How to determine if you need a contractor or a permanent employee

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Michael Andreyev
March 21, 2023
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We at Toughbyte help companies in Europe and the US find developers for full-time positions and shorter-term projects. Some of our potential clients are unsure whether they should consider candidates for a full-time commitment or as contractors to work on a time-and-materials basis. Over the years, we’ve helped many clients hire suitable candidates for the job, so have a good understanding of when an organization needs a permanent employee and when a contractor.

Several key factors should be considered when hiring developers to work for you full-time or as freelancers, such as the overheads, the amount of work you have and how easy it will be for you to recruit them. In this blog post, we’ll explain these factors in more detail to help you decide whether you should hire a permanent employee or a contractor.

Amount of planned work and budget available

First, you should determine how much work you have for the developer. If you have a short-term project that needs to be done within a specific timeframe, having a contractor is the better option. On the other hand, if you have a lot of ongoing tasks for the developer and are certain there will be more work for them in the future, hire an employee.

If your budget is limited or you have a fixed amount to allocate to your project, you should work with a contractor. When hiring a full-time employee, you should have sufficient funding to cover the ongoing expenses related to having an employee. If you’re a startup with funding, make sure to have at least 6-12 months of runway. If it’s less, candidates may have doubts about joining your company.

The ability to pay benefits and taxes associated with having a person work for you full-time should also be considered. Hiring a contractor can be more cost-effective for short-term projects due to not having to pay taxes and social security contributions. However, you’ll have to pay more for their work since skilled contractors usually charge higher rates. Hiring a full-time developer has additional costs you should factor in, such as taxes, pension, social security contributions and the cost of administrative work. Additionally, if you’re working with a tech recruitment agency, their fee for finding a suitable candidate, which is typically 20% of the yearly salary, should be taken into account. Agencies finding contractors typically have the contractors invoice through them, including their fee in the hourly rate. Despite all the associated costs, hiring a permanent employee can be a more attractive investment from the long-term contribution perspective since you would ideally want to have them work for you for an indefinite time.

Note that one way to save on costs is to hire developers for permanent roles to work for you remotely from abroad. Even if from an administrative point of view they will likely be considered contractors, they would be part of your team longer term just like local employees. If you’re hesitant to do this because of concerns related to taxation, check out our post on how to pay remote developers abroad.

Control and flexibility

Employees are typically easier to manage and control than contractors. If you prefer a more structured work environment where there is a clear hierarchy, streamlined communication and efficient decision-making, this will be harder to achieve if all your team members are freelancers.

One factor you should consider is the ability to terminate the relationship with the worker. If you work with a contractor under a B2B agreement, it is easier to terminate the collaboration without repercussions. On the contrary, it can be harder to part ways with a full-time employee. They will be obliged to work their notice period according to the employment contract and you will have to ensure they hand over their tasks before leaving. If you still need a developer, you will have to find a replacement, which takes time. Laying off an employee also carries additional expenses such as severance pay and can negatively impact your team’s morale.

Contractors have more flexibility in adjusting their workload. Since they work on specific tasks, they can log less than eight hours a day, so you don’t have to worry about them not having enough work to do. If you hire an employee, however, you must ensure there is enough workload for them to be engaged forty hours a week. You should also factor in weekends, holidays, vacations and days off when giving tasks to full-time developers if you don’t want them to work overtime trying to meet unrealistic deadlines.

Recruitment process

Finding a contractor usually takes less time than finding a suitable candidate for a full-time position. In our experience, hiring a contractor can take from a few days to a couple of weeks, whereas hiring a full-time developer can take from two weeks to a few months depending on the requirements for the position, how attractive it is for candidates and whether you need them to work on-site or remotely. The reason for this is that contractors are often between projects and may be able to ramp up with one while winding down another. Employees on the other hand typically have notice periods with their employers, which can be anywhere between two weeks and two months.

If you have a project that needs to be done as soon as possible, hiring a contractor is the better option since they can start working for you faster. When considering a full-time employee, you should consider the amount of administrative work involved and the time it will take to onboard a new team member.

Full-time developers can be harder to find because they are already employed in long-term positions and are less likely to be searching for new job opportunities. On the other hand, freelance developers are more readily available because their work arrangements are flexible and involve moving between short-term projects.

Culture fit and teamwork

If company culture is important to you, you should hire a full-time employee. You can give them a culture fit interview and invest more time in making sure they are aligned with your values.

Full-time employees have the advantage of forming stronger connections with their co-workers. They typically have more opportunities to build rapport and establish trust. Additionally, they share a sense of commitment and loyalty to the organization.

Contractors are hired for specific projects or tasks, so can quickly adapt to different work environments and integrate into new teams. They also bring new perspectives and skills to the table. Since contractors work with different organizations, they can share best practices based on their experience at other companies.

Fundability

Finally, it’s important to note that investors, especially VCs, place much more value on having permanent employees as opposed to freelance contractors.

The reason is that employees demonstrate a higher level of commitment to the company's success, as they should have a vested interest in the form of equity or stock options. Contractors, on the other hand, can be juggling multiple clients and projects at once and may not be as dedicated to a single company.

Startups often rely on their unique ideas, products or services. Having employees ensures that the intellectual property remains within the company, while working with freelancers can pose risks to the confidentiality and ownership of the startup's core ideas.

Investors also place a lot of value in company culture and, as discussed above, fostering that culture is easier with employees than contractors.

Summary

When considering whether to hire a contractor or a permanent employee, you should take the following into account:

  • If you don’t have enough work for a developer to be engaged full-time or your budget is limited, hire a contractor
  • Contractors can be more flexible and log less than eight hours a day or forty hours a week, whereas when hiring a permanent employee, you should ensure there’s enough work for them to be occupied full-time
  • Hiring a contractor is more cost-efficient if you need a short-term project done, whereas hiring a full-time employee has additional costs related to taxes and social security, but is cheaper longer term
  • It’s easier to terminate a B2B agreement with the contractor than an employment agreement with a full-time worker
  • Finding a contractor can take from a few days to a couple of weeks and they can start working for you faster while recruiting a full-time employee can take from a few weeks to a few months
  • Full-time employees are a better culture fit than contractors
  • Contractors can be more flexible and adapt to changes faster while employees form stronger bonds with teammates
  • Investors value permanent employees over contractors as employees are more committed to the company's success and ensure intellectual property remains within the company

At first glance, it may seem that hiring a contractor is the better option. However, the additional costs can quickly add up over time and having only contractors onboard makes your company less fundable. Who you should choose depends on your individual situation, your needs and the factors we’ve covered above. If you’re still unsure which type of developer would bring more value to your company, don’t hesitate to ask for help from a tech recruiter who can find either type of candidate.

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