Independent contractors are workers who perform work for your business, but are not employed by your business. They may be self-employed or may be employees of another company. Employees are workers whose services are rendered exclusively to your business and who have certain employment rights under the law. The line between employees and independent contractors can be blurred at times. In general, however:

Employees:

- Are given certain rights under labor laws concerning minimum wage, holiday and overtime pay, termination and working conditons.

- Covered by workers’ compensation paid for by their employers.

- Have an exclusive employment relationship with their employer.

- Have income tax and FICA taxes withheld from their paychecks by employers.

- Have employer-provided health care benefits.

- Cannot claim deductions for expenses related to work such as travel or meals.

Independent contractors:

- Are considered self-employed and are not covered by many of the same labor laws that employees are.

- Are responsible for submitting their own income and FICA taxes.

- Must provide their own workers’ comp insurance.

- Typically work for a number of employers.

- Can deduct business expenses from their tax bill.

The Pros and Cons

Each type of worker, independent contractor and employee, has advantages and disadvantages for their employers.

For independent contractors, the chief benefit to employers is the flexibility of the workforce and the lack of standing, long-term commitments to the employee. Hiring independent contractors results in lower overhead, as you will spend less in expenses, payroll and benefits. You also won’t have to spend as much time on bureaucratic work related to employment, such as withholding income and social security taxes.

Not having to provide health benefits is another advantage of hiring independent contractors. Providing health benefits for employees can cost thousands of dollars per employee.

Because you’re hiring workers to work on a per job basis, rather than an hourly basis, you have the flexibility to meet the changing demands of your business, ramping up staffing during peak times and tapering off as business slows. This helps you control your labor costs considerably.

There are some disadvantages to hiring independent contractors, however. You have less control over when the work is performed and how it is performed. With excellent independent contractors, or contractors who have worked for you before and are familiar with your needs this poses little problems, but for new or B and C players, this can be very problematic.

Fluctuating prices are another disadvantage. Independent contractors may charge varying rates per job based on their estimate of the complexity or difficulty of the job or on market demand. In some cases, this can drive costs up considerably at times when that’s the last thing your business can handle. Labor costs for employees are more settled and predictable.

Contractual obligations can be another downside to independent contractors. Contractors can demand extra compensation for changing assignments and also work termination penalties or other terms into the contract that makes it more difficult to dismiss them than employees.

Also, if you make an error and classify a worker as an independent contractor when according to IRS standards they should be employees, you run the risk of substantial penalties.

For employees, the advantages rest chiefly in having a stable workforce with predictable costs.

By hiring and coaching up employees, you can instill a level of buy-in and dedication that you simply can’t expect of an independent contractor who shifts from employer to employer. This loyalty can translate to increased productivity and innovation from your employees.

Employees may be more willing to take on a variety of roles than independent contractors, whose duties are more narrowly defined in their contracts.

Also, the stability a dedicated work force provides can be advantageous as it makes it more easy for you to coordinate yoru projects with employees who all work for you than guiding a loose confederacy of independent players.

The disadvantages for employees lie chiefly in the costs involved in providing them with a regular salary and in more administrative headaches. When you hire employees, you must pay them a regular salary, comply with many labor regulations, make sure that you’re withholding the appropriate amount of tax and deal with various other issues.

Also, the time you spend managing employees takes away time when you can focus on the more creative and dynamic parts of your business.

When making the choice between independent contractors and employees, consider the pros and cons and consider the task you need done. For short-term projects or busy seasons, taking on a few independents may be the right move. For long-term or recurring needs, hiring full-time employees may be a more effective means of getting the job done.

It’s a lot easier to hire the right employees than identify and fire the wrong employees later on, so your employment screening process is important. While in most cases there isn’t one clear alarm that may signal that a job candidate is a potentially bad fit for your organization, there are several clues when taken together can signal that you may want to consider someone else for the job.

The following are a list of red flags you should be on the lookout for when screening prospective employees:

1. Incomplete or sloppy resume – A bad resume is a reflection on the candidate’s ability to organize information and attention to detail. If a prospective employee does a poor job of representing himself or herself, how well will he or she represent you?

2. Misrepresentation – If you catch a potential employee in one fib, can you guess how many you didn’t catch? For your business to be successful, you need employees who you can trust. By avoiding hiring dishonest employees, you can ward off a lot of trouble later.

3. Lack of references – A lack of credible references on a resume shows that your potential employee may have left a former employer on bad terms. This shouldn’t be an automatic disqualifier, but if your potential employee has a lack of references or only references from friends or co-workers, you may need to do some further research before making a hiring decision.

4. Inability to completely answer questions – If an employee can’t answer job specific questions that you ask based on what they’ve put on their resume, chances are they may have embellished their actual work experience or education on the resume. You may want to think twice before hiring.

5. Reluctance by former employers to give references – Legal concerns frequently prevent employers from giving their workers poor references, but if employers completely decline to say anything about employees, it may be a telling sign.

6. Poor punctuality – If a prospective employee doesn’t show up for a job interview on time, it’s highly likely he or she won’t show up for the job on time either. Not a big deal in a non-time intensive business, but in other businesses where schedule is king, punctuality is important.

7. Overqualified candidates – If your candidate is overqualified for the work, he or she may not stick around long, as its likely they’re only taking your job as a place holder until they can find something they’re better suited for. While this may be fine for some business owners, it may be troublesome for employers who need workers for the long haul.

8. Your gut. If you get a bad feeling about an employee, you may want to dig a little deeper before you hire him or her, or avoid hiring him or her altogether. In interpersonal relationships such as the employer/employee relationship, feelings and intuition play strong roles. If someone rubs you the wrong way after a 15 minute interview, consider how you’ll feel after spending 15 months with them.