Hiring employees vs contractors: Which you should hire and when - SystemsAccountants

Estimated reading time: 6 minutes Hiring employees vs contractors: Which you should hire and when

Deciding whether to hire an employee or contractor was once a simple choice: contractors were the go-to hire for shorter sprints and employees were appropriate for longer hauls. But it’s not so simple now.

The world of work has changed significantly over the past two years, with employees now expecting greater flexibility and employers facing fierce competition for talent in sectors like finance and IT – regardless of whether that talent is a contractor or a full-time employee

What’s the difference between employees and contractors?

The key differences between employees and contractors are legal. Employees have employment contracts that control and protect aspects of their ongoing work process and product, compensation and specifies mutual obligations – the key one being that the employer must provide work and the employee must agree to do it. Contractors have fewer protections but fewer obligations, their work may not be classed as ongoing and their compensation is structured differently.

But legal differences are not the only important consideration. Leaders looking to hire must think carefully about context too – such as their strategic goals, types of projects and budget. And they have to consider structural challenges too.

“At a high level, you have very different problems to two years ago,” says David Hammel, UK managing director of SystemsAccountants. Among those problems he lists Brexit, the pandemic, IR35 – tax legislation that has significantly narrowed the definition of a contractor – the energy crisis, problems with the cost of living, and difficulties with logistics and manufacturing.

Despite these factors, job openings and skill shortages have been at an all-time high.

These different challenges are reflected in the statistics, adds Hammel.

“Pre-pandemic we had about a 70/30 percent split for recruitment positions, in favour of contractors,” he says.

“Now it’s 50/50. That mirrors how much tougher the decision is now – especially in the modern finance function, which tends to be leaner.”

Why hire an employee?

An employee is an individual on a company’s payroll. They receive wages and benefits in return for working under the company’s rules and wider regulations. The company, depending on jurisdiction, must pay certain taxes on behalf of the employee and fulfil certain obligations, such as providing the individual with regular work. The company has to spend more money to recruit but, says Stephen Geater, CFO at Pai Skincare, “employees have the advantage when it comes to driving and delivering plans and targets because planning cycles are often of a greater length than contractors’ term periods”.

There are other benefits to employees too. Working in the finance function requires both knowledge of money management software and of financial strategies – such as how to increase revenue. Employees aren’t just focused on the go-live date for big systems upgrade projects but, as Hammel says, “have a wider stake in the continuous improvement of the company, including knowledge retention, and taking part in decision-making at a strategic level.”

However, Hammel says that companies who want to hire employees will have to spend more time and money doing so: “They have to hire employees from a mindset perspective – a cultural perspective and ask themselves ‘will this person represent my business and be a custodian of the brand of both the finance or IT function and the company itself?’”

In addition to the time and expense in hiring, there may be other downsides too. Employees are more expensive to dismiss quickly, require more supervision, must spend more time on personal development – and therefore less on projects – and it’s no longer guaranteed that they’ll be happy with less flexibility than a contractor.

Why hire a contractor?

Contractors are self-employed individuals who may work with a limited liability company. They pay their own taxes, submit invoices for the work they complete and don’t have the same benefits as employees – like pensions or healthcare. They aren’t on the payroll and tend to work on shorter-term projects – and they can usually leave when they like with little or no friction.

The usual benefits of hiring contractors are obvious: they’re less costly for short-term work, don’t need much supervision or training, and spend most if not all of their time on core projects. Geater says that contractors can “hit the ground running and are used to making an impact from day one.”

But there are plenty of other benefits too. “Many of the contractors we match with companies have tremendous delivery, project, and governance skills,” says Hammel.

“They’re great at managing stakeholders and vendors and crucially have years and years of experience. They don’t necessarily travel light, but bring a lot of ‘lessons learned’ with them.”

For companies pursuing big transformation projects using ERP or EPM solutions such as Netsuite or OneStream, contractors can add significant value. “Their deep subject matter knowledge means they’re typically great at ensuring user adoption really transpires,” says Hammel.

And it’s not necessarily the case that contractors tend to ‘stay in their lane’. “The best contractors are very driven and have “no problem making big strategic calls and advising the C-Suite,” he adds.

But eventually, with contractors, you lose at least some aspects of that knowledge when it comes time for them to move on. “Yes, they get the job done,” says Hammel, “but the big risk factor is not properly extracting everything you can from them and not retaining what intelligence they’ve given you.” And, says Geater, “both IR35 legislation and timing contractors’ exit can be complicated”.

So who should I hire?

The key to deciding between going for a contractor or an employee, says Hammel, is “to remain open-minded” – especially, as Geater observes, because “there is a real shortage of the right skillsets.”

Hammel says: “Companies have to get out of the mindset of go-live and business as usual and focus instead on picking the individual who’s going to deliver the greatest value to the wider business through business partnering, problem-solving, and focusing on continuous improvement.”

The distinctions between contractors and employees has narrowed to the point where many finance leaders will be making the hiring decision based on what stage of growth their company is at.

“Ultimately,” says Hammel, “the blended model is best. For example, we provided both contractors and employees for a FTSE 250 company looking to upgrade its systems and processes.

The key, says Hammel, is to look across your team and see if you have “the right number of employees to drive your continuous improvement goals, and the right number of professional contractors who have the expert skills you need to embed new processes and technologies”.