20 Pros and Cons of Hiring Employees and Subcontractors

Help! Should I hire Employees? Or should I hire Subcontractors? It's a great debate and I see this asked daily. The goal of this post is to dive deep into the pros and cons of hiring employees and hiring subcontractors. 

Before I list them out, I concede that this article is geared towards a US audience. I don't know the labor laws in other countries. While some laws may be similar to US law, I'm certain there are many differences. If reading this from outside the US, definitely take this with a grain of salt.

Borrowing from the Internal Revenue Service (IRS), "anyone who perform services for you is your employee if you control what will be done and how it will be done." Conversely, a person is an independent contractor (also known as sub or subcontractor)... "if the payer (you as the biz owner) has a right to control or direct only the result of the work and not what will be done and how it will be done."

The IRS has a simple litmus to measure independence using three categories: behavioral, financial, and type of relationship. 

Questions to consider:

• Are you directing the worker when and where they are to work (within a property)?
• Are you providing supplies and equipment to the worker?
• Are you directing the worker what supplies and equipment to use?
• Are you training the worker?
• Are you telling the worker they can or cannot hire other workers to work on their behalf?
• Are you telling the worker where to purchase supplies and equipment?
• Are you assigning specific jobs each worker for specific tasks each shift?
• Are you directing an order or sequence for each job?
• Are you reimbursing your worker for supplies or equipment?
• Are you telling your worker they can't work elsewhere cleaning somewhere else for someone else?
• Are you paying your worker an hourly wage?
• Could your worker infer that they could be employed as an employee or do you call them your "1099 employee" or simply your "employee"?
• Are you offering benefits like paid time off or holiday pay?
• Is there an implied or actual permanency to the contractor-worker relationship? Are they working the same job in perpetuity?
• Is the worker providing a service that is the main focus of your business?
  
  

If you said "yes" to any of the above, the IRS could view your worker as an employee rather than a subcontractor. 

There are certainly no absolutes. There are glaring examples that point to employer-employee relationships like providing supplies or providing training. But some are not as obvious. For example, the last one, if all you do is cleaning, does that mean you can't have any subs that clean? Uber hires only subcontractors for their primary business focus in driving. Does that mean they're running afoul of IRS rules? No. But it was certainly challenged in court. Another is directing your worker where to work within your client's location. If you provide them the scope of work within your contract or proposal, does this mean you're directing them, and therefore they're an employee? No, just like your client directing you, as the cleaning biz owner, what to do doesn't constitute an employer-employee relationship. You're not directing your sub. You're providing them the contractual requirements between you and your client.

The IRS covers the three topics listed above, but they also used the IRS 20 Factor Test in the past. They abandoned that in favor of the above, though some have reported that they're still actively using it. Is the IRS the only authority on this? Nope. Definitely not. The US Department of Labor amended the Fair Labor Standards Act to include a 6-factor test, namely, 1) Is there an opportunity for profit or loss depending on managerial skill? 2) Who makes the investment in the job? The employer or the worker? 3) Is there any permanency in the working relationship? 4) Who has the degree of control, you or the worker? 5) Is this position an integral part in your business? And 6) Is there a higher degree of skill or initiative?

Outside of the federal level, states have their hand in this too. In the above mentioned Uber/Lyft lawsuit, California pressed for these workers to be labeled as employees and not subcontractors. States are passing laws to make an employer-subcontractor relationship much harder. After all, there's a lot at stake including money paid into Workers Comp, state unemployment, additional withholding taxes, and more. 

Subcontractors vs Employees….PROS and CONS of each, in general:

Subs - Pros:

1. Save money on insurances like WC. 
2. Save on labor taxes, and any other state or local mandates. 
3. You save on supplies and equipment because they pay for it. 
4. It can potentially help with cash flow because you can structure monthly payments to them vs paying weekly or biweekly. 
5. They might have more experience as a worker. 

Subs - Cons:

1. They might be unvetted and inexperienced. Provides for a logistical challenge for background checks.
2. Subs can bring in whoever they want to bring in. 
3. It can be a challenge to chase after their COIs. 
4. They have a right to leave the job whenever. You cannot hold them to a firm schedule, though you can fire them if the job isn’t done as the scope requires.. 
5. They are allowed to wear their own uniforms and represent their own company. 

Employees Pros -

1. Great tax write off. 
2. You can direct them to do what you need them to do in detail. 
3. You can move them from job to job at will. 
4. There’s greater leeway if you need them to work FT or to earn OT (Subs tend to bounce from job to job). 
5. Employees can lead to long term relationships. We have employees that have been with us 20-30 years. 

Employees- Cons:

1. They are subject to a zillion laws and regs. Biggest challenges for us are OT, any mandatory PTO (required locally), and we’re always spending time researching new regs. 
2. Despite tax savings above, we do pay those extra taxes. 
3. Sometimes they come with less experience due to resume padding. 
4. They are quicker to turn against you if loyalty waned. 
5. They’re not business-minded. They lack understanding of what we go through as biz owners.

There are steps you can take to protect yourself if you have subcontractors:

1. Require they fill out a W-9 and make sure you send out 1099s in a timely manner. 
2. Have them sign an IC agreement.
3. Make sure they’re providing your job site with their supplies and equipment.
4. Encourage them to take jobs elsewhere.
5. Make sure you’re not offering them any benefits that employees would get, like time off or raises. 
6. Have them invoice you.
7. If you feel they’re trying to get out of paying taxes because they received a 1099, drop them like a bad cold. 
8. Ask for their COIs.

Use this information to make the right choice between a subcontractor or an employee. Build a solid foundation for your labor.

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Next on Deck: Ultimate Lead Guide - Finding Banks (6/12/24)