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Benefits and Risks of W2 Employees Vs. Independent Contractors

17.May, 2023

Benefits and Risks of W2 Employees Vs. Independent Contractors

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Benefits of Hiring W2 Employees

Benefits of Hiring W2 EmployeesContractor v Employee: Risks and Benefits

There are risks and benefits anytime you make a hiring decision because as great an interviewer as you may be, no one can ever truly predict how a new employee will turn out. That said, hiring W2 employees comes with many benefits, most notably:

  • Control over work: W2 employees can be trained and managed more closely than independent contractors, which could lead to more consistent and better quality work. 
  • Legal protection: Organizations have some legal protections when they hire W2 employees, including protection against unfair competition, conflicts of interest, and theft of intellectual property.
  • Company culture: W2 employees can be more invested in a company’s culture and mission, which can lead to greater engagement, productivity, and profitability. 
  • Access to world-class talent: There are some incredibly talented individuals out there. Many just aren’t comfortable working as independent contractors, so hiring W2 employees may make hiring and retaining outstanding talent easier. 

Risks of Hiring W2 Employees

If you’re considering hiring W2 employees, here are some risks you may want to consider:

  • Increased costs: W2 employees require more overhead costs than independent contractors, such as the costs of employee benefits, various employee and payroll taxes, workers’ compensation insurance, and unemployment insurance.

  • Administrative burden: Between benefit plan administration and managing compliance, an increased administrative burden is placed on organizations when hiring W2 employees.

  • Termination: Title VII of the Civil Rights Act protects employees from discrimination and retaliation in employment. For this and many other reasons, organizations may face legal consequences if they terminate an employee without just cause or proper documentation, even in employment-at-will states.

Limited flexibility: Because of the legal, financial, and administrative implications, hiring W2 employees is a commitment (long-term or not) and thus removes some of the flexibility inherent in hiring independent contractors.

Benefits of Hiring Independent Contractors

Benefits of Hiring Independent Contractors

On the other hand, if you’re thinking about hiring independent contractors, here are some key benefits you can expect:

  • Flexibility: Since independent contractors can be hired on a per-project or per-contract basis, this type of employment relationship can help you respond with greater ease, speed, agility, and flexibility to rapidly changing business conditions.
  • Reduced costs: Unlike W2 employees, independent contractors are responsible for their taxes, insurance, and benefits, which can lead to significant cost savings for employers.
  • Access to specialized skills: Hiring independent contractors can help you acquire specific skills or expertise that might not be in your organization. Contractor hiring and staff augmentation have become increasingly popular in tech spaces, where the competition for highly desired yet rare skills is fierce. 
  • Reduced administrative burden: There are fewer independent contractor legal requirements, which can lead to reduced administrative burden.

Risks of Hiring Independent Contractors

Risks of Hiring Independent Contractors

While these benefits explain why hiring independent contractors, freelancers, and gig workers is undoubtedly on the rise, this popular staffing strategy does come with some risks:

  • Compliance burden: The burden of ensuring proper employee classification falls entirely on the organization in the employment relationship. Independent contractor misclassification can result in significant legal and financial consequences for organizations, including tax penalties, back pay and benefits, and potential lawsuits that can reach millions of dollars. 
  • Lack of control: Independent contractors are generally responsible for their work and are not subject to the same level of control and oversight as W2 employees. If you wish to maintain significant influence and control over the work, you may be better off going with a more traditional W2 employment relationship. 
  • Quality control: Because of the lack of control and oversight, you also may have less control over the quality of work performed by independent contractors than W2 employees and less recourse to address a performance management issue.
  • Cultural fit: One of the biggest challenges with independent contractors is figuring out how to integrate them into your organization to ensure seamless teamwork and communication. Though not always, contractors may not be as invested in your culture or mission as W2 employees, which could lead to less loyalty and commitment to the organization from them.

Interested in learning more? Connect with us today at info@flexiblestaffingstudio.com