Decide Whether You Need Staff or Contractors
The use of contractors in business is widespread. Even in sectors with traditionally stable staff structures, it’s commonplace to find people working under contracts. They provide specialist roles that continue for months if not years, and offer temporary cover for staff shortages.
Nonetheless, there are arguments on both sides as to whether an entrepreneur should choose permanent staff or contractors. Urgent need, skills, worker availability, and the type of business may dictate the approach. For many businesses, however, it’s worth considering the pros and cons of such decisions, and the implications in certain circumstances.
Advantages of Permanent StaffPermanent staff can bring loyalty and motivation to a business. They can also provide in-house skills over which an entrepreneur has direct control. Above all, staff give a business a secure base with costs that are easy to forecast and monitor.
Disadvantages of Permanent StaffTo employ staff, an entrepreneur must adopt a method of recruiting them. Even if an entrepreneur uses an agency, this can take time, especially if potential employees need to have specialist skills.
Once staff are in place, an entrepreneur must have a mechanism for salary payments that accounts for PAYE and National Insurance. The entrepreneur, or a manager, must also ensure staff have their full employment rights such as holidays; adoption, maternity and paternity leave; and redundancy terms.
Advantages of ContractorsThe main advantage of contractors is their availability at short notice. This means that an entrepreneur can employ them to fill staffing gaps, or recruit them for temporary jobs that require certain abilities.
Consequently, contractors are more flexible. Payment is usually a straightforward fee, and there are usually no major administrative issues to deal with.
Disadvantages of ContractorsContractors can be more expensive than an equivalent permanent member of staff, although the advantages of a short-term contract may outweigh this. If an entrepreneur uses contractors for long-term work, however, the extra cost may begin to have an adverse effect. The situation deteriorates further if long-term contractors become complacent and don’t demonstrate the commitment shown by permanent staff.
Other Points about ContractorsContractors are not employees. They don’t have a contract of service like a member of staff. Instead, they have a contract for services, with an entrepreneur acting as the client. Nonetheless, there are circumstances under which contractors are legally employees. In other words, they have full employment rights. Consequently, an entrepreneur must always be clear about the status of contractors otherwise problems can soon develop.
Even when contractors don’t have full employment rights, they still have some basic entitlements. These include receipt of the National Minimum Wage; the right of protection against unlawful discrimination; and the right to paid annual leave. Entrepreneurs who employ agency staff should check whether they or the agency are obliged to pay for this leave.
There are also situations in which an entrepreneur is responsible for contractors’ income tax and National Insurance deductions. This generally arises when the IR35 rules of HM Revenues & Customs rules apply to limited companies and partnerships. A company’s accountant can clarify the position.
Entrepreneurs who work in construction may already be aware that the industry has its own rules about contractors. The government introduced the latest set of regulations in April 2007 with the Construction Industry Scheme.