The Hard Choice Between Contractors And Full-Time Employees

In the past, it's been a simple question of which type of employee is a better fit for the task. Do you need a highly skilled worker for a short-term project? Consider contract workers.

Do you need someone who can solve similar problems for you on a long-term basis? Consider offering full-time employment.

But the contract position vs. full-time employee debate has transcended these questions. How your company hires now plays a role in a larger conversation over what defines good work and how people get paid for what they do (and whether that method of payment is making the world a better place).

Trends In Contract Work vs. Full-Time Work

In December 2017, NPR and Marist found that 20% of all American workers are contract workers or independent contractors. Other methodologies and results vary (including one study that found over a third of Americans making some income through informal work), but it's fairly well accepted that contract working is growing in the United States.

One statistic that supports this notion is the fact that Google had more contract employees than full-time employees for the first time in 2018.

But it's not just huge international companies like Google that are cashing in on contract work. Small businesses are using contract workers, too. In fact, data from January 2019 shows that small businesses have been hiring significantly more contractors than they have full-time employees.

And, of course, there are big stories like Amazon offering employees $10,000 to quit and become contractors (which, unsurprisingly, ignited some controversy).

No matter the figures you look at, it's clear that contract jobs and work are a big part of modern employment culture. And not just in the US, either; it's also becoming a significant part of Western European culture, too.

At first glance, it seems like a good way to give employees flexibility and save companies on health insurance and other benefits. But the decision to hire a contractor or a full-time employee runs much deeper than that.

Why Companies Hire Full-Time Employees

If contract work saves companies so much money, why do companies still hire full-time, in-house employees?

In some cases, the cost savings of hiring contractors instead of full-time employees aren't actually as big as you might think. Especially if companies need help on long-term projects that could take years to complete. Some organizations have a "revolving door" of short-term contract employees to work on these kinds of projects, but training overhead and management time can make this inefficient.

One of the biggest benefits of hiring full-time employees is that they grow with the company. Long-term employees become embedded in the organizational culture, develop company-specific skills, and prepare for better performance in upper management positions while enjoying job security in the process.

Contractors don't provide any of those advantages. And that can be a huge detriment to companies, say multiple professors of management at Wharton.

In short, full-time employees help companies create long-term growth. Full-time employees are more loyal, more valued, and less stressed. That helps them deliver better long-term results for companies.

If you need someone that can help your company move successfully into the future, hiring a full-time employee is often the right decision.

Why Companies Hire Contract Employees

That's a lot of good reasons to fill full-time positions. So why are so many companies relying more on contract employees?

The first element of this discussion is always cost. As pointed out in the Wharton article linked above, companies are trying to reduce their overhead costs (whether that actually works or not). They want higher-skilled employees for less money.

Does this actually play out with contractors?

In many cases, it does. Arc took a deep dive into the cost of hiring full-time and contract software developers, and found that costs like taxes, benefits, and administration make hiring full-time employees more expensive.

Keeping costs down has become a high priority in a corporate world where profits have become the primary product.

And, of course, contractors are great for working on short-term projects. Why hire someone who might be with your company for 10 years when the project only requires six months? There's no reason to scrounge for more projects they can work on—hire them for a short period and bring them back later if you need them.

In an age when companies need highly educated and highly skilled technical workers, the combination of these factors can prove very persuading. Companies change quickly—especially when they're first finding their place in the market—and they may need a completely different skill set in a years' time.

Keith Cunningham-Parmeter, quoted in the MarketWatch article above, puts it this way: "It has been an ongoing project of American businesses from the 1970s to off-load risk onto workers."

Bringing on contractors reduces the risk a business takes on hiring full-time. There's no need to worry about whether the employee will be a good fit or will consume company resources.

Contractors save companies money and provide access to in-demand skills without adding to a company's risk. It's no wonder that contracting is growing in popularity.

But That's Not The Full Story About Contract Positions

I mentioned that the full-time vs. contract employee debate is bigger than just saving money on a small project or bringing in an employee for a longer engagement.

Companies need to shift from a problem-solving mentality (is a contractor or an employee better for this particular task?) to a cultural mentality (how do I want the world of work to look, how can my company contribute to that ideal, and how will that affect my employees?).

This all starts with understanding why you're hiring and why you're considering contract employees. If you're interested in contracting just to save money, you may want to look beyond the immediate cost to more long-term factors.

Remember, for example, that hiring full-time employees helps you grow as a company by grooming people for management positions. If all of your developers or HR reps are contract workers, you may have to hire an outside manager for a senior position, which could cost you more money, both in salary and training.

And there are wider societal factors, too. Placing too strong an emphasis on contract work can exacerbate wage inequality, for example.

In a world where consumers are increasingly savvy about the wider implications of doing business with companies based on their environmental and societal impact, these are serious considerations in the contract vs. full-time employee debate.

In the end, the right choice comes down to understanding your own motives. Are you looking to get top-quality work for bottom dollar? If you are, you should re-examine your priorities.

If you need to solve a short-term problem, a contractor is often the right way to go. If you absolutely don't have the money to hire a full-time employee, contracting out work can give you the short-term benefits mentioned above and get you in a better position to plan the future of your company.

But if you want someone who can help your company grow into a more successful organization over a period of years, hiring full-time is almost always the best choice.

A Potential Solution for Everyone: Contract-To-Hire

There's one option we haven't yet discussed that could combine the advantages of contract and full-time employees without the disadvantages of either.

What is contract-to-hire?

Contract-to-hire is a type of job that brings in a contractor for a short-term project that can—if both parties agree—turn into a full-time job at the end of the project.

There are significant benefits for companies in this hiring model:

• Organizations can vet future employees instead of relying on resumes and references.

• Companies can recruit the best talent for positions that may not yet exist.

• If the project doesn't pan out as planned, or the company's prospects change, there's no need to make a long-term hire—there's little risk involved.

• It provides financial flexibility for bringing on highly skilled workers when they're needed and quickly reducing overhead when it's necessary.

Employees see similar benefits. In this model, contractors who would accept a slightly lower salary with benefits can be confident in their choice. And if they'd rather keep freelancing, they can.

Contract-to-hire helps both companies and contractors create better results for each other. Consistent work, loyalty, upward mobility, financial efficiency, and the availability of highly skilled labor make this a strong compromise between hiring contractors and immediately bringing on employees.

While contract-to-hire positions are available today, they aren't as common as they might be. But if companies start embracing this model, there's a good chance they'll see the benefits quickly.

And they can be proud of the work that they're doing to not only benefit the long-term success of their company, but the labor market and society as a whole, as well.

Conclusion: Re-evaluating How We Think About Employment

Back in 2015, John Boudreau argued that we need to reframe the employee vs. contractor debate:

In 2019, that idea is more important than ever. "Good work" no longer just extends to what you provide for your employees. It includes how your hiring affects the economy, future job prospects, and your company's long-term health.

The debate of full-time vs. contract is far from over. But instead of seeing the two as different methods of hiring, it's time to recognize them as two parts of an integrated hiring strategy for your company.

• Does your company hire contractors?

• What's the reasoning behind your use of contract or full-time employees?

• What are the benefits and drawbacks of contract workers that you have seen?