Hiring an independent contractor or new employee is an important business decision. To help guide you towards the best possible decision, let us first consider the pros and cons of hiring an employee or a contractor.
Loyalty: Making the commitment to hire an employee can result in obtaining an individual with greater loyalty to your organisation than an independent contractor. This loyalty can result in higher productivity.
Multiple roles: Loyal staff members will be more amenable to taking on additional roles where required. This provides various learning opportunities for staff and a flexible, diverse workforce for the company.
Company benefits: For the permanent employee, the biggest drawcard to permanent employment is that of job security and company benefits. These benefits often include a performance-based bonus, medical aid contribution, car allowance and garage card, preferential rates at financial institutions, training, sick leave, holiday pay, provident fund, and death and disability benefit. These additional parts of the cost-to-company can dramatically reduce the employees' outgoing expenditure and increase their monthly disposable income.
Reduced costs: The attraction of hiring an independent contractor is the reduction of costs associated with expenses, payroll, benefits, and other cost-to-company overheads. This is especially true in the short term.
No medical aid contribution: This advantage merits separate mention. A significant burden, especially on smaller businesses, is the cost of employee health benefits. According to a national survey conducted by Mercer on employer-sponsored health plans, the average total cost of health benefits for a US employee was USD10 558 per annum in 2012. In South Africa, private health care policies vary considerably in price, depending on their scope and the percentage coverage, but generally cost from R1000 to R2000 per month for basic coverage, although these costs are significantly higher for comprehensive cover. Many companies pay a percentage of employees' health insurance costs, ranging from 50 to 100%, and extend the coverage to the employees' immediate family members.
Flexibility: Hiring an independent consultant offers flexibility to the changing work demands of your company. With a contractor, an organisation has the ability to grasp added opportunities as they arise and, during slow periods, have greater cost control. A contract workforce often comes fully trained and highly specialised. If you went through the process of adding staff to your organisation, you have to follow the rules prescribed by human resources with regard to coaching, disciplining, documenting, and terminating employees. It is rarely as easy as sending a contractor home for good - put simply, if the resource does not fit into the organisation, s/he is easy to remove and replace.
The time and costs spent sourcing: When hiring contractors there is no lengthy and costly recruiting process. You will more likely move rapidly through the entire process; from job posting, to candidate review, to interview, to hiring, within a matter of hours or days - not weeks. If you know exactly what you need to get done, suddenly needing it done "yesterday" doesn't seem impossible.
Outside management: Contract resources do not have to be managed by the company (line management function) and the traditional HR function is taken care of by the individual themselves or the contracting house, where applicable. The company only needs to manage the contract resource from an output perspective.
Extra overhead: Each additional employee augments the costs of employee benefits and payroll to the company. In smaller companies, adding to the staff complement may eventually require a larger office space and the purchase of equipment.
Removal and management: As previously mentioned, it can be very difficult to dismiss someone, and the looming threat of time-consuming and tiresome CCMA appeals are always on the horizon. Performance management of employees is an ongoing process, whereas independent contractors will often require less management due to more motivation from being self-employed.
Higher rates: The rate charged by a contractor is often significantly higher than the salary paid to a permanent employee, as they do not get to enjoy the additional benefits offered to full-time employees and need to cover all their expenses themselves. For the business, hiring a contractor may work out to be cheaper as a short-term solution, but in the long run it is often less expensive to permanently employ.
Loss of intellectual property: Hiring contractors brings the added risk of loss of intellectual property when the contractor leaves. In our experience, contractors tend to get antsy, "check-out", and start looking for alternative positions long before their contract comes to an end - this anxiety is compounded as many larger companies tend to renew contracts at the last minute.
Lack of ROI: Even though, in some circumstances, it may make financial sense to choose a contractor over a permanent employee, as the company is not committed in the long term, there is also the question of the unquantifiable investments made through time spent on the resource. All resources, contract or otherwise, have to get to know the organisation, and should a contractor be replaced, this process has to start all over again.
When deciding between outside help and internal staff increases, always keep in mind the additional costs associated with the hiring of employees, and the higher costs of employing a contractor in the long term. Once the cost factor is weighted, remember the intangibles, like flexibility and loyalty, to the organisation. To date, our placement ratio is 80:20, permanent versus contract placements.
In our experience, contracting excels when there is a specific, once-off project, with firm timelines. Similarly, if there is unlikely to be any post-project work requirements, then it certainly makes sense to hire a contractor.
On the other hand, well-selected permanent employees frequently prove to be more reliable, work harder, and offer a higher degree of commitment to the organisation.
Whether you choose to hire a full-time employee or an independent contractor, remember, it all comes down to finding the right people who "fit" your organisation.
