Understanding the Different Types of Employment Choices for Your Business

Written by: Amor Traceski  

Should you hire a consultant, an employee, independent contractor, contractor (temp) or freelancer? The answer  largely depends on your business model and how you see the position or positions evolving over time. Before you  decide, you must first know the actual work relationship that exists between you and the person performing the  services. Then, make sure to classify your workers correctly, following criteria provided by the Department of Labor  (DOL) and the Internal Revenue Service (IRS).  

The first step is to understand the various worker classifications and then determine which ones align with your  business model. There are two broad worker classification categories: 

(1) Employees – Staff members who are on the employer’s payroll and whose work means and methods the  company controls. Various employment laws protect their rights and pay and they have access to benefits  and perquisites. The four types of Employees are: 

a. Full-time Employees (FTEs) – Employees who work a minimum of 30 hours per week or 130 hours in a  calendar month by IRS standards, and qualify for benefits. 

b. Part-time Employees (PTEs) – Employees who work fewer than 30 hours per week and typically don’t  qualify for benefits. Note: Employers must pay the same taxes for employing them as if they worked  full time.  

c. Direct-Hire Temporary Employees (Temps) – Employees hired directly for a specific task or project and  for a set length of time; no longer than one year. Direct-hire temps have taxes withheld from their wages  and are entitled to unemployment and social security benefits.  

d. Seasonal Employees – Employees hired during peak seasons, e.g. holidays, summer months. Like temps,  they are entitled to unemployment and social security benefits and employers must withhold taxes from  their wages or pay a penalty. 

(2) Contingent Workers – Non-permanent workers who are hired on a per-project basis. Unlike employees, they  do not receive benefits such as health, life and disability insurance, retirement and other perks. The common types of contingent workers are: 

a. Consultants – Generally self-employed, independent professionals who have extensive skills, training and  knowledge in their field. Consultants assess either whole businesses or specific areas, then make  suggestions and provide advice on how to make improvements. They, typically, will not carry out the  actual work themselves, but will show the client how to implement their proposals. Due to the expertise  and skill level required to be a consultant, they usually command high rates of pay for their services. 

b. Agency Contractors or Temporary Workers – Workers who are employed by staffing agencies or back office service providers to perform specific tasks or projects for a set length of time. They generally work  for one client at a time. 

c. Freelancers – Those individuals who generally work on multiple projects and for more than one client.  The amount that freelancers charge for their services will depend on their area and the work involved. 

d. Independent Contractors –Individuals who enter into contractual agreements with businesses in order  to provide a service in exchange for a fee. Companies do not have control over the means and methods  by which independent contractors deliver their services. 

Below is a comparison chart with the main factors to consider when determining whether to hire employees or  contingent workers, or even both.  

Factors Employee Contingent Worker
Costs to  considerBase Pay (salary or hourly wages) + Bonuses (if  applicable) + Benefits + Payroll Taxes + Job  TrainingProject-based Fees or Hourly Rate.
Employment  Taxes &  BenefitsPayroll Taxes (social security, Medicare,  unemployment) + Health Insurance +  Retirement + PTO (vacation, sick leave, etc.) +  Disability & Unemployment Insurance +  Workers Compensation + Overtime Pay (if  applicable).None required.
Project  ScopeOngoing work that requires supervision +  involves building relationships + functions as  necessary for the business.Temporary work, short-term projects, which  require outside expertise, e.g. technical  consultations, seasonal assistance, or  administrative services.
Degree of  ControlResults + How work is performed + Where work  is performed + When work is performed.Results only.
Pros • Employees tend to be more invested in the  success of the business • Longer return on upfront training &  development investment • More predictable costs• Contingent workers are more flexible to  scale work, as needed • Ideal for project-based and creative tasks • No payroll taxes or benefit costs
Cons • Generally, employees cost more overall • Less flexibility to scale • Hiring process is more intensive• Costs are less predictable • Less control over the how, when, and  where of work • May be less accessible if they are working  with multiple clients • May likely give more attention to higher  paying clients

Whether you are a sole proprietor transitioning to an S-Corp with salaries, an established company working to right structure your business or anything in between, you may want to consider a hiring strategy involving both  employees and contingent workers to positively impact the bottom line. Yes, payroll is one of the biggest expenses  for most companies and you may be able to save in classifying workers you control as independent contractors or  other contingent workers, but that will be short-lived. No matter what position title you give them or what their  job descriptions or services agreements stipulate, the DOL and the IRS will base their determination on the actual work relationship you have with the worker.  

Below are direct links to the DOL and IRS websites, for your reference. 

• Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA) | U.S. Department of Labor  (dol.gov) 

https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or employee

Following legal guidelines will not only enable you to build a solid foundation from which your business will grow,  it will also enable you to move forward without having to look back – with the IRS and DOL, that is.  

About the author:

Amor Traceski

Amor Traceski is a Human Resources Consultant with over 20 years of experience in human resources management in various fields of industry.  She is also a motivational speaker, life coach and author of Been There, Done That: Practical Tips & Wisdom from Cancer Survivors for Cancer Patients.  

Learn more about Amor online at https://www.amortraceski.com/

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