills and experience to complete the project. A contractor's onboarding is typically just a signature away.
Full-time employees, on the other hand, receive a more detailed onboarding process, which may include training on company culture, policies, procedures, and technical skills. Companies must focus on this great onboarding because they need to boost up retention and overall job satisfaction. Actually, a report found that a well-designed onboarding program can raise new employee retention by 82% and increase productivity by more than 70%.
Onboarding is generally considered more complex for full-time employees than for contractors, but if a streamlined process is set up, then this should not be a challenge.
Hiring Goals and Long-term Commitment
The hiring goals and long-term commitment of organizations also depend on whether they are hiring contractors or full-time employees. Contractors are often hired for specific projects or to fill temporary staffing gaps. The relationship between the contractor and the organization is typically short-term. If the contractor works out well for the company, both parties can arrange to extend the relationship. And contractors can even become full-time employees.
Full-time employees, on the other hand, are hired with the expectation of a long-term commitment. Employers invest in their training and development—as they hope to retain them for an extended period. This long-term perspective can lead to greater job security, opportunities for career development, and a stronger sense of loyalty to the organization.
Flexibility and Work-Life Balance
Contractors have greater flexibility in managing their work-life balance. They can choose their working hours and location, allowing for a more personalized schedule. This is not a problematic point for companies. The digital nomad ecosystem is built around workers delivering results from a hut on the beach.
On the other side, full-time employees often have a more structured work schedule, with fixed working hours and specific deadlines. As we said, while this may limit flexibility, it can also provide a sense of stability and routine. These are healthy boundaries, if anything, because they help employees structure their work. In any case, multiple companies have taken a cue from contractors and now offer flexible work arrangement to their employees, such as remote days or unlimited PTO.
Legal Implications and Compliance
Misclassifying workers as independent contractors can have significant legal and financial consequences for businesses. This goes two ways. Companies shouldn't have contractors that are, in fact, full-time employees. And they shouldn't have employees who are making decisions like if they were a small business themselves. Let’s take a look at what the Fair Labor Standards Act (FLSA) tells us about it.
The Economic Reality Test
The FLSA uses the “economic reality test” to figure out whether a worker is an employee or an independent contractor. This test considers the following factors:
- Opportunity for profit or loss: Does the worker have the opportunity to earn profits or suffer losses based on their own managerial skill and decision-making? For example, does the worker invest in equipment or marketing, negotiate rates, and hire subcontractors? This could be a sign of being an independent contractor.
- Investments by the worker and employer: Does the worker make significant investments in the business, such as buying equipment or marketing their services? How do these investments compare to the employer's investments? If the worker makes significant investments, it may suggest it’s an independent contractor.
- Permanence of the work relationship: Is the work relationship ongoing or project-based? Does the worker have a long-term relationship with the employer or work on various short-term projects? A long-term, ongoing relationship may indicate employee status.
- Nature and degree of control: Does the employer exercise control over the worker's schedule, work methods, and work location? For example, does the employer set specific hours, provide training, or supervise the worker's performance? If the employer exercises significant control, it may be an employee.
- Integral nature of the work: Is the work performed essential to the employer's business operations? Does the worker's work contribute directly to the core functions of the business? If the work is essential to the business, it may mean the employee isn’t independent.
- Skill and initiative: Does the worker exercise independent judgment and initiative in carrying out the work? For example, does the worker market their services, set their own rates, and manage their own schedule? If the worker exercises significant skill and initiative, it may point to an independent contractor.
Potential Legal Consequences
Misclassifying workers as independent contractors can land businesses in serious legal trouble. If you misclassify a worker, you could be on the hook for back wages, overtime pay, and payroll taxes. You might even have to provide benefits like health insurance and retirement plans. And that's not all, folks—the Department of Labor can hit you with hefty fines.
Best Practices for Compliance
Businesses should take several steps to avoid misclassifying employees as contractors or the other way around. They should pay attention to whom they're hiring and for what. If a company needs someone who can meet daily, use the company's Slack, and have a corporate email address… then hire an employee, not a contractor.
In case an authority comes around asking, businesses should be keeping detailed records of the worker's activities, compensation, and any agreements or contracts. Also, they must stay informed about changes in labor laws and regulations that may impact worker classification. Finally, organizations should use written contracts to clearly define the relationship between the worker and the employer—which outline the nature of the work, compensation, and the parties' expectations. The best to follow up with this checklist is with HR software that can onboard both employees and contractors.
Manage your Contract Workers and Full-Time Employees with HR Software
It's important for businesses to know the differences between temporary workers and permanent workers so they can hire the right people. If organizations carefully consider factors like compensation, benefits, or what they need from an operations' standpoint, they can choose the hiring strategy that best fits their goals.
In short, contractors offer flexibility and can be cost-effective for short-term projects. Still, since they don’t have a direct manager they report to, they might be autonomous and reliable to work out for a company. The downside is they may not be as committed to long-term goals, which is predictable, since they're not subject to the same benefits as permanent employees. Full-time employees will probably be more loyal, but they can be more expensive to hire and retain in the sort-term.
So, to make smart hiring decisions, businesses should keep in mind the scope and duration of the project, budget constraints, and the level of supervision they believe they need.
TalentHR could be the platform that might best help you out when you realize you need both contractors and full-time employees working with you. Beyond its platform for managing traditional employees, offers a specific HR software solution for contractors. So you can enroll and onboard both kinds—and administer the right benefits—from a single platform. TalentHR also allows you to customize the interface to match your particular way of working.
Register now and try it for free! It takes seconds to sign up to TalentHR.
