Hiring workers to help run operations is not a decision that business owners should take lightly. There are legal requirements that come with hiring employees vs. contingent workers. Employers that misclassify either group may be penalized. Here’s basic information about the types and classification of workers.
Types of Employees
Employees are different from contingent workers in four key ways:
- Employees are on an employer’s payroll as permanent staff members.
- The law protects employee’s rights and pay.
- Employees have access to benefits and perquisites.
- Employers must withhold income taxes from employees’ wages, pay unemployment taxes on their earnings, and withhold and pay Social Security and Medicare taxes.
1. Full-time Employees
Full-time employees typically work a 30- to 40-hour week. Common benefits offered by employers to full-time employees include:
- Vacation time
- Additional paid time off
- Health insurance
- Employer retirement plans
Theoretically, employees can work 30 to 40 hours and still be freelancers. In this case, the worker in question is a “permalancer” in a middle ground between employment and contingent work. Business owners may benefit from these arrangements, but some workers may find them undesirable.
Full-time employees are the most common type of worker for many reasons. Full-time work can bolster employee loyalty while minimizing the chances that a highly knowledgeable employee will leave and take their knowledge with them. However, since full-timers must be offered benefits and, in many cases, paid leave, they can cost you more than other types of workers.
2. Part-Time Employees
Part-time employees work fewer than 30 hours a week and typically don’t qualify for benefits. Employers must pay the same taxes for employing them as if they worked full time. That means you’ll have your part-timers provide you with IRS Form W-4 at the start of their employment as would full-timers. Similarly, part-time employees and full-time employees both receive W-2 forms to include with their tax returns.
Among the many types of employees, part-timers may be best for companies that need consistent work in fewer hours than full-time. The steady paycheck accompanying part-time work can also make for employees as loyal as full-timers. However, part-timers may be more hesitant to do extra work than full-timers. After all, part-timers know that full-timers are making more, so they might decline to do more work if they don’t receive more money.
3. Temporary Employees
Temporary employees (aka temps) fulfill a business need while allowing employers to avoid the cost of hiring a regular employee. Temps can be hired to meet seasonal demand, fill in for an employee on sick or maternity leave, and many other needs.
Temps can be used to “test” the most interesting prospects for a full-time position before formally extending a full-time offer. However, some temps may find themselves working as long-term employees that lack the benefits shared among full-timers.
What Are Contingent Workers?
A contingent worker is anyone whom your business hires without a contractual framework resembling that of an employee. Your relationship with a contingent worker may pertain to solely one project or a series of recurring but irregular business needs. A contingent worker can also be someone who performs a task or assignment for you on a regular but infrequent basis.
Business owners often seek contingent workers for their expertise and self-sufficiency. To work together, both parties typically sign statements of work (SOWs) that outline the contingent worker’s responsibilities. An SOW may also indicate the timeframe during which a project must be completed. Either way, an SOW isn’t a substitute for an employment contract, and contingent workers aren’t employees even if they regularly report to your workplace.
How Are Contingent Workers Different From Employees?
Contingent workers typically lack the following traits typical of employees:
- Access to employee benefits such as health insurance or retirement plans
- A salary, as contingent workers are often paid per project or per hour
- No need to pay self-employment taxes
- Adherence to a strict schedule
- Inability to reject work that an employer assigns
In some cases, the above traits essentially make contingent workers their own businesses. In other cases, contingent workers are simply employees you don’t keep on payroll year-round. You can find several examples below.
Types of Contingent Workers
Contingent workers have become very popular due to the gig economy. Employers basically hire contingent workers as needed. The workers don’t have the protection of labor and employment laws or access to employee benefits.
Contingent workers have also become more popular during the COVID-19 pandemic, as some companies struggling with the economic downturn have replaced full-timers with contingent workers. The below facts about the many types of contingent workers may explain why.
4. Contract Employees
Contract employees can be a life saver for a busy business owner. These days, you can find a contract employee to perform almost any service from accounting to marketing to administrative support. In fact, in 2018, NPR reported that about 20 percent of American jobs consist of workers under contract. A study by Intuit predicted that by 2020, 40 percent of American workers would be independent contractors.
Contract employees are hired for a specific job at a set rate.
A contract employee doesn’t become a staff member and isn’t considered a permanent employee. They give you all the benefits of employees without any of the typical drawbacks. However, the line between contract employees and actual employees can be so thin that you could easily land on the wrong side by accident. And that mistake can cause lots of trouble.
The IRS takes worker misclassification seriously. According to the IRS website, “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done.”
Keep in mind that if your contractor is discovered to meet the legal definition of employee, you may need to pay back taxes and penalties, provide benefits, and reimburse for wages as outlined in the Fair Labor Standards Act.
Law Depot ® offers free contractor agreements templates here. You’re able to choose agreements for a fixed job, until a specified date or on an ongoing basis.
5. Seasonal Employees
Seasonal employees are temporary, short-term, and hired for a specific time period like the holidays or other busy time. Examples include a catering company hiring servers during the wedding season or a retail store bringing on additional clerks for the holidays.
Under IRS and Treasury Department regulations, new seasonal employees are not considered "full-time," benefits eligible even if they are expected to work 30 or more hours per week. Seasonal employees are thus a great choice for business owners who need short-term help but can’t spend extra on benefits plans. Their obvious drawback is that, when their time with you ends, the hours you’ve poured into training them may feel like a poor return on investment.
6. Shift Workers
You might have heard that working an overnight shift comes with extra pay. However, additional pay isn’t legally required and depends on the employment agreement. The Fair Labor Standards Act (FLSA) does not require extra pay for night work. However, the FLSA does require that covered, nonexempt workers be paid not less than time and one-half the employee's regular rate for time worked over 40 hours in a workweek.
Shift workers are great for businesses that require work during undesirable hours such as overnights. When you pursue shift workers for these hours, you’ll be more likely to find the right person than if you sought standard employees. However, since working unusual hours often requires greater pay, shift workers can be more expensive.
Freelancers typically operate as their own business. Quite often, the term gets used interchangeably with independent contractors, but there can be some differences.
A freelancer is considered a self-employed person who:
- Pays their own self-employment taxes
- Doesn’t have any employees
- Sets their own rates
- Works remotely at their own location, wherever they choose
- Chooses which projects they want to work on
- Works with multiple clients or just one
Freelancers can be beneficial for companies lacking the infrastructure to easily deduct taxes from paychecks. They can also prove helpful if you know you need extra help but not quite as much as a part-timer would provide. Plus, since freelancers are experts in their field, you should theoretically get great work from them. However, since they set their own schedules and can reject work, they’re not subject to the same control you exert over employees.
An independent contractor often functions as a freelancer, but typically will work with one client for a longer time frame. In many cases, independent contractors work for an hourly rate. Furthermore, they might work through a third party or agency but can also work on their own. To create a contract to work with a freelancer, visit the WikiHow ® blog: How to Write a Freelance Contract.
Interns work at your company to gain experience relevant to their career goals. Interns can be unpaid or paid and part-time or full-time, and they’re often students.
For example, if you run a digital marketing agency and a college student is looking for hands-on experience before graduation, you can hire them as an intern. Since the student doesn’t have a degree and is seeking experience (if not pure resume padding), you don’t necessarily have to pay them. You can set the intern’s hours based on the help you need from them and your capacity (or lack thereof) to supervise someone.
Since interns lack experience, you or someone on your team may need to be more hands-on with them, especially at first. However, if an intern sticks with you for longer than, say, a semester and performs especially well, you can offer them employment upon graduation. Interns may thus be best for companies in need of inexpensive labor for lower-level tasks from people who seem fit for eventual employment.
A consultant is someone who, whether on their own or as part of an agency, advises clients on their field of expertise. For example, a branding consultant may provide extensive brand image advice to several clients over the course of a workweek. The thing is, none of these clients employ the consultant. Instead, the consultant employs themself or works for an agency.
Consultants are best for companies that need help in a specific area for fewer than 40 hours per week over a short period. To continue the above example, let’s say your company needs to develop a new brand voice within six months. In that case, a brand consultant with whom you meet twice per week can prove more affordable in the long-term than a full-time employee. In the short term, though, consultants can charge high enough rates to make them more expensive. Their expertise, though, may be worth it.
Hiring and Management Resources
The SmartBiz ® Blog has a wealth of information about hiring, training, and retaining employees who are happy and productive. If you’re ready to hire, our comprehensive article has information on how to set up payroll, obtain worker’s compensation insurance, register with the Department of Labor, and more: Tips for Hiring Your First Employee.
WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.