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Pros and Cons: Self-Employed Contractors in the Gig Economy

By April 12, 2022August 24th, 2022No Comments
Self-Employed Contractors in the Gig Economy

With the rise of the gig economy, self-employed contractors have become an essential part of business growth across the world. Once used as short-term or part-time help, contractors now make up a significant part of the workforce—so much so that contractors are replacing full-time workers on a mass scale.

Whether you’re hiring a contractor or want to change up your career by becoming one, there are a few pros and cons to consider. Use this list to discover the positives and negatives of contract work in today’s labor market.

What Is a Self-Employed Contractor?

A self-employed contractor provides services for a set rate on a schedule of their own design, usually on an occasional, part-time or full-time basis.

What Is the Growing Gig Economy?

The gig economy is a labor market that utilizes self-employed contractors instead of full-time employees to provide direct services. Usually, these short-term contract roles exist under the agreement that the contractor can set their own schedule and control the amount they earn.

Which Companies Are Part of the Gig Economy?

There are a number of businesses created to exist solely within the gig economy and provide convenience-based services, like delivery, personal assistance, cleaning, and more.

Within the past five years, consumers have come to fully embrace and rely on the gig economy for help with everyday tasks. For consumers, ride-sharing apps like Lyft help users get around, while third-party delivery apps like DoorDash help with dinner. For businesses, task management apps like TaskRabbit help professionals hire personal assistants, while specialized freelance apps like Toptal help companies hire top-tier tech talent. Some notable companies and services within the gig economy include:

Gig Economy CompaniesThe Gig Economy Has Changed the Way Contractors Are Used

The demand for gig-based services has caused thousands of job seekers to rely on the gig economy for stable employment.

In a 2021 study by MBO Partners, a top Independent Contractor Engagement and Compliance (ICEC) firm, the gig economy in the United States now accounts for more than 51 million jobs. After a dip in work related to COVID-19, the number of full-time, part-time, and occasional contractors rose by 34%.

This growth shows that, for companies, using self-employed contractors can be a cost-effective and low-risk path to global expansion. And for individuals, becoming a contractor is one way to find gainful self-employment, fast. Let’s look at the pros and cons of both hiring and becoming a contractor.

The Pros and Cons of Hiring Contractors

Pros and Cons of Hiring ContractorsThe Pros

Big Savings

With contractors, businesses get to retain an available team of self-employed workers without having to hire more employees and pay benefits, health insurance or extra taxes. The company can also alter compensation on a contract-by-contract basis. This means it is far less expensive to use contractors, especially for one-off projects.

Less Risk

Businesses do not have to worry about the risk of market fluctuations for services. When no work is available, contractors do not get paid. Companies also have no obligation to find more work for a contractor and, instead, can end a contract when the work is finished.

Faster Expansion

For companies that are trying to expand into international markets, contractors can supplement a company’s workforce without the need to set up a local entity. Employers can even pay contractors remotely from another country. This makes contractors a great choice for handling short-term projects abroad.

The Cons

Ethical “Gray Area”

In many cases, contractors are not treated as employees or valid independent enterprises. This means that contract workers are often less protected than permanent employees, which can undermine the ethics of businesses that use contractors en masse. This has caused companies to reevaluate how contractors are classified and compensated.

Reputation and Quality

One of the downsides to hiring contractors as opposed to full-time employees can be a lack of skill and experience. Whereas formal employee interviews are designed to find the best possible candidate for a role, the swift hiring of contractors can have mixed results due to a lack of specific skills. By using too many contractors, a company may suffer a drop in quality that can have a lasting effect on its reputation.

Legal Misclassification

When hiring contractors in new markets, companies must realize that each country has its own unique laws regarding contractor classification. These laws make proper contractor classification essential when drafting any contracts. Correct classification involves declaring the right benefits, wages, overtime pay protections, and more. If a contractor is misclassified, it can result in major consequences, including tax penalties.

The Pros and Cons of Being a Contractor

Pros and Cons of Being a Contractor
The Pros

Accessible Work

Contract work can be far more accessible and plentiful than full-time employment. This is because many contract roles do not require an extensive resume or interview. For certain gig economy jobs, contractors might only have to pass a background check to get hired. Some delivery roles, for example, may simply require downloading an app, creating a profile, and uploading necessary documents like a photo ID and insurance card.

Flexible and Autonomous

The gig economy has brought a new level of autonomy for contract workers. In most roles, contractors can set their own schedule and work when they please. And while many employees must work within a specific location, many international contractors can work from where they want, including an entirely different country than the business they have a contract with.

Control of Pay

One of the biggest reasons that contract work is so popular is that individuals have a choice in how they work. A contractor has the opportunity to set their rates and, depending on the job, they can take on multiple clients at once. Finally, they can choose to adhere to their own schedule. From having one client a week to three clients per day, contractors get to control how much they work and earn.

The Cons

Self-Employment Taxes

According to the United States Internal Revenue Service, an individual is a contractor if the employer (or payer) has the right to control or direct the result of work, but not what will be done, how it will be done, or when it will be done. This means contractors face different tax rules than employees and are subject to self-employment taxes. With self-employment taxes, contractors must track, calculate and report all of their taxable income without the help of a company payroll system.

Lack of Support

By being under contract and self-employed, an individual does not have the same support as an employee. This support system includes having HR and legal departments, plus benefits, health insurance, pay raises, and bonuses. This means a contractor must be completely self-reliant in finding work and funding their own support systems for legal, accounting, insurance, and retirement.

Exploitative Practices

Many individuals become contractors without understanding the implications of doing so. Being self-employed, contractors are responsible for all tax withholding and other independent business considerations. Within this, contractors can be forced to work too many hours to meet income and tax obligations, potentially leading to exploitative practices by the employer.

Make Contract Work Viable With the Right Solutions

With the right tools, contracting is more viable than ever before.

For employers, Velocity Global’s suite of contractor payment solutions helps businesses compliantly hire international contractors and correctly classify contractors and manage distributed, contract-based workforces across the globe.

For contractors, our Global Work Platform uses cloud-based technology to connect talent with employers, all while offering a centralized platform to send invoices, receive payment, and house compliant contracts.

Reach out to learn how Velocity Global is refining the gig economy with better contractor solutions for all.