The real cost of employees vs contractors

Are you trying to work out the real cost of employees vs contractors? It can be a tricky thing to understand. On the surface, everyone is always taught that employees cost less. When you take into account the hours worked vs the salary paid, the numbers point towards the employee being the cheaper option.

However, there are so many factors to consider when working out the real cost of an employee vs freelancer. Many of which don’t get considered. The real cost of employees can range anywhere from +25% to +100% of their salary. Why? Because there are so many hidden costs associated with actually employing someone. 

Not to mention, there is the mental burden of having someone’s employment and livelihood hanging over your head. For many business owners, this stress is just too much. However, they know they need more hands on deck in order to grow. In these cases, contractors and freelancers can be an amazing addition to the team.

Many people think that contractors are more expensive (because generally, if just comparing base salary rates, they are). However, when you take into account some of the key considerations, working with contractors can make a lot more sense.

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Cost of employees vs contractors: The key considerations

Here’s the key considerations to think about before deciding between employees vs contractors.

  • Added costs with employees

First things first, employees can actually cost a lot more than you think. This is because there are so many added costs associated with hiring an employee vs contractor.

The normal employee benefits probably spring to mind. Things like annual leave, insurance, pensions, taxes etc. probably come to mind. However, the cost of an employee can be much broader than that.

When running a business, you have to consider the overheads. Employees benefit from a business infrastructure that they use daily, but never pay for. These benefits include accounting fees, HR departments, admin costs, contract costs, office overheads and the list goes on.

Contractors on the other hand pay for all of their own equipment. They provide their work tools, their laptop and office equipment, and they sort their own taxes with their own accountant. This means that not only does your business not have to pay for all of those things for them, but it doesn’t have to worry about these contributions either.

Employees can have plenty of hidden costs. These can include:

  • Annual leave or paid vacation time
  • Insurance
  • Annual Bonus / 401K Contribution
  • Payroll taxes (company paid portion)
  • Office equipment: laptops, printers, headphones, phones, phone bills
  • The overheads of running a business/ the infrastructure and admin costs per person also have to be consideredman and women gathered around a table
  • How much do employees actually work?

In some cases, even after calculating the normal employee benefits, contractors work out more expensive per hour. This is usually because they are offering a more specialised service, and they don’t get all the benefits that being an employee comes with.

However, a key consideration when working out the cost of employees vs contractors is how much employees actually work. For example, say you have an employee who comes in and does a standard 9am-5pm day on a rate of $20p/h, costing $160 a day. After factoring in their annual vacation leave, 401k, payroll taxes and insurance, we can round that up to at very least $200.

So, you have an employee working at $200 a day, or a contractor coming in at $45 p/h or $360 a day. On the surface this looks like you’ll be paying nearly double for the contractor, right?

Wrong. The contractor will nearly always complete more work vs the employee, because they charge for their time more specifically. They bill for the hours they work, and leave out the ones they don’t. This means that they don’t charge for work they don’t do. Meanwhile, the employee will often be so comfortable in their role that they will take frequent breaks, chat to colleagues, take personal phone calls, take a long lunch etc. 

This isn’t a bad thing – and employees shouldn’t be punished for taking a more casual approach. It’s just a different work style and attitude to work. For contractors, time on the job means time on the job, and they charge for every minute they work. Employees on the other hand are just part of the furniture, and will often take a lot longer to get things done.

  • Upscaling and downscaling is possible with contractors

For many businesses, analysing the cost of employees vs contractors comes at a time when you are upscaling your business. However, if this is a new thing for a particular company, they might like to work with contractors to offer them the flexibility of scaling up or down. Employees are a commitment for any business, and one that can put the pressure on.

Contractors require less notice to terminate a contract, and are easier to let go of in the event of a downturn of business. This can put business owners’ minds at ease, and allow them to continue growing their business without the stress of having an employee to look after.

Contractors can be there when you need them, and expect to be let go of when business is quieter. In this sense, contractors are ideal for businesses going through periods of growth where they’re unsure how the future might look.

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  • Contractors tend to be more highly skilled in one area

Contractors tend to be experts in their field. While working across many clients in one specialist field, they can gain an expertise that is hard to come across from a regular employee. For this reason, often the service you get when you work with contractors is more efficient and effective.

While they could cost more hour for hour, when you take into account how quickly they can work and how much they can get done, their value becomes obvious. When comparing the cost of employees vs contractors, it’s vital to consider the specialist skills your business will acquire.

Plus, often contractors supply a fresh set of eyes on a project that money can’t buy. Having team members with a fresh approach and new skills will only benefit your team.

  • Moving an employee on can be hard

Last but not least, the true cost of an employee can start to show when the business relationship has soured and you’re trying to get an employee to move on. Firing an employee is notoriously hard, and having someone on the books who is not really working, or who is souring the company culture can be very bad for business. 

In some cases, contractual commitments can see employees working for months at a reduced work rate due to a lack of motivation. This can cost employers significantly.

The true cost of an employee vs contractor

Hopefully this article has shared some considerations to be evaluated before deciding on an employee vs contractor. If you do want to start working with contractors, why not learn more about the BorderlessMind hiring process now?Or, reach out with your questions and we’ll get back to you as soon as possible.


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