- Employees cost nearly twice their base salary when benefits, taxes, and overhead are included.
- Contractors offer flexibility and lower short-term costs for project-based or specialized work.
- Employees bring long-term stability and cultural alignment that supports business growth.
- Misclassification and compliance risks can impact overall savings and must be managed carefully.
The conventional 9-5 job is losing appeal as global work preferences shift, with nearly 1.57 billion people (about 46.6%) of the worldwide workforce now engaged in freelance or independent work.This rise in contract and gig work has made HR and finance leaders rethink hiring strategies and compare the real costs of full-time employees versus independent contractors.
Cost is a major factor in this comparison. With contractors, employers often avoid expenses like health insurance, retirement contributions, paid time off, and other benefits. At the same time, it’s important to understand the risks and limitations of relying on independent contractors.
In this blog, we’ll explore the true cost of employees vs. contractors, with examples to help you decide what’s best for your business.
Let’s begin by understanding the distinction between contractors and full-time employees.
Employee vs. Contractor - The Distinction
Here are some differences of Employee vs. Contractor for you to make an informed decision and meet your business objectives.
Factors Contributing to the Real Cost of Employees & Contractors
Before calculating the true cost of each engagement type, it helps to map the cost factors that apply. The table below sets up the inputs used in the calculation that follows.
The True Cost of Hiring an Employee & Its Calculation
To calculate the hiring cost of a permanent employee, ensure all costs are allocated accurately. It’s essential to categorize the indirect costs into three main types. For a closer look at outsourced employment costs, see the true cost of hiring through an EOR.
1. Fringe Benefits:
These include costs such as healthcare, retirement contributions, paid time off, and workman's compensation.
2. Overhead:
This encompasses business expenses not attributable to a specific project, such as rent, office supplies, communication charges, and hosting services.
We can determine the additional annual overhead costs incurred by including building costs, property taxes, utilities, payroll taxes, benefits, insurance, supplies, and equipment.
Example:
Let’s assume that an employer spends an additional $80,000 on overhead costs for 10 employees. The per-employee additional expenditure amounts to $8,000 annually.
Adding this to annual labor cost, the average hourly cost rises to approximately $68.
3. General & Administrative (G&A):
These expenses pertain to running the business. They include salaries for corporate executives, administrative personnel, legal fees, and accounting fees.
Based on government contractor benchmarks published by Grant Thornton (2017 data), applying multipliers such as fringe benefits (35%), overhead (25%), and G&A (18%) yields an estimated cost multiplier of 1.99. Note that these figures are based on 2017 data and may have shifted with recent labor market changes.
This means each employee typically costs your company roughly twice their base salary.
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The True Cost of Hiring Independent Contractors & Its Calculation
To make a fair financial comparison between hiring an employee and engaging a consultant, it's important to consider the true costs involved:
Initial belief: The common perception is that hiring an employee is cheaper while engaging a consultant is more expensive.
Contractor cost components to factor in:
- Contractor hourly or project rate: Typically higher than an equivalent employee hourly wage to account for the contractor’s own taxes, benefits, and downtime.
- Platform or marketplace fees: Costs from contractor sourcing platforms or marketplaces, often a percentage of contract value.
- Contractor management software: Tools used to onboard, track, and pay contractors across countries.
- Cross-border payment fees: Currency conversion and transfer fees for paying international contractors.
- Misclassification risk costs: Potential back taxes, penalties, and benefits liability if a contractor is later reclassified as an employee.
- Contract and legal review: Cost of drafting and maintaining compliant contractor agreements across jurisdictions.
Example: If a contractor charges $75/hour for 20 hours/week over 6 months, the base engagement cost is roughly $39,000. Add a platform fee of 5% ($1,950), management software at $50/month per contractor ($300), and cross-border payment fees averaging 2% ($780). The all-in cost is approximately $42,030, before factoring in any potential misclassification exposure.
Here are some additional points to remember:
Potential financial risks: Hiring an employee involves risks, such as the cost of retaining underperforming employees and potential legal complications. In contrast, ending a consultant's engagement is typically easier and less costly.
Impact of recruiting fees: Hiring employees often incurs recruiting fees, which can significantly impact the overall cost. It is essential to recognize that these fees not only affect the hired employee but also increase the real cost of all employees due to higher overhead expenses.
Key Takeaway:
Examining all the hidden costs is crucial when considering the cost implications of hiring an employee versus engaging a consultant. Each situation is unique, and there is no one-size-fits-all answer. However, knowing the factors discussed in this article will help you make informed decisions that align with your business needs and financial considerations.
Cost Of An Employee Vs. Contractor - Which One Should You Choose?
When deciding to expand your workforce, it's essential to consider the cost implications of hiring employees versus engaging contractors. Both options have advantages and can be justified depending on specific circumstances.
Use the quick comparison below to identify which model fits your situation, then explore the detailed sub-sections that follow.
In this section, we will explore situations where the cost of a contractor can be justified and times when the cost of an employee is more advantageous.
Cost of a Contractor - When can it be justified?
1. Short-term Projects or Specialized Expertise:
- Contractors are often suitable for short-term projects requiring specialized skills or expertise.
- Hiring a contractor for a specific task or project can save costs associated with long-term employment commitments, and can support global outsourcing strategies for project-based work.
2. Flexibility and Scalability:
- Contractors offer flexibility in project duration, allowing you to adjust your workforce based on fluctuating demands.
- Engaging contractors can be beneficial during peak periods or when additional resources are required temporarily.
3. Access to Specialized Talent:
- Contractors often bring unique skills or specialized knowledge that may not be readily available within your existing team.
- By leveraging contractor expertise, you can access a wider talent pool and tap into industry-specific insights.
Cost of an Employee - When can it be justified?
1. Long-term Commitment and Stability
- Hiring employees is suitable when you need consistent and ongoing support for your business operations.
- Employees provide stability, continuity, and long-term commitment, which can be essential for core functions and team collaboration.
2. Company Culture and Loyalty:
- Employees become part of your organizational culture and foster loyalty towards the company.
- Hiring employees who align with your values and vision can contribute to a cohesive team and a strong company culture.
3. Collaboration and Growth:
- Your company grows with its employees. Having employees who are constantly upskilling means your organization’s abilities grow as well. Contractors don’t offer such growth. .
- Building a team of employees fosters collaboration, knowledge sharing, and the ability to work towards common goals.
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Team Up with Gloroots To Hire Contractors & Employees
Choosing between employees and contractors requires careful consideration of costs, needs, and strategic objectives. Whether you opt for contractors' flexibility or employees' stability, making an informed decision is crucial for your business's success.
At Gloroots, we understand the complexities of managing a global workforce and offer a comprehensive solution to streamline your employment processes. With our cutting-edge technology, in-house expertise, and exceptional customer service, we simplify global employment, making it simple and scalable.
Our highly transparent EOR solution can help you onboard a global team without establishing local entities. We can manage your payroll, guarantee timely payments, offer the benefits of an EOR across 150+ markets, and help easily scale your contractor teams. In short, our "all-in-one" EOR solution can empower you to hire anyone, anywhere, maximizing your workforce potential.
Contact us today and unlock a world of possibilities for your global employment needs.
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