Why do Companies Hire Contractors Instead of Employees?

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Article by Nancy DiSciullo, Profiles Senior Account Manager, Washington, DC

Creative jobs, Web jobs, Marketing jobs, contract, contract to hire, direct hire

Although 90 percent of Profiles’ clients are enterprise companies, people looking for a job are always surprised  and often ask “Why do companies prefer to hire contractors instead of full-time employees?”

First, we should cover a few terms that are commonly used to describe Contract vs Permanent employees:

  • Contract Employment is also referred to as Temporary Employment or Consulting. Contract hires are employed by the staffing company which will distribute pay based on hours worked. The staffing company carries the burden, payroll, benefits, paid time off, etc. A contract position can still work 40 hours per week and include overtime pay which is 1.5 times the amount of pay for a regular hour.
  • Direct-Hire Employment is also referred to as Full-Time Employment or Permanent Employment. Direct hires are employed directly by the hiring brand or business. These employees are carried on the hiring company’s payroll, paid a fixed annual salary, and offered its benefits package. Staffing firms are used in this process to make the match, however, the offer letter and onboarding process are managed by the brand directly. A typical work week is defined as 40 hours and oftentimes overtime worked does not result in additional pay though this varies depending on local legislation.

When a company is determining whether to hire a contract vs. full-time employee, it often comes down to more than just your hourly wage or annual salary. For example, if a company hires you and offers a $50,000 salary for a permanent position, it actually costs almost 20% more to employ you. Let’s break down the financial difference between independent contractors and employees.

True Cost of Hire:

  • $50,000 for a base salary
  • $7,500-12,000 in benefits (based on packages and PTO)
  • $3,825 in Social Security and Medicare Taxes
  • $3,000 in Federal Unemployment Tax
  • $2,500 (estimated) in State Unemployment Tax

TOTAL: Approximately $70,000

(This calculation doesn’t even include overhead: computer, phone, heat, building, paper, pens, training, etc.)

Independent Contractors vs. Employees: A Few Key Differences

Taxes and Headcount for Contract vs. Full-Time Employees

Did you know that companies are required to match your social security and Medicare tax dollar for dollar? It’s expensive to hire a person as a full-time employee.

Then there’s the dreaded word, “headcount”. When dealing with any public company, it is critical that they prove to their investors that they have maximum productivity using the least amount of employees. This is because employees are considered the most expensive cost to any company, and the most risk. Companies address these costs by hiring long-term contractors. When engaging a professional, a contract staffing agency takes on the risk, finances the employees’ benefits and matches all taxes.

Contract-to-Hire Possibility

Working as a long-term contractor is a great way to get your foot into the door of a large, desirable company. Contract positions often convert to full-time, direct-hire roles. It provides both the company and contractor the opportunity to make sure they are the right fit for each other and allows the contractor to shine in a competitive job field.

Working With Profiles

This article offers an insider’s look at why companies hire contractors instead of employees. As you’re looking for your next dream job and targeting major corporations, consider working on a contract vs. full time basis. It may be your window to big opportunity. Search our current openings here.

About Profiles

Profiles is an award-winning staffing firm specializing in Marketing employment, Creative, and Web & IT jobs. Since 1998, we have served the needs of our Clients and Talent by matching the best candidates with the best companies in the Mid-Atlantic region: Baltimore, MD, Washington, DC, Philadelphia, PA and Richmond, VA.

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