What is an independent contractor?
The importance of classifying workers correctly
The race to hire the best talent is on, whether that’s full-time staff or an independent contractor. The number of job vacancies in the UK rose to a record 1.3 million in May 2022 – with many companies considering flexible workers as an answer to their staffing vacancies.
But what is an independent contractor? In this blog, we’ll explore what it is that makes a contractor unique. We’ll also look at the benefits of hiring a contractor, how to avoid misclassifying an employee, and how a flexible working relationship could help your business in many different situations.
What does an independent contractor do?
An independent contractor is a worker that offers their services to the general public on an ad-hoc basis. Many different professions can work as contractors – some of the most popular include creative roles like graphic designers, or business roles like management consultants.
The amount and type of work will vary by role. An independent contractor is not an employee and is available to work for many different clients at once – although they can provide their services to one client at a time on a project basis.
An independent contractor might also be known as a:
- Subcontractor (in some trades, like construction)
- Nonemployee, 1099-contractor, 1099-employee, 1099-independent contractor (in some countries).
When hiring an independent contractor, companies need to be aware of laws like the UK’s IR35 that distinguish between contractors and full-time employees. They should carry out an independent contractor evaluation to define the worker’s role within the business.
Typically, a contractor will choose where and when they complete work, have many other clients, their own website, and provide their own equipment. If this is not the case, they might be a full-time employee instead. Misclassification of employees can bring serious consequences – so it’s vital to get it right.
Are independent contractors self-employed?
An independent contractor’s employment status is self-employed. They are their own business, their own boss, and operate as self-employed individuals. This means that an independent contractor handles their own tax returns, business expenses, and financial matters.
Self-employment tax affairs are separate from the company hiring a contractor. Companies will typically receive an invoice from the contractor and settle it as a standard payment. This is a straightforward arrangement for the hiring company, simply paying one invoice instead of being responsible for employee deductions such as tax and social securities, benefits and pension contributions.
How should I manage an international independent contractor?
In today’s remote world, many independent contractors choose to work abroad. This brings additional challenges but also opens up endless hiring options. Companies should make sure they have the correct structure in place for paying overseas employees – complying with local laws when hiring an international independent contractor.
Are there any disadvantages of using independent contractors?
As independent contractors work in a flexible way, this might present some disadvantages to the hiring company. They might not receive a full-time equivalent of work from the contractor and can’t dictate working patterns. Likewise, companies can find it tricky to find and verify contractors – in this case, they might consider working with an independent contractor solutions partner.
For contractors, their self-employed status means submitting income tax returns and not receiving any full-time employment benefits like sick pay. Their income is usually more unpredictable than full-time workers’ compensation, and they may have periods of time without work.
For many contractors and companies, though, the benefits far outweigh the disadvantages.
What are the benefits of an independent contractor agreement?
The independent contractor relationship brings many benefits – both to the hiring company and contractor.
Benefits for the employer
Hiring an independent contractor benefits a company in various ways.
- A company can hire an independent contractor as and when needed. This saves committing to full-time employees if they are not required long-term and allows the company to quickly bring in talent when it is needed most.
- Access to skills. Contractors offer extensive and complex skillsets. When hiring full-time employees, some of these skills might demand high wages. For small business owners especially, paying for short-term contractors is a great way to access these specialist skills without the expense of high full-time salaries.
- Hiring self-employed workers can be a more straightforward process than managing a full-time employee. Employers aren’t responsible for social securities, retirement plans or other payroll deductions – simply receive an invoice and settle it.
- Backup plan. Contractors can also help plug gaps in an emergency. If a staff member is taken ill or has to spend time away from the business, you can hire a contractor as a backup to cover areas of their work. This avoids having to start a permanent recruitment process and keeps the position ready for your staff member’s return.
- Seasonal variance. If your business experiences periods of higher and lower workloads, independent contractors can provide support just when you need it – without taking on additional permanent staff members.
- Simple onboarding. Usually, businesses will hire independent contractors without the full-time employee recruitment and onboarding process. That means no prolonged interview process, no notice periods, and no onboarding tasks. Instead, the contractor will usually provide a portfolio of work, agree a deal, and get started.
- A fresh pair of eyes. Sometimes, a different perspective gives new ideas. Especially in consultancy roles, a contractor can help identify new processes, ideas and suggestions. This fresh viewpoint can sometimes be lacking with full-time staff members who are used to the way you work.
- A trial run. Contractors can be a great option for businesses trialling a new position, structure or idea. Instead of committing to a full-time staff member, hire a contractor to test your new concept – it might turn into a full-time success story.
Benefits for the contractor
Similarly, the independent contractor relationship brings many benefits for the worker.
- Being an independent contractor frees a worker from the constraints of a full-time role. While many like the security of permanent roles, self-employed people typically enjoy the independence.
- Flexibility of lifestyle. The added freedom allows contractors to enjoy tremendous flexibility — many operate remotely, basing themselves overseas or travelling while working.
- Choice of clients. Independent contractors can also pick exactly which kinds of clients they take on. They might enjoy working in a particular sector or on projects with specific values.
- Adapt workload. An independent contractor can take on as many clients, or as much workload, as they like. In busy times they might take on less new work – or look for new clients in quieter times.
- Working with many different clients keeps a contractor’s contacts list full. This can help them find future opportunities, or even open up full-time roles within successful projects.
The flexibility enjoyed by independent contractors is a key identifier when classifying employees. With any hire, companies should bear in mind the importance of classifying employees correctly – avoiding the penalties and legal issues that can come with it.
Manage your contractor partnerships
An independent contractor offers ad-hoc services and skills. They might come on board for a small project, or longer-term, repeated tasks. They offer companies versatility, flexibility and access to a massive range of skills. To find and verify the right worker, consider working with an independent contractor solutions partner. You can also learn more about Mauve’s services on our blog.