Staffing a New Business: Should I Hire Employees or Contractors?
As a small or medium-sized business owner, you face many decisions on a day-to-day basis, and as you grow, you continue to juggle more and more. At some point, you will likely need to expand your team to include more people.
Often, this takes the form of having a capacity gap — you can’t do all the work you need to in the time allotted, and you need more people to get it all done — or a knowledge gap — you need a specific skill set or expertise that you do not hold.
You may find yourself asking, “Should I hire employees or contractors?”
Whether you have a capacity gap or a skill gap, there are many ways you can seek additional support, such as by hiring employees or contractors. This decision — hiring employees or contractors — is nuanced, so we rounded up information to help guide you and ensure you make the best hiring decisions as you staff your business.
Should I Hire Employees or Contractors?
Whether you should be hiring employees or contractors when staffing a new business is a complex question, and is not one we can answer in a vacuum. As you consider expanding your team, prepare to solicit input from a variety of employment professionals, including lawyers and HR professionals, in addition to your accountant.
At KeyLin, we have a variety of expertise that we can lean on, from CPAs to bookkeepers, but there is no hard and fast set of rules we can follow to give you one answer to this question. Having a group of advisors can help you make sure you have a holistic understanding of the situation and make an informed decision.
Generally, the employee versus contractor debate for staffing a new business comes down to the relationship between the parties: who is deciding on the details of the work?
As a quick rule of thumb, if you want to have more oversight over work activities as the business owner or manager, you are likely seeking an employment relationship. Situations with more flexibility by the other party to make their own decisions indicate more of a contractor relationship.
Here are some additional guidelines and details to consider, including insights from an HR professional and a lawyer, as well as KeyLin’s President, Amanda.
Employees Fill Capacity Gaps
An employment relationship is one that most people are familiar with. Employees typically have a combination of the following:
An ongoing or long-term relationship with the employer
Significant oversight and governance by the employer
Tools, information, training, and guidance provided to them
Concrete, specific work assignments and deliverables assigned to them
Contractors Fill Expertise Gaps
Contractors are often area experts that are hired to do a specific task or fill a specific need. In a contractor relationship, they generally have:
A short-term relationship with the employer
Freedom over work hours, work style, and process
More specific knowledge or expertise in their field
Open-ended or outcome-focused responsibilities
Hiring an Employee vs. Contractor: An Incomplete Checklist
Again, there is no one way to answer the question, “should I hire employees or contractors?” as you’re staffing a new business or growing your existing business.
As you continue to establish the boundaries between employees and contractors, keep these things in mind:
Input and Oversight by Management | More input and oversight by the employer generally creates an employee relationship, while contractors should have freedom to make work-related decisions, like workload or work hours, for themselves.
Integration into Company | Employees are free to be fully embedded into a business, including having titles and company emails. Avoid giving contractors titles or emails, though, because it muddies the water on responsibilities, oversights, and expectations.
Replacement of Employees | If your goal is to replace someone who should be an employee in your business with a contractor, such as to save money, that role should still be filled by an employee. Contractors are not a “get out of jail free” card for employers.
Length of Relationship | As the length of the relationship increases, generally the likelihood that the relationship should be an employment one increases.
Payment Style | Generally, contractors should receive a flat fee, unless they’re providing professional services, in which case they should have an hourly or monthly rate that adjusts based on the amount worked. Contractors should not be salaried like employees can be.
Restrictive Covenants | Contractors cannot have restrictive covenants included in their contract, such as non-compete clauses. In Minnesota, employees can have non-compete clauses, but only in certain circumstances.
Level of Client Interactions + Client Loads | Contractors should have the freedom to determine the amount of interaction they want with Clients, and when they do so. They should also be permitted to take on other Clients if they choose. If someone is acting as the face of your company on your terms, or if they are being forced to reduce other work to complete your requests, you should consider an employment relationship.
Reliance | If one individual is relied on regularly and continuously to maintain business operations, and they are the only person capable of performing specific duties, they are likely an employee.
Tally up your answers.
For an employee, seven or more “yes” answers is a good sign.
For a contractor, seven or more “no” answers is a good sign.
Note: having one or two answers that are in opposition to what you have planned to staff your new business is not inherently cause for concern. As you get more and more of a mix of the two, though, you should consider changing your planned designation, or at least getting a second opinion.
This is not an exhaustive list, but rather can act as a starting point as you collaborate with your trusted advisors on establishing what your needs are as you’re staffing a new business or scaling up a current business. As you plan, be mindful of what your needs and desires are, so you can choose the staffing methods that will not only serve your business, but also be in alignment with local, state, and federal employment laws.
Other Staffing Considerations
As you ask yourself, “should I hire employees or contractors?” remember: there is more to that decision than legal or tax classifications. What are your business needs? What are you able to spend on staffing? And benefits?
Depending on your unique circumstances and business, a mix of employees or contractors may be the most effective way to staff your business. Similarly, you can have a mix of full-time, part-time, and temporary employees. The key to any of these relationships is being aware of the distinctions between them. Be mindful of the boundaries, and you can create a staffing model that meets your needs.
Or you can change your relationships over time as your business changes. Regularly assessing the working relationship and conditions between yourself and your team will help you ensure the relationship remains above board. If you notice that a team member’s work is shifting, don’t hesitate to rethink their responsibilities or classification.
Ultimately, though, none of these decisions are up to you. You can work to set boundaries and reduce the likelihood of a misclassification, but government agencies like the IRS and Departments of Labor and Revenue have the final say. If you get audited and you’re found to be out of compliance, you can face hefty fines. This is why it’s so important to have a team of advisors to support you. They can be experts in another field and see a perspective you may miss alone.
Let KeyLin Join Your Advisory Team for Staffing Decisions
As you’re staffing a new business or considering growing your current business, let us be your trusted advisors. We have experts in accounting, bookkeeping, tax preparation, and payroll. Together, we can look through the financial aspects and implications of hiring employees or contractors so you can make an informed decision. Schedule your first free consultation today to get started.
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