Hiring contractors is a recruitment technique that plenty of business owners use to save costs, increase flexibility and bring in specific expertise to assist with projects and development. It can be an incredibly valuable approach, but itโs also one that you should go into with your eyes wide open.
The last thing that you want when hiring a contractor is to be surprised by a hidden cost, especially if youโre trying to keep costs low as you expand your team. By making sure that youโve properly weighed up the cost-effectiveness of your hiring decision and thoroughly researched what is involved, youโll be unlikely to get caught out by any unfortunate surprises.
In this article, we break down some of the lesser-known financial and legal considerations of working with contractors to help you get up to speed on the potential hidden costs of this approach.
1. Contractor rates vs. salaried employees
Contractors tend to be paid per hour for their services, in comparison to full-time employees who are paid an annual salary for a fixed number of hours every week. Whilst this means that contractors typically cost more per hour than your employees do, you donโt have to pay for benefits for a contractor, such as holidays, sick leave and even medical insurance.
Another cost to consider when hiring is that youโll need to train your new hire, with full-time employees typically requiring more investment to get them fully onboarded. However, time spent integrating contractors with all of your internal processes and systems can add up, especially if you want them to be part of your team long-term.
The hidden cost to be aware of in this respect is that it can be costly to hire a contractor in the long term. If youโre just seeking support for a project then itโs more likely to be a resourceful move, but the longer you keep a contractor on your payroll, the more this decision is going to add up.
2. Compliance and legal costs
One important aspect of hiring a contractor that can come back to bite you is how the employment contract is drafted. Unclear agreements and loopholes can end up being incredibly costly if something in the working relationship goes wrong, and these weaknesses are more likely to be present if you rush this final part of the hiring process.
Weโll go into more detail later, but you should also be aware of legislation surrounding whether you classify a contractor as an employee or not. As part of the contractual agreement, you need to be certain about whether the work youโre asking a contractor to do means that they need to be taxed like an employee, as you could face significant fines if this is handled incorrectly.
As part of your contractual agreement, you should also be careful about what you decide in regard to intellectual property. Some contractors retain their intellectual property rights unless stated otherwise in their employment agreement, and you donโt want to end up in a costly legal battle in the future if this comes into play.
3. IR35 and the tax implications of hiring contractors
IR35 is a piece of UK tax legislation that was brought in to make sure that contractor workers were paying the correct amount of income tax and national insurance, instead of using their position to dodge these payments. It was introduced over 20 years ago but updated significantly in 2021, which means that most contractors are now familiar with what the guidance entails.
If a contractorโs IR35 status is incorrectly determined, your business could end up owing HMRC money. Not only could these unexpected costs add up, but you also face scrutiny over whether there was any deliberate avoidance of these taxes, which can also have a negative impact on your reputation.
In order to stay compliant and ensure that you correctly determine whether a contractor is inside or outside of this legislation, you should use an IR35 calculator to assess risk. This will be incredibly helpful in keeping your business compliant with contractor laws and saving you a lot of future hassle.
4. Hidden operational costs
The final area to watch out for hidden contractor costs is in your businessโ operational activity. In many cases, hiring a contractor can be an advantage because they donโt require the same kind of support and direction as a permanent employee, but in cases where a contractor isnโt familiar with a system or tool, misunderstands the brief or isnโt as experienced as you hoped, they could end up needing more supervision which could be costly.
You might also be faced with hidden costs if you hire a contractor to work directly with a team of permanent employees and they arenโt well aligned with your company culture or way of working. This lack of cohesion can mean that productivity suffers if the team cannot find their flow working together, meaning that you end up having to pay the contractor for longer than planned.
Finally, consider the potential long-term cost of hiring contractors instead of employees when it comes to how your company culture will develop. Permanent employees who are dialled into your business goals and internal growth will ultimately benefit you more than growing your team with contract employees who arenโt integrated or committed to helping your business flourish in the future.
Conclusion
Hiring contractors can be a brilliant resource for business owners to utilise when you need to increase your workforce quickly but also bring in particular skills or experience to help support your project. But theyโre not always the โcheaperโ option when it comes to the hidden costs that could come into play if things donโt go to plan.
As a business owner, you should weigh up things like the immediate cost of contractors vs the impact of longer-term investment. This article can help you to be aware of everything you need to consider before deciding if a contractor is the best decision for your company.
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