Direct Hire to Contractors – Planning Conversion

Whether you call it the gig or the freelance economy, there is no doubt that there has been a massive movement from employees to independent contractors in the past decade. It gained even more steam when COVID entered the picture. Companies sent employees home to work. In doing so the found that they did not lose productivity as expected. They then began to think about the money and management hassles they could save in moving some employee-centric jobs to independent contractors.

Advantages of Hiring Independent Contractors

As your business grows and as your ever more mobile employees attrition out to their other career objectives, it can be an excellent time to consider not replacing them with other employees. There are some advantages to this conversion:

  • No more keep-busy work for employees not fully engaged in productive work.
  • Avoid full-time employees handling infrequent or irregular services. Hiring out tasks that are only performed weekly, monthly, or annually can be more efficient use of your compensation money. This ties in with other items in this list.
  • Avoid the “jack of all trades master of none” quality situation. Often a small and growing business needs to hire employees with multiple skills or areas of knowledge. When you can only afford one employee, but you have several tasks, you try to interview to find someone who can get those jobs done in an acceptable manner.
  • Get an expert in every major task area with independent contractors. You can canvas the freelancing websites and contractor hire sites to find people who specialize in the specific task area you require. Proper selection gets you an expert in the specific area of knowledge who you can hire on a freelance basis for far less than trying to put them on the payroll. Hiring specific skills gets you the most experience just when you need it and not when you do don’t.
  • Lower employee benefits costs. Insurance, paid time off, retirement plans, or other employee costs are avoided.
  • Less administrative overhead – There is far less paperwork and management necessary for subcontracted workers than for employees. Without payroll, withholding, W-2s, and reporting, you save time and money.
  • Scheduling flexibility – For the employer and the hired contractor, there is flexibility in when work is to be done and when it is to be delivered. There is less supervision and only a deadline to be met for delivery.
  • Less dependence, more professionalism – Contractors are running their own business, not asking an employer for favors, time off, or raises. They tend to be more professional in their work delivery.

Cautions and Drawbacks

Using independent contractors has few drawbacks, but there are a couple of considerations that require your attention to make their use a success:

  • Well-defined work descriptions and requirements – You cannot expect the subcontractor to deliver what you want when you want it if you do not carefully describe the scope of work and your requirements for delivery. Disputes usually arise due to misunderstandings about what was ordered.
  • IRS rules for employee versus independent contractor – You want to carefully review the IRS tests used to determine if you have an employee or a valid independent contractor. Missteps in this area will cost you penalties and interest.

With the growing popularity of the gig economy among skilled people, you may find that using independent contractors will contribute to your success and profitability.


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