Determining whether you want to use consultants vs. employees in your company requires careful consideration of many variables, many of which we have outlined below. Consultants are usually engaged (not hired) for a short, limited period of time to satisfy a very specific need or task (for example, business strategy, analysis of a particular problem, completion of a one-time project etc.). Employees, on the other hand, are generally hired to satisfy the long-term needs of a company in any given role, which may be generally and broadly defined (for example, software development, business development, management, sales etc.).
To be clear, many of the differences outlined below are based on convention. There are far more commonalities than differences when it comes to comparing consultants vs. employees as well as lots of flexibility with compensation of either.
- Employees are typically committed to a single employer for the long-haul. They are integral and integrated members of a team and perform duties that are dictated or controlled by senior management or shareholders.
- Employees are trained by their company for any specialized work beyond their general education and prior work history.
- Employees are often reimbursed for expenses incurred during the course of their work.
- Many employees work for a single employer full-time and maintain an off-hours job at night or on the weekend, while others work on their independent projects on their own time. There is a certain camaraderie and loyalty expected of employees, since they usually maintain no more than one or two jobs simultaneously.
- Hiring employees also requires an understanding of local and federal taxation, insurance, and employment laws. Employees receive net salaries after employers withhold income tax, social security, and Medicare tax. Because of these withholdings and associated government regulations, employees are likely eligible to receive unemployment compensation after they have been laid off or terminated and will also receive worker’s compensation benefits for workplace injuries. These employer-subsidized health, life, disability, and retirement benefits are like “hidden paychecks” that provide value to employees over time. Consultants don’t always enjoy such benefits.
- Employees may also be entitled to join unions and take advantage of workplace safety and employment anti-discrimination laws, whereas consultants are not usually protected by these laws.
- Consultants often offer a level of specialization and objectivity that a company may lack internally during its early, startup stage. It may not make sense for a startup company to use its internal employees for solving acute problems that the company is not in the best possible position to understand or address. For example, public relations and corporate law are two areas in which it would make perfect sense to engage the services of a PR professional or lawyer. The types of problems experienced in those two areas are of a sensitive and specialized in nature. Assuming PR and legal risks without proper consultation could result in compounded, irreversible long-term harm to a company.
- Consultants are typically paid an hourly fee, a fixed fee, or a commission based on a percentage of sales. The fee may be contingent upon completion of certain services or meeting certain benchmarks.
- A consultant typically does not need to be reimbursed for overhead expenses, insurance, retirement, or other employee benefits. They are entrepreneurs and responsible for the entire operations of their business. Their compensation is not often included in a company’s direct payroll cost budgeting. In short, there is lots of flexibility around compensating consultants with the understanding that the engagement is mean to be short-term and limited in nature.
- Consultants may have an advantage of employees when it comes to taxes because they can write off all reasonable and necessary business expenses associated with their consulting business. Employees do not enjoy the same tax advantages and may only be able to enjoy limited deductions for business expenses. On the other hand, consultants usually experience a much higher overhead to operate their businesses (all expenses, staffing, commercial leases).
- When it comes to intellectual property, a consultant typically retains ownership of the work they produce unless they agree to a contractual “work for hire” clause in combination with a catch-all assignment of IP that is created during the engagement.
- The fact that a consultant may not have a vested interest in the long-term growth and success of a company may adversely affect his or her performance. Consultants often run their own businesses and may be engaged by many different companies at the same time.
- Even if a company enters into a robust independent contractor agreement with a consultant, there is still the chance that the consultant will not prioritize work over other engagements. Even worse, there may even be instances where the consultant’s work with another competitive company results in a conflict of interest or breach. Some states, such as California, only enforce covenants not to compete (i.e. promise not to work for a competitor) under very limited circumstances that do not apply in most cases.
- From a compensation perspective, it is possible for both employees and consultants alike to participate in a company’s incentive stock option plan.
- There may be more flexibility with regards to terminating a consulting relationship since the engagement is not intended to be long-term. Even if you hire an at-will employee, that doesn’t mean that you can terminate them for any reason.
Consider the above factors when making your decision about whether to hire employees or engage the services of consultants in your company. It’s not uncommon to first engage the services of a consultant for a limited time or task so you can test their abilities and fit within your company, then commit to hiring them as an employee later on. Using an independent contractor agreement is a great way to memorialize the rights and responsibilities of both parties so that there is no room for misinterpretation about the nature of the relationship, services performed, deadlines, ownership, or compensation.
Startup Documents offers a fairly comprehensive Independent Contractor Agreement template generator. Remember to always consult with a lawyer if you have any questions!