If you’re a business owner who’s looking to hire people to help you take a load off, so to speak, it can be hard to know whether you need a contractor to join your business, or to hire a full-time employee. In this blog, employees will face off against contractors to determine who will be the heavyweight champion for your business.
In the left corner, weighing in at 147 pounds and with a love of Nespresso coffee and Golden Retrievers, we have an employee; Emma! EmmaF is paid the same wage on a regular basis for a defined number of hours, and you have employee liabilities with her; things like holiday pay, sick leave, KiwiSaver, performance management, branded coffee mugs, and a whole lot of admin factors around employing someone.
In the right corner, weighing in at 178 pounds and with a dislike of astrology and short-sleeved shirts, we have a contractor; Kent! Kent isn’t tied to your business; he has other clients that he works for, he dictates the hours he works for you, he can head to his barber for a fresh cut whenever he likes, and he’s responsible for his own sick leave, holiday pay, tax, and more (although whether he keeps on top of it is anyone’s guess).
In New Zealand, the IRD is the main business world overlord, and has its own set of rules to determine whether someone is a contractor or an employee. As a business owner, they’ll ask you questions to make sure you’re employing and paying people the right way, and their rights and responsibilities are taken care of.
For example, as an employee in New Zealand, Emma has access to all the minimum employment rights under employment laws (e.g. the Employment Relations Act 2000, Minimum Wage Act 1983 and the Holidays Act 2003), which covers things like being paid at least minimum wage, holiday and leave entitlements, a written employment agreement, and the right to take a personal grievance against you.
In contrast, contractors aren’t covered by most employment-related laws, so general civil law determines most of Kent’s rights and responsibilities.
Weighing Up Your Options
Whilst they’re generally doing the same job for you, the difference between an employee and a contractor is often how they’re paid, and it’s easiest to look at an employee as being a fixed cost, and an independent contractor as being a variable cost.
Generally, when a company and its income is growing, its costs are (hopefully) growing proportionately too. In this instance, it makes sense to bring in Contractor Kent for X hours per week at X dollars per hour, and when it looks as though you’re going to be paying him about the same amount or even more than if you were to hire Emma as a full-time employee, you should look at giving Kent the boot and Emma the loot.
Contractor Kent is good for your business in that initial phase of growth because during the times when your income drops back (i.e. over Christmas or during a specific season), you don’t have to worry about wages, holiday pay, sick leave, or any other full-time employee benefits. See you in the New Year, Kent! Basically, it’s a nice, simple way to dip your toes into the employer waters and see how it works out for you.
We’re not really selling the value of Employee Emma here, are we? Emma can be great for your business, too! Because you’re paying her a salary and not on an hourly basis, in many cases you’ve got her there to work within and outside of the hours that you’re paying her for. Because she (usually) only works for your business, she’s going to be more invested in the business, aligned with its values, and often much more passionate about the work she’s doing. She also provides more security for the business; knowing that she’s going to be there Monday to Friday, 8:30am to 5pm, with only your business and its goals to focus on.
And The Winner Is…
Contractor Kent will always be more expensive initially, because he can charge an hourly rate that is set by him, and Employee Emily will generally work out to be cheaper in the long run. There are lots of factors you need to take into account when considering hiring someone though; the stage your business is at, your income vs outgoing costs, administration time, whether you can be bothered printing and supplying branded coffee mugs (essential for any employee) and also if dedication to your business alone is important to you.
If in doubt, it’s super important to get advice from an expert who’ll help you understand which option will be right for your business. Want to know more about us? Check out our “A” v “B” Accountant report which shows you all the things a good accountant should be offering you. Then, let’s chat to see if we can make great business together.
Want to know more about us? Then, let’s chat to see if we can make great business together.