Key Takeaways:

  • Employees vs. Contractors: Employees work on a permanent basis with benefits like paid time off, while contractors are typically hired for temporary, project-based work with more flexibility but fewer benefits.
  • Pros of Permanent Employment: Stability, regular pay, benefits, and a predictable work schedule.
  • Cons of Permanent Employment: Limited flexibility, less variety in tasks, and fewer opportunities for negotiating pay.
  • Pros of Contracting: Higher pay, flexible hours, and diverse work experiences.
  • Cons of Contracting: Lack of job security, no paid time off, and inconsistent income.
  • Hiring Decisions: Employers should match the type of worker to the nature of the job (short-term project vs. ongoing role).

There are many pros and cons of contracting versus permanent employment that employers should consider when hiring for a new or existing position. A business might use a mix of different employment types to meet its labor needs. These employee types might include full-time, part-time, and independent contractors. When looking at the pros and cons of contract employment versus permanent employment, it's important to understand the difference between these employment types.

What Is an Employee?

An employee is a person who works for another person or company on a permanent basis. An employee can be a person who works either part-time or full-time for the business. This employee is expected to work based on an employment agreement and receives payment on a continued basis. This individual might receive payment in the form of a salary or an hourly wage.

Key Differences Between Permanent Employees and Contractors

The fundamental difference between permanent employees and contractors lies in their work arrangements, expectations, and benefits. Permanent employees typically engage in long-term employment with a set schedule, job security, and company benefits. They may receive health insurance, retirement contributions, and other perks that enhance their job stability. In contrast, contractors work on a temporary basis, often for specific projects or short-term needs, with greater flexibility but less long-term job security.

These differences affect how businesses approach hiring decisions. A permanent employee is often seen as an investment, especially for roles that require a long-term commitment, like customer service or technical support. Contractors, on the other hand, are more appropriate for short-term needs or specialized projects, such as software development, marketing campaigns, or consulting.

What Is a Contractor?

A contractor, also known as an independent contractor, provides his or her services to an outside organization. Contractors are usually hired for a predetermined amount of time and at an established hourly or daily rate. Typically, a contractor is hired for a short-term project and is assigned a specific task to complete. Contractors are expected to work independently and maintain strong self-management skills.

Contract vs Permanent: Employment Flexibility and Work-Life Balance

One of the most significant distinctions between contract vs permanent employees is the level of flexibility offered. Contractors typically enjoy a high degree of control over their schedules. Many contractors can work from home, set their own hours, or even balance multiple clients. This makes contracting an attractive option for individuals seeking work-life balance or those who prioritize freedom in choosing where and when to work.

Permanent employees, however, often work within more structured environments, with set hours and locations. While this predictability can be advantageous for individuals who prefer stability, it may not appeal to those seeking flexibility. Additionally, permanent employees tend to work under a more structured hierarchy and within defined roles, which may restrict their ability to pursue personal projects or experiment with diverse tasks.

Pros and Cons for Employees

Each of these employment types has both pros and cons for the business and for the employee. Many of the differences between contract and permanent employees revolve around how the employee is expected to work, the type of work they are expected to produce, and the benefits they receive from the company they work for.

Pros of Being a Permanent Employee

  • Maintain set work hours and/or work schedule.
  • Less financial risk due to receiving a regular paycheck.
  • Maintain a continued expectation of work.
  • Employer typically provides paid time off, vacation time, and/or holiday pay.
  • Income taxes are deducted from paycheck.
  • Might receive additional employer incentives or benefits, such as bonuses.

Cons of Being a Permanent Employee

  • Typically have a daily commute to an office.
  • Only have a limited number of days off per year.
  • Provided with a limited scope of work.
  • Might not have the ability to branch out and try different types of work.
  • Less freedom to decide one's own schedule.
  • Less opportunity to negotiate pay rates.

Pros of Being a Contract Employee

  • Typically receive a higher wage than permanent employees.
  • Might have the opportunity to work remotely.
  • Flexible schedule and work hours.
  • Higher control of the amount of work and type of work completed.
  • Have the ability to test out a company and try many different companies.
  • Have access to learning additional skills quickly.

Cons of Being a Contract Employee

  • Work location might change drastically, depending on where a company is located.
  • Might have a long commute or have to travel to the work location.
  • Work is not guaranteed and might change on short notice.
  • Holidays and time off are not paid for by the company and must be planned carefully.
  • Might have financial difficulties since a set salary is not in place.

Job Security and Career Growth: Contract vs Permanent Employment

Job security is often a key consideration when comparing contract vs permanent positions. Permanent employees generally enjoy a higher level of job security. Their contracts are open-ended, and they are often protected from immediate dismissal unless serious performance issues arise. This stability can foster long-term career growth, as many businesses are willing to invest in employee development, including training, promotions, and mentoring.

Contract employees, in contrast, face a more uncertain future. While contractors can sometimes earn higher wages, the lack of job security means they constantly need to look for new opportunities. Career growth can be more challenging, as contractors typically do not have the same access to promotions, internal training programs, or long-term benefits that permanent employees do. However, some contractors actively seek variety and a broader skillset, which may offset the instability with valuable experience across different sectors or industries.

Which Type of Employee Should You Hire?

The key factor for deciding between permanent employment and contract employment is the expected duration of work that the employee is hired for. If hiring for a project with a set end date or time frame, a contractor might be a better fit. If hiring for tasks that are recurring or regularly scheduled, a permanent employee is a better option.

Generally, a business will hire permanent employees as its core staff and use contract employees on an as-needed basis to pick up extra work that the core staff is not able to complete. This gives the business an opportunity to complete tasks quickly or use a contractor's specialized skills that might not be available within the company's core staff.

Evaluating the Right Fit: Contracting vs. Permanent Employment for Your Business

When determining whether to hire a contractor or a permanent employee, businesses should consider several factors. Contract employees are ideal for roles requiring specialized expertise for a limited period, such as project-based work in technology, design, or consulting. Contractors are also an excellent choice for seasonal needs or when the business requires flexibility in staffing, such as during periods of fluctuating demand or growth.

Permanent employees, on the other hand, are better suited for positions that require continuity, long-term relationships with clients or customers, or significant investments in training and development. These employees are often critical for maintaining business operations, managing teams, and contributing to a company's culture over time.

Another consideration is the financial impact of hiring either type. Permanent employees often cost more to hire, as businesses must provide benefits such as health insurance and retirement contributions. Contractors can be more cost-effective since they generally handle their own benefits and may not require long-term commitments. However, businesses should evaluate whether the potential loss in expertise and continuity outweighs the cost savings.

Hiring Any Type of Employee

Regardless of the type of employee you are hiring, it's important to assess their skills thoroughly. The candidates should go through a pre-hire assessment that determines their skill level, ability to accomplish the required work, and their ability to fit into the company's culture.

Legal Considerations When Hiring Contractors or Employees

Hiring contractors and permanent employees involves distinct legal obligations that businesses must navigate carefully. For permanent employees, businesses must comply with labor laws related to employee rights, benefits, and tax obligations. These include minimum wage laws, workers' compensation, unemployment insurance, and various other regulatory requirements specific to permanent staff.

For contractors, businesses have fewer responsibilities but must still adhere to laws that govern independent contractor agreements, including tax withholdings and the proper classification of workers. Misclassifying a contractor as an employee can lead to penalties, so it is crucial for businesses to ensure their contracts are clear and accurate. Legal advice can help ensure that contracts are drafted properly and that both parties understand their rights and obligations.

FAQ Section:

1. What are the main benefits of being a permanent employee?Permanent employees enjoy job security, benefits such as paid time off and healthcare, and often have opportunities for career advancement within the company.

2. Why might a business choose to hire contractors over permanent employees?Businesses may hire contractors for specialized skills, short-term projects, or when they need additional flexibility without long-term commitment.

3. What are the main disadvantages of contracting?Contracting can lead to job insecurity, lack of benefits (such as paid time off or healthcare), and unpredictable income due to the temporary nature of the work.

4. How do businesses decide between hiring a contractor or a permanent employee?The decision depends on the nature of the work—contractors are suitable for short-term or specialized tasks, while permanent employees are better for ongoing, recurring roles.

5. What legal obligations do employers have when hiring contractors?Employers must ensure proper classification of contractors, avoid misclassification, and follow tax and contract law guidelines for independent workers.

If you need help with the pros and cons of contracting versus permanent employment, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.