Hiring employees represents a considerable investment for a small business. Employees can be expensive and incur additional liabilities for the organization, but they also allow business owners to handle a larger workload. In addition, business owners with employees can typically exert more control over workers and build more solid relationships than they can when working with contract help.
Many small-business owners try to avoid hiring employees as a way of keeping costs low. As the business expands, though, business owners may find themselves turning away business because of insufficient resources to fill customer requests. When this loss of business, known as an opportunity cost, exceeds the cost of hiring an employee, it becomes beneficial to bring on additional help.
Though many small businesses offer independent contractors a higher rate per hour than they pay employees, hiring employees typically is more expensive than using contract labor. According to the Internal Revenue Service, employers must contribute toward both Social Security and Medicare each time they pay an employee. Many small businesses offer employee benefits packages that include health and dental insurance, discounts on merchandise and 401k retirement accounts. These additional taxes and benefits can increase the cost of hiring an employee by as much as 35 percent, according to the human resources website 1099 Fire.
Though employees typically cost more than contract workers, small-business owners have more control over employees than over independent contractors. A 2006 article in "Forbes Magazine" noted that a business can usually direct the actions of its employees, but independent contractors have freedom to perform their work on their own terms as long as they deliver an acceptable final product. "Forbes" went on to explain that independent contractors may, depending on their contracts, own the copyrights to any works they produce. If an employee produces original works on behalf of the company, though, employers typically own the rights to those materials.
The 1099 Fire website explains that employees typically have a number of rights, so hiring workers tends to increase a business’s legal liabilities. If a small business must hire help, employees and contractors represent a separate and distinct set of liability issues. Employees may sue when they feel the business has violated their rights, and businesses with employees may become the target of discrimination or harassment lawsuits. Independent contractors, by contrast, typically have fewer rights and opportunities to sue. Contractors usually do not have workers' compensation insurance, though, and may sue the organization for injuries sustained on the job or on company property.
An expanding small business must advertise for help, interview candidates and pay wages while getting new workers up to speed. If the opportunity cost of not having an employee is higher than the cost of recruiting and training, small-business owners will benefit from hiring an employee or bringing on a contractor. If a business hires an employee, it may require the worker to provide notice before leaving the job and may even build a long-term employer-employee relationship. In a contractor arrangement, by contrast, the business risks losing the employee each time the contract expires.