When Should Startups Hire Independent Contractors? 3 Signs to Look Out For

Ayush Sharma, CEO · February 14, 2024

When Should Startups Hire Independent Contractors? 3 Signs to Look Out For article visual

One of the biggest challenges founders face is scaling their business. Limited funds and resources mean you don’t have a lot of room for error.

Instead of hiring employees, some startups seek out independent contractors (or freelancers, as they’re often called) to ease their growing pains and stretch their budget further.

But how do you know if hiring contractors is right for your business? Here are three things to look for, plus four ways to know if you should hire an employee instead.

Three signs your startup should hire independent contractors

Independent contractors are specialized workers who use their skills and knowledge to complete specific projects for a company. They’re not bound to a single client, so contractors often offer their services to multiple companies at a time.

Because of the way they operate, freelancers are essentially business owners in their own right. They have complete control over their work in a way that employees don’t. Contractors establish their own schedules and work processes — but they’re also responsible for business expenses like taxes and health insurance, making them a valuable asset if your startup is in one of the following situations.

You have limited resources

Hiring employees is expensive: The 2023 State of Tech Salaries Report from Hired, an AI-driven recruiting company, revealed that the average annual salary for US tech talent was $158,000. The report showed that many tech workers also expect other benefits, like equity (67%) and sign-on bonuses (53%), when they accept a new job.

On the other hand, 81% of hiring managers report that working with freelancers helps them be more cost-effective, according to research from Upwork.

Working with contractors allows you to keep the business running while also keeping your employment expenses and overhead costs low. Say goodbye to budgeting for payroll taxes, unemployment insurance, employee benefits, equipment, and training costs!

You need an expert’s skills on demand

Hiring contractors also allows you to take advantage of an expert’s skills and knowledge with minimal onboarding required. Because they already have the expertise you need, they can get started on your projects right away. Compare that to full-time or part-time employees, who typically need onboarding and training before they generate returns on a startup’s investment.

Dr. Marcia Layton Turner, a business book ghostwriter and founder of the Association of Ghostwriters, exclusively works with freelancers to support the needs of her businesses.

“I’ve never considered hiring employees because my need for talent is often short-term but immediate,” she says. “I hire contractors and freelancers because they are experts in their field, can do what I need in less time than I could do it myself, and I can pay for the work I need done without an ongoing commitment.”

As a newcomer to your organization, freelancers also bring a fresh perspective to your startup’s processes and challenges — which is especially helpful if you’re stuck or struggling to see things objectively.

You need help with a short-term project or fluctuating work

Contractors are ideal for short-term projects or tasks that don’t require 40 hours of work a week to complete. For instance, a startup company might work with a contractor to build a new website or test out a new marketing strategy.

Many businesses with seasonal or constantly-changing workloads also use contractors to support their main workforce. Because freelancers give startups the flexibility to scale their team up or down as needed, these organizations are able to capitalize on unexpected business opportunities.

“[Working with contractors] gives me the flexibility to hire experts for specific engagements rather than training employees to meet my disparate needs,” shares Dr. Turner. “For example, I have an online research guru I rely on at the start of new projects to gather background information. I may use her for 10 hours one month and none the next, until I have another project.”

When should your startup hire full-time employees?

Chances are you’re already very familiar with the pros and cons of hiring traditional employees.

They require more money and resources than their contractor counterparts, but they work exclusively for your company in return. A team of strong employees also provides a stable and dependable foundation for startups to build long-term plans on.

Here are some situations where full-time employees are well-worth the extra investment.

You want a worker who’ll stay with the company long-term

Statista found that, in the US, contract workers stay with a company for 10 weeks on average. Today’s employees, on the other hand, are the opposite: A 2022 Gallup report showed that 53% prioritize job stability and security when deciding whether to accept a job offer.

This expectation allows startups to build business plans around their workforce. Since they already spend time and money training their employees, a founder may decide to cut costs upfront by hiring a junior employee and developing them over time.

When you have employees on your team, you can create long-term goals with the expectation they’ll be around to achieve them.

The work is crucial for the success of the business

Since many contractors work with companies on a temporary basis, they’re best used in positions that aren’t essential to your startup’s success. Avoid using them to fill founding or leadership roles.

After all, hiring a freelancer to oversee your marketing strategy might be fine if they plan to stick with your company for the next few years. But if different contractors shuffle in and out of that role every few months, your startup will end up dealing with inconsistent messaging, unfinished projects, squandered opportunities, and more.

At the end of the day, you want someone who’s fully committed — not just to their day-to-day responsibilities — but to the mission and growth of the organization. And since many freelancers work with several clients at a time, there’s no guarantee that the ones on your roster will always be available when you need them.

So if your business will see significant setbacks if a particular role isn’t filled, hire a full-time employee for that position.

You need control over your work processes

Because contractors control their schedules and work conditions, they won’t be as available or responsive as an employee would be. You may have to wait a day or two to get a question answered, or they won’t be able to join recurring meetings with the rest of your team. Some freelancers will have work styles that aren’t compatible at all with how you do business.

In comparison, businesses have much more control over how and when employees do their work. These workers are better suited for duties that require them to be available during business hours, follow specific guidelines, or complete urgent or time-sensitive tasks (like putting out fires and handling last-minute client requests).

You want to strengthen your company culture and identity

Company culture is based on an organization’s shared beliefs, values, practices, rules, and standards. So whether they know it or not, every person in your organization plays a role in creating your company culture.

The problem? Businesses made up of mostly freelancers may have difficulties building a strong identity or company culture.

Since contractors are temporary workers by nature, they’re generally less invested in maintaining a company’s mission, vision, and values than employees are. And when freelancers frequently join and leave your team, it’s hard to build relationships and camaraderie between members.

This can hurt your chances of hiring top talent in the future. According to LinkedIn, 40% of job seekers globally prioritize company culture when choosing a new job. So if company culture is important to you, consider rounding out your founding team with a few full-time employees.

Should you hire independent contractors or employees for your startup?

The short answer: It depends on the needs of your organization.

Many startups benefit from hiring an independent contractor early on — either as the first member of the team or in addition to an existing W-2 workforce. Use your goals, budget, workload, and the gaps in your business to inform your decision. If you need specific guidance, ask your accountant or employment attorney if hiring contractors makes sense for your company.

Whether you hire freelancers or employees, count on Warp to make paying them easier than ever. Try out the platform today to see for yourself.

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