In today's economy, not every person who helps you meet your business needs is necessarily a full-time employee. In fact, independent contractors and freelancers are becoming commonplace for many companies.

Breaking down the pros and cons of utilizing independent contractors can help you decide how best to budget for the needs you have.

Advantages of hiring an independent contractor

There are a number of key reasons companies look to independent contractors more and more, including:

  • Saving money: Independent contractors often cost more per hour than employees. However, they don't require employer-paid benefits, office space, education or equipment. On average, independent contractors can save you between 20 and 30 percent of your typical operating costs for a regular employee.
  • Flexibility: Independent contractors often do not work in your office space and have flexible schedules, and you can use that flexibility based on your business needs. It also frees up the need for training, since many contractors are experts in their field and don't require much supervision to get started on a project. There's also no long-term commitment to independent contractors.
  • Reduce the likelihood of lawsuits: Because your full-time employees are protected under several federal laws and regulations, they can file lawsuits against your business if they feel their employee needs aren't being met. Independent contractors, however, are not covered under these regulations.

Identifying your business needs and the savings opportunities with independent contractors is a worthwhile discussion among management. It's possible, too, that hiring an independent contractor could open new doors to other opportunities, or even offering a full-time opportunity to a good candidate in the future.

Disadvantages of hiring an independent contractor

According to the FDIC, hiring independent contractors can come with some drawbacks. As mentioned previously, independent contractors usually demand higher rates because they're considered self-employed.

Businesses must also walk a careful line so an agreement or contract with an independent contractor doesn't turn into the need for government-required benefits.

  • Lack of control: Independent contractors work on their own time and often away from the office. Unlike your employees, whom you can monitor at any given time, independent contractors have a certain freedom, which can prohibit you from interfering or becoming too hands-on with their work. Because your company may not be the only company a contractor is working for, your needs might not come first.
  • Lack of continuity: Also unlike your employees, independent contractors frequently come and go. While many companies use independent contractors on a short-term basis, larger, longer projects could be abandoned at any time by the contractor, who might have other projects or clients that are higher priorities. If a long-term project or relationship is something you want to establish, it might be in your best interest to hire a full-time employee.
  • Higher costs: It's no secret that independent contractors often cost more because they're not receiving the same benefits, vacation time or insurance as full-time employees. Discuss the payment for an independent contractor before the agreement is signed.
  • Copyright issues: Because independent contractors are not hired full-time employees, your company may not have the right to works produced by the contractor. If a contractor creating something for you, it's important to arrange an agreement for this understanding.

As stated above, the government can audit your business if they find the relationship with the independent contractor is parallel to your full-time employees, which could entitle them to benefits, workers compensation, and other regulations and protective rights.

What to include in your independent contractor agreement

Now that you've made the decision to hire an independent contractor, it's time to talk about the contract. What will your independent contractor be doing? What is expected, and in what kind of turnaround?

As many of us know from experience, oral agreements are open to misinterpretation. Putting an agreement in writing will clearly define the professional relationship of the contractor and what is expected from both parties.

Keep in mind these important terms when compiling your independent contractor agreement:

  • Description of the services required
  • Description of compensation or pay for the duty required (which ay be a fixed fee or monetary compensation based on timeframes) and when it will be paid
  • Explanation of who the contractor will answer to throughout the duration of the project
  • Expectations of who will pay for expenses
  • Description of the term of the agreement
  • Acknowledgement that the benefits provided to full-time employees are not extended to independent contractors
  • Description of how disputes between the company and contractor will be resolved
  • Statement defining the relationship as an employer-independent contractor relationship
  • Statement or verification that the contractor carries liability insurance
  • Statement or verification that the contractor has all the necessary certifications or licenses to perform specific duties
  • Description of circumstances under which you or the contractor can terminate the agreement

Learn more about contractor agreements and best practices. With help from our resource center, you can draft your own independent contractor agreement. Browse our independent contractor resource documents for example agreements or guidelines for creating contracts.

The importance of nondisclosure agreements

Nondisclosure agreements are especially important when hiring independent contractors, so both parties have a clear understanding of what kind of information is to remain confidential, including trade secrets, sales information or other information that make your company unique.

Preventing contractors from divulging this information can be done with a nondisclosure agreement. The NDA will hold the contractor responsible for anything he or she might say that breaches the confidentiality agreed upon.

Take a look at our nondisclosure agreement resource to get started on drafting yours.

Put everything in writing

No matter what kind of independent contractor you're interested in hiring, make sure you weigh the costs and benefits to your company, and to your business needs. Using online resources and putting your contracts in writing will help protect you-and your contractor-from misunderstandings.