Why Do Companies Hire Contractors Instead Of Employees?

In 2018, for the first time in the two-decade-old history of Google, contract workers outnumbered full-time employees.

They’re known by different names: Freelancers, contract workers, temporary workers, independent contractors, or independent workers. There could be minor differences in the way they work, but essentially, they are contracted to hire. They make up more than 30% of the workforce in the US.

This enormous group of more than 60 million contractors contributes upwards of $750 million to the American economy. They work in areas as diverse as law, healthcare, education, accounting, media, the arts, entertainment, construction, investigation and forensic science, real estate, property management, the IT industry, and more.

While young people fresh out of college sought full-time, permanent jobs in the past, this is not a priority with the modern generation.

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This is the generation that uses technology more confidently, has the skill-sets for on-demand projects, they’re mobile and value their leisure. They follow their passion and live out their dreams. They could work a shift as an Uber driver, run thriving e-commerce or a photography business and offer psychological counseling or ethical hacking services all at the same time.

Not for them the intern-to-retiree route in one company, with the gold watch and speech at the end of forty years. Today’s corporation doesn’t adopt that old paternalistic attitude towards its workforce, where you could hypothetically work your way up from mail-room to board-room.

Towards the end of the last century, powerful investor lobbies on Wall St began to insist on companies maximizing returns. This meant that only those that fit into the core competencies of the firm were deemed appropriate to be full-time hires, while other services were increasingly farmed out to contractors.

While this resulted in companies getting more affordable rates for outsourced services, the trend became deeply entrenched in the corporate culture of the country. It has also resulted in a two-tier economy. The services of full-time employees who earn higher wages are more likely to be contracted out compared to those who are on lower pay grades. Visit https://clayburnettgroup.com to know more.

Who Is A Contractor?

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If we look more closely at contract hire jobs, they fall somewhere in between a freelance gig and the regular jobs that are more permanent. The top jobs for contractors according to a survey conducted in 2016 are computers and information technology, administrative, accounting/finance, customer service, medical/healthcare, research, writing, education, and training.

Contractors are:

  • people whose performance of services are not legally controlled by an employer but may be controlled by their staffing company
  • responsible for paying their own taxes
  • full-time, part-time, flexi-time workers or may be temporary workers
  • full-time permanent employees who may also moonlight
  • diversified professionals with several different sources of income from full-time and freelance work
  • professionals whose charges are usually 1.5 times more than full-time employees

Why Do Companies Prefer Contract Hire To Direct/Full-time Hire?

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Some of the reasons include:

1. Cost

The real cost to the company of maintaining a workforce includes basic salary, benefits based on package and paid time off, Social Security and Medicare taxes, and the prevailing State Employment Tax. Contract workers are not entitled to receive health insurance or disability insurance, 401 (k) retirement benefits provided by employers. Permanent employees may also have to be paid termination costs or severance costs. However, in real terms, contractors may charge up to 1.5 times more per hour as compared to regular hires. Most contractors also have their own up-to-date certifications, licenses, and insurance. This works out much cheaper in the long run. Employers don’t have to pay for training or refresher programs either. Contractors keep your headcount low and they don’t need to be paid for overtime. They’re not eligible for workers’ compensation or unemployment benefits.

2. Time and Work

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Contract hire is best suited for one-off projects. They represent a “body” or a “mind” that doesn’t have to feature on your books. While projects may get extended or lead on to other projects, the main reason to hire an independent contractor or consultant is that you don’t incur cost overheads. Many contractors work from home so you don’t have to provide them with infrastructure. They’re also ideal if you’re test-driving a project and want to experiment with whether to make it a part of your suite of services. Contractors are not allowed to join unions, and they’re not protected by workplace safety or anti-discrimination regulations.

3. Skills

Employers who need just-in-time niche skills and high levels of experience would rather hire a contractor than go through the process of finding in-house talent, training, refresher courses, upskilling, etc. Contractors are job-ready from the word Go, so you don’t waste time with orientation and onboarding. They also work relatively independently and have the authority to take decisions. Tech firms in particular use contractors for more than 40% of their tasks.

4. Flexibility

Every business goes through rich and lean periods. Often, the workloads may swing from one extreme to another. This allows employers to adjust to varying fluctuations in the flow of work and load. Employers must pay their permanent staff regardless of whether there’s work or not, but with contractors, you can opt to hire them or not, and also terminate the contract without too many issues, if the terms of the contract don’t specify otherwise.

Are There Any Risks?

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Though the benefits are certainly significant, there is a flip side to hiring contractors. If the work is safety-critical, there could be huge risks involved in sub-contracting out the work. Though the workers are not permanent employees, the company could face serious litigation in the case of workplace accidents.

For contractors, many of them don’t feel part of the organization or that they have a stake in its success and well-being. They usually don’t get invited to meetings or critical meet-ups. Some companies have different color badges for permanent staff vs contractors. Contractors often have to pay for their meals in the company cafeteria and they often feel that they’re not part of the elite inner circle of permanent employees. This could affect morale and dedication. The job is not stable and for older employees, it could increase the stress and uncertainty of having to work well into their senior years to create a retirement nest egg.