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Employee vs. Contractor vs. Freelancer: Which Is Right for Your Tech Business?

Employee vs. Contractor vs. Freelancer: Which Is Right for Your Tech Business?

Friday, July 15, 2016/Categories: independent-contractor-liability

A few decades ago, tech businesses typically hired staff to deal with upticks in work. Today, small-business owners are almost just as likely to hire a freelancer or contractor instead.

According to the Freelancers Union, almost one-third of all US workers are independent workers – which adds up to about 54 million people. That's no surprise when you consider it's often cheaper for a business to hire a contractor or a freelancer rather than an employee.

“One of the most expensive elements of any business is the costs associated with hiring and keeping employees,” says Corey Bray (@CoreySF), founder and CEO of the legal document site (@LegalNature). “While good employees are more than worth the costs associated with their employment, sometimes there are other ways to achieve the same goals without all of the associated costs. One way to do this is to utilize independent contractors whenever possible.”

So how do you know whether your IT business should hire a freelancer, contractor, or employee? Let’s break it down.

When to Hire Freelancers

Freelancers are typically hired on an as-needed basis to work on a specific project. For example, say you are working on a client project that requires some graphic design work. That's not something your company normally does, so it might make sense to hire a freelance designer for this one-time gig.

“A freelancer is used more so for off-site or part-time projects,” says Angela Riggs, IT branch manager for the Nashville office of (@Addison_Group), a professional staffing service. “Freelancers are allowed to set their own terms, such as working from home, and they are paid hourly. Freelancers can also work part-time for various clients as it is more of an ‘as needed’ role.” 

Heads up: The laws in your state dictate employment classification. Just because you say a freelancer isn't your employee doesn’t always make it true.

“Either a contractor or a freelancer can be considered an employee under various employment laws, such as the Fair Labor Standards Act, the National Labor Relations Act, and the Family and Medical Leave Act,” says Michael Cardman (@michaelcardman), an employment law editor at (@XpertHRusa), specializing in wage / hour and independent contractor issues.

Insurance concerns: Bob Zeglarski (@BizLawyer), founder of (@CutwaterLaw) notes that if the worker is considered an employee, you may need to carry Workers’ Compensation Insurance.

Bray adds that if your workers – freelancers or employees – work at your business premises, “it is important to have adequate General Liability Insurance.”

You might want to add Errors & Omissions (E&O) Insurance to the mix, too, in case you're sued over your freelancer's work.

When to Hire Contractors

Small IT businesses typically hire contractors to work for a specified amount of time or to work on a specific task. Say, for example, more customers ask for graphic design services, but not enough that you can afford to hire a full-time employee. In this case, a contractor might be the way to go.

You can hire contractors directly or through staffing agencies.

Heads up: Just like hiring a freelancer, you want to make sure…

  • You and your contractor are on the same page regarding their employment status.
  • You comply with any applicable state laws, such as Workers’ Compensation requirements.

Nina Kaufman (@NinaKaufman), business attorney and strategist at , says, “Just because I say you are an independent contractor and you say you are an independent contractor doesn’t mean the government is going to agree.”

Insurance concerns: Kaufman also stresses the importance of double-checking that your contractor has their own liability insurance.

“You need to look very carefully at whether that independent contractor has their own independent business and their own contractor liability insurances,” says Kaufman.

Bray agrees on the importance of checking the contractor's business insurance coverage.

“You should require all contractors to acquire and provide proof of appropriate insurance,” says Bray. “This is especially important if the contractor will be responsible for employees or other workers.”

When to Hire Employees

Once your IT business consistently has more work than you can handle, you may crave the stability and consistency that comes with having a full-time employee. Just make sure you're equipped to handle the added costs before you start the interview process.

“A full-time employee is a good option for someone who foresees this need as ongoing and also has the budget for a full-time salary,” says Riggs. “Taking on a full-time employee means the employer pays a portion of the employee's Social Security and Medicare taxes, unemployment compensation insurance, and Workers’ Compensation, on top off all other additional benefits that may be offered through the company,” says Riggs.

Heads up: Full-time employees definitely come with higher price tags than freelancers or contractors, thanks to payroll taxes, unemployment insurance, and Workers’ Comp costs. It's an investment, for sure, but one that comes with a potential payoff. After all, your employees can help you grow your business and free you up to do big-picture work.

To learn more about freelancer or contractor insurance requirements, read our article “Do Your Subs Need IT Contractor Insurance? (Hint: Probably).”

About the Contributors

Corey Bray

Corey Bray is the CEO and founder of LegalNature, which provides individuals and small businesses with access to professional legal documents without the high cost of formal legal representation. A serial entrepreneur, Corey has successfully exited several startups and is currently focused on revolutionizing the business document industry.



Michael Cardman

Michael Cardman is the legal editor for the wage and hour content in the employee compensation section of XpertHR. Prior to joining XpertHR, Michael was the managing editor for Thompson Publishing Group's library of HR publications.




Nina L. Kaufman

Nina L. Kaufman, Esq., is an SBA Small Business Champion and Entrepreneur.com legal expert – not just your ordinary business attorney. Forbes Magazine calls her “One of the 25 Most Influential Women Tweeting about Entrepreneurship.” A Mets fan by marriage and former stand-up comic, she is a sought-after professional speaker and frequent media resource who has been featured in the Wall Street Journal, U.S. News & World Report, Crain’s NY Business, Mashable, Huffington Post, MSNBC’s Your Business, and Fox′s Good Day NY. 


Angela Riggs

Angela Riggs is the IT branch manager at Addison Group’s newest office in Nashville, Tennessee, where she manages a team of recruiters and business development managers who place professionals with companies in search of their specialized skills. Angela is constantly striving to stay abreast of the latest advancements in the IT industry in order to recognize trends, read the market, and identify opportunities.


Bob Zeglarski

Bob Zeglarski is an attorney and the founder of Cutwater Law PLLC, a digital media, technology, and entertainment law firm headquartered in Nashville, Tennessee.

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