Employee vs Contractor: Everything You Need to Know

June 15, 2023
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With a growing talent pool, India remains a popular destination for companies to outsource work, especially tech talent. The IT industry in India contributes to 56% of the outsourcing market globally

To expand your team in India, you must understand legalities, costs and the differences between hiring contractors vs employees. 

In this post, we will look at these details so you can make an informed decision.

But before that, let’s discuss the basics. 

What is a Contractor?

India recently revisited the definition of contractors and employees. 

Contractors are self-employed professionals providing services for a specific project or a set duration. 

As per Indian law, contractors must:

✅Be free to work for multiple companies

✅Have full control over their work

✅Be able to choose their own hours.

What is an Employee?

An employee is a worker hired to do a specific job. Employers have control over how they work. And in return, they are eligible for benefits like provident fund, insurance, leaves and more.

Differences Between Hiring Contractors and Employees

On to the meaty part now. Here are the differences between hiring employees vs contractors.

1. Type of contract

Employment contracts in India are usually unlimited-term (valid till employee termination or resignation). Contractors have a fixed contract with well-defined services and project duration.

2. Tax obligations

You’ll be required to deduct tax deducted at source (TDS) on salary payments for employees in India (if the salary exceeds the tax exemption limit). For contractors, you have to deduct TDS only if payments made in a single financial year exceed INR 30,000.

3. Liability

You are liable for any negligent acts of employees. But as contractors are self-employed individuals, employers are usually not liable for their actions, with a few exceptions. The main exception is if the actions of contractors caused public damage and the employer is found responsible for negligible hiring and supervision.

1. Project rates

Employees get a yearly package (including benefits). The average salary of technical talent is $29K, ranging between $19K and $121K. Of course, it varies from role to role. Contractors charge per hour or project and can have variable billing. The average per-hour pay for contractors is close to $14.

2. Overhead expenses

Hiring employees comes with additional expenses of equipment and admin costs like rent, electricity, food, commute and more. However, contractors own their equipment and may not work from the office, so overhead expenses when hiring contractors are close to zero.

3. Benefits 

Employees are eligible for benefits like insurance, holidays, parental leaves, wellness allowance, travel allowance, provident fund, and more. Benefits packages vary from company to company. Contractors usually do not avail these benefits.

Employment benefits and protections

1. Workers' compensation

As per the Workmen's Compensation Insurance Policy in India, employers provide legal compensation to employees/dependants in case of any injury on the job. Independent contractors are not mandatorily covered unless you want them to. 

2. Unemployment benefits

There is no fixed system for unemployment allowance in India. There are different state-backed policies. Atal Beemit Vyakti Kalyan Yojana is a pilot scheme which states that employees should get relief payments for up to 90 days in case of unemployment. 

Amidst no centralised system, most tech companies give one-time severance packages in case of layoffs. However, contractors are not eligible for this as an independent service provider. For contractors, employers can pay for termination based on the terms and conditions agreed upon in the contract.

3. Retirement plans

Companies with 20 or more employees have to register for the Employee Provident Fund scheme. Provident fund (PF) is a retirement corpus for employees. As an employer, you may have to pay up to 12% of the basic salary (salary excluding benefits) to the PF account of the employee. Contractors plan their own retirement and don't get PF benefits from their employers. 

Degree of control and flexibility

1. Supervision and direction

Contractors define their work schedules and processes. Also, they are usually hired as experts or specialists for particular skills. This reduces the need to supervise. When it comes to employees, you define the direction of work, which means regular check-ins and supervision.  

2. Scheduling and availability

Contractors choose their work timings and move from project to project, so one cannot guarantee fixed availability. For employees, you define the schedule, so you can predict the availability.

3. Equipment and tools

Contractors use their equipment and tools. But employers provide all equipment and any tech setup to employees.

Expertise and specialisation

1. Training and certification

As an employer, you are responsible for training/certification or any upskilling of employees. Contractors are skilled experts with no additional training needs.  

2. Experience and reputation

Contractors come with diverse experiences and stay up-to-date on the latest trends and technologies. Contracts are a good choice for immediate requirements where you need specialists. 

Pros and Cons of Hiring Contractors

Pros

1. Flexibility

Working with contractors means less commitment. You can hire different resources for different projects and also fill in last-minute requirements. 

2. Enables trial runs

Companies hire people as contractors to get started soon for a project. As the project progresses and companies are able to identify the right employees for the role, the Contractor role is discontinued.

Cons

1. Less control

Contractors work based on their schedules and processes. You have limited transparency over the way work is done. And if the task is something core to your company, then giving it to an independent contractor where you don't have any insight into the process can be tricky.

2. Limited loyalty and commitment

Independent contractors move from project to project and are not loyal like employees. They also work with a client pool, and you are one of many clients they deal with. Hiring employees is better for any long-term project needing more time and commitment. 

3. Possible misclassification

Worker misclassification is the biggest loophole in working with independent contractors. If you hire a contractor who 

performs any task core to your business 

(or) 

you decide where and how they work.

Then, you are at risk of misclassification. 

Misclassification is classifying employees wrongly as independent contractors. It comes with severe fines and penalties. Even the biggest of the biggest firms have made such lapses. For instance, Microsoft paid $97 million for misclassification in 2000. 

Pros and Cons of Hiring Employees

Pros

1. Full control

You have better control over work hours, equipment and processes. This is especially important for building core teams which need a lot of internal coordination. 

2. Increased loyalty and commitment

In-house employees can be more connected to the company vision as they do not work from project to project like contractors. They work more closely and support your business growth. 

3. Easier to build teams

Building teams is a long-term task needing regular interactions/meetups. Doing those with contractors is tough as you don't drive their schedule. It's easier to bring employees on the same page and build a team. 

Cons

1. More administrative work

Employees also add administrative tasks of maintaining offices, equipment, food travel, etc. Also, there are accounting tasks to track insurance, salary and taxes. 

2. Less flexibility

You can't hire employees for a specific project and let them go. With employees, you need to plan further on how to engage them after a project is over. It sometimes means assigning another project. It could also mean training them in a new skill altogether if their skillset is outdated/not in demand.

Factors to Consider When Choosing To Hire Employee or Independent Contractor

Here are the four main parameters to consider while hiring independent contractors vs employees. 

1. Nature of the work

Mike Fox, CEO of Brightlights, suggests finding projects which are key to your business and keeping them in-house. Contractors are for sudden rush projects.  

2. Project duration

Ben Baldwin, Founder, ClearFit, says to check if the particular skill you are hiring is something you need for a long time. If it's a temporary requirement, then a contractor is a good choice. 

3. Available resources

For small businesses just starting out making their first or 10th hire, you may not have physical resources like office space or equipment to support full-time employees. The flexibility and less overhead expenses with contractors are good to get a headstart. 

4. Work culture 

Are you hiring for any tasks where the workers need to coordinate within teams and blend into company culture? Hiring employees is the way to go, then.

Employee or Contractor | What Is Best for Your Business

Daniel M, Principal Attorney at Mayer Law, says contractors do come with short-term cost savings. Still, considering the legal complications/costs of misclassification, employees are a good choice unless the requirement is super-specific and short-term.

Rapid help you hire employees in India without having to juggle through all the local laws. With our deep Indian expertise, we handle onboarding, compliances, payroll, local Benefits, HR  and liabilities. We also help you find the best tech talent in India through our services marketplace. So you can focus on growing your business.

Book a demo with one of our experts, and let us take the busy work off your plate. 

Disclaimer: This content is for educational purposes only. Please consult a legal professional to comply with local employment laws.

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