Independent contractors — also known as freelancers — are self-employed professionals that companies hire to carry out specific tasks, usually on a short-term or project basis.
The number of independent contractors in the US alone grew from 38.2 million in 2020 to 65 million in 2022, driven by the rise of the gig economy and remote work.
Many businesses turn to independent contractors to bolster their team’s capacity because they can help the company save money and have the skills to hit the ground running.
However, overreliance on independent contractors, especially ones based in other countries, can put you at risk of breaking local labor laws — with potentially disastrous financial consequences and reputational damage for your business.
If your company regularly works with independent contractors, you need to be aware of the risks — and why hiring full-time employees may be a better option.
It’s easy to see why many companies prefer to work with independent contractors rather than hire full-time employees. For instance, companies typically pay employees more than contractors, and hiring an employee incurs additional costs such as payroll, taxes, health insurance premiums, employee benefits, office space, and other expenses.
However, depending on the country you’re hiring in, savings are not always a given. For example, in Spain, companies must offer benefits to an independent contractor who spends 75% or more of their time working with them.
In addition to lowering costs, businesses are often attracted by the flexibility independent contractors offer. Their specialized skill sets allow them to start working with minimal onboarding, allowing companies to expand and contract their teams according to their needs.
However, the risks involved in hiring independent contractors may outweigh these perceived benefits. Let’s take a look at some of the main threats you need to be aware of.
At what point does an independent contractor become considered an employee in the eyes of the law? The answer varies from one country to another, but if you work with the same contractors on a long-term basis, it’s something you’ll need to consider to avoid misclassification, which carries potential financial penalties and even jail time.
For example, in the US, the penalties for misclassifying employees as independent contractors include paying back taxes to the Internal Revenue Service (IRS), interest, and a fine of up to 35% of the tax bill for each misclassified worker.
A contractor owns any IP they create unless otherwise specified in the independent contractor agreement.
For example, if you hire an independent contractor to write a book, you must ensure they sign a written agreement transferring copyright ownership to you before starting the work.
On the other hand, employers typically own any IP created by their employees, meaning they don’t have to worry about potential copyright infringement lawsuits.
Because independent contractors are not subject to the same level of supervision and oversight as full-time employees, companies may have less control over the quality of their work.
Additionally, since they may be working for several companies at once with differing requirements, they might be less familiar with your business’s particular ways of working.
Working for multiple companies at a time means that your favorite contractors might not be available for your company’s next project, which can disrupt your business if you rely heavily on independent contractors.
If you want to work with the same person on a consistent basis, hiring them as a full-time employee will ensure they’re always available when you need them.
Contractors run their own small businesses, so there’s a higher risk of attrition when working with them because they have other clients whose work they may choose to prioritize over yours.
When working with contractors, you need to be prepared for them to turn down future projects, terminate an ongoing contract, or choose to work for a competitor.
Workers’ compensation insurance typically covers employees who are injured at work, so the company doesn’t have to pay out-of-pocket. These employees give up their right to sue their employer for damages in exchange for the compensation they receive for their injuries from the insurance company.
Because independent contractors are not covered by workers’ compensation, they may be able to sue the company and recover damages if they sustain an injury while working for you.
Independent contractors can sometimes be a good solution, but if you’re working with the same people consistently over long periods of time, you might want to consider hiring them as full-time employees. Not only can hiring employees minimize any legal risks, but it can also have several advantages for your business, including the following:
While hiring full-time employees may require spending more on salaries and benefits, it can actually contribute to lowering costs in the long run. For example, full-time employees require less training and supervision than independent contractors, and they can produce high-quality work consistently and with fewer mistakes.
Additionally, full-time employees tend to have lower attrition rates, so you save time and money that you would have to spend looking for a new contractor if one isn’t available.
Companies have greater control over full-time employees’ work processes, procedures, and working hours, which can help ensure consistent quality, adherence to company standards, and timely completion of work.
Hiring people as full-time employees can give them a greater sense of security and show them that you value their work and want to support them. This can help them feel more motivated at work, leading to greater productivity.
Full-time employees build stronger relationships with their coworkers and become more integrated into the company culture. They are more likely to share the company’s values and collaborate with other team members to achieve common objectives, making them more committed to your business goals.
Of course, hiring employees can have its drawbacks too, and it may not always be the right choice for your business. For instance, employees come with higher costs, including benefits like healthcare, retirement plans, and paid time off.
Additionally, hiring full-time employees represents a greater commitment on the part of the company, so for short-term projects, you may still want to work with a contractor.
An employer of record (EOR) like Remofirst takes global hiring off your hands, ensuring all your international team members are classified correctly. Whether you need contractors or employees, Remofirst can help.
With Remofirst, you get compliant and localized contract creation, onboarding and termination HR guidance, on-demand expertise on local rules and regulations, access to benefits and health insurance, one-click international payments, and intellectual property protection.
Book a demo to learn more about how Remofirst can help you hire compliantly in over 150 countries.