What Is a Contract Employee or Freelancer?

A contract employee is a self-employed individual that a company or organization hires to perform specific projects or services.

Contract employees are also known as freelancers, contributors, independent contractors, or self-employed individuals.

Unlike traditional employees, contract employees own and operate their own businesses, often as sole proprietors or through limited liability companies or partnerships. Contractors have a different set of tax obligations compared to permanent employees.

Companies often engage contractors to access niche expertise or specialized skills not readily available within the company. Companies can also work with contractors to fill temporary project gaps or specific workloads without the commitment and costs of full-time employment.

While the type of work a contractor performs varies significantly, common examples of contractor positions include the following:

Web designers and developers
Graphic design
Content and copywriters
Digital marketing and public relations
Business and legal consultants
Accountants
Translators
Customer service
Data entry

Definition of freelancers

Freelancers are self-employed professionals who offer their services to multiple clients on a project-by-project basis. The terms “freelancer” and “contract employee” are often used interchangeably, as both refer to independent professionals who are not permanent employees of a company. However, there are some subtle differences in how these terms are commonly applied.

Freelancers typically work on shorter-term projects or assignments and may manage multiple clients simultaneously. They often have more flexibility in terms of work hours and location compared to contract employees. Freelancers are particularly common in creative industries, such as writing, design, and media production, but can be found across various sectors.

While all freelancers can be considered contractors, not all contract employees identify as freelancers. Some contract employees may work exclusively for one client for an extended period, resembling a traditional employment relationship regarding work hours and integration with the client’s team, despite their independent contractor status.

Contract employee vs. full-time employee

Differences between contract employees and full-time employees have to do with their worker rights, responsibilities, and tax implications. The main differences between a contract employee and a full-time employee include the following:

Autonomy. Contractors set their schedules, fees, and work methods, while employees follow company rules and have set work days, hours, and pay schedules.
Employer relationship. Contractors usually focus on specific tasks or projects outside the core business, whereas employees perform duties defined by their company, receive training, and have ongoing job commitments.
Exclusivity. Independent contractors can work for multiple clients at a time, while employees work exclusively for one employer.
Pay. Contractors are often paid upon project completion and receive no employment benefits, while employees receive a regular salary and benefits.
Taxes. Contractors receive 1099 tax forms and handle their own taxes. Employees receive W-2 tax forms and automatic payroll tax deductions.

When you might hire contract employees vs. full-time employees

Employers may choose to engage contract employees over full-time employees for the following reasons:

To complete short-term assignments

Companies may decide to hire a contractor employee instead of a full-time employee when they need to hire someone with specific expertise to work on a short-term assignment or project. A contractor’s focused attention on a single project also often translates to faster project completion.

To save on costs

Companies may also engage contractors to reduce costs and resources associated with hiring full-time employees, including onboarding, payroll tax, statutory contributions, statutory benefits, ongoing career development and training, and work equipment.

Enter new markets quickly

Additionally, a company may engage an international contractor when they don’t want to establish an entity in a foreign country but still want boots on the ground to provide market insights for potential global expansion. Companies can hire international contractors directly without spending time, money, and resources on entity establishment.

Benefits of hiring freelancers and contractors

Hiring freelancers and contractors presents many advantages for companies seeking to broaden their scope and capabilities, including:

Access to a global talent pool. Companies can access a diverse pool of professionals with the most relevant skills for their specific needs, regardless of their location. Global freelancers and contractors often possess specialized expertise, diverse backgrounds, and unique cultural perspectives that can provide fresh insights and innovative approaches.
Entry into foreign markets. Companies gain valuable local knowledge and connections through global contractors and can quickly test new markets for future expansion. By engaging professionals familiar with local customs, regulations, and consumer behaviors, companies can tailor their offerings and marketing approaches more effectively.
Quick and easy onboarding. Freelancers and contractors typically bring immediate expertise to projects, reducing the time and resources required for onboarding. Payroll is also more straightforward because global contractors handle their own taxes and benefits.
Workforce scalability. Freelancers are often more accessible and flexible when scaling a workforce. Companies can scale their teams rapidly in response to market demands, project requirements, or seasonal fluctuations. This agility enables organizations to optimize resource allocation, maintain lean operations during slow periods, and quickly ramp up when opportunities arise.
Flexible commitment. Companies can engage contractors for specific, short-term needs and discontinue the relationship upon completion. Contractors can be seamlessly re-engaged for future projects if needed. This model allows companies to access cutting-edge expertise without the overhead of permanently maintaining such specialized skills in-house.
Cost savings. Contractors do not require the same expenses as full-time employees. Companies can avoid heavy costs associated with benefits, office space, equipment, and long-term commitments. This financial flexibility allows businesses to allocate those resources toward other strategic investments.
Sharper competitive edge. The agility and expertise that freelancers and contractors offer enable teams to respond more quickly to market changes, technological advancements, and emerging opportunities. This talent dexterity, combined with access to diverse skill sets, positions organizations to enter new markets more efficiently and outmaneuver competitors who rely solely on traditional workforce models.
Better work-life balance and productivity. The flexible lifestyle freelance work offers often leads to higher job satisfaction and productivity. Professionals who choose this work style are self-motivated and efficient, bringing a results-oriented approach to their projects. This can translate into higher-quality outputs and more innovative solutions for the hiring company.

Challenges of hiring freelancers and contractors

While freelancers and contractors may offer flexibility and specialized skills, they also present challenges for companies, including:

Limited control. Freelancers and contractors manage their tasks, tools, and timelines, making it more difficult for companies to oversee their work. Additionally, their temporary nature and ability to work with multiple clients may limit their overall investment in the company’s long-term goals.
Transient workforce. Engaging freelancers and contractors for short-term projects may lead to frequent turnover and potential workflow disruptions. These independent professionals may not always be available for future projects or reliable for ongoing needs.
Increased liability. Unlike employees covered by workers’ compensation, injured contractors may sue their clients for work-related injuries. Companies must be mindful of this increased liability and consider contractor insurance options.
Loss of copyright ownership. Freelancers and contractors usually retain copyright ownership of their work unless explicitly defined in the contract, increasing the risk of sensitive company information going into a competitor’s hands.
Misclassification. Employers must comply with local worker classification laws, which vary worldwide. If an employer misclassifies their talent, they face risks and financial liabilities, including unpaid taxes, back benefits, legal fines, and reputational damage.
Communication challenges. Working with freelancers and contractors across different time zones and cultures may lead to miscommunication or delays in project completion. Clear communication channels and expectations are crucial for successful collaboration.

Are your independent contractors compliantly classified? Use our contractor risk assessment checklist to find out and learn how to avoid misclassification:

Misclassification is costly. Our checklist helps you stay safe.

How to avoid misclassifying contract employees

Leveraging contractors for projects and services offers many benefits, especially when testing new markets or meeting short-term needs. However, navigating complex global employment laws can be daunting, especially for busy HR teams.

Companies can work with a contractor management partner like an employer of record (EOR) to assist with contractor classification and payments.

An EOR simplifies global expansion while mitigating misclassification risks by providing local expertise and in-country insight to engage and manage contractors. An EOR works on your behalf to manage contracts and correctly classify your workforce to ensure global hiring compliance.

Companies can also avoid contractor misclassification risks by converting contractors to employees. An EOR partner employs and pays talent on your behalf so that they are legally considered full-time employees while you continue to oversee their day-to-day operations.

Best practices for working with contractors

Managing contractors and freelancers is crucial for successful project outcomes and long-term business relationships. By implementing best practices for managing contractors, companies can maximize the benefits of working with these flexible professionals while minimizing potential challenges. Here are some key strategies to consider:

Develop clear contracts and agreements that define project scope, timelines, deliverables, and payment terms upfront.
Create a streamlined onboarding process for freelancers to integrate them into your workflow and company culture quickly.
Establish robust communication protocols using project management tools like Slack or Asana to maintain seamless collaboration.
Set clear expectations and goals for each project, ensuring alignment between the contractor’s work and the company’s objectives.
Implement a system for evaluating freelancer performance based on predefined criteria, such as quality of work, timeliness, and overall contribution.
Provide regular feedback and maintain open lines of communication to promptly address any issues.
Respect the contractor’s independence while fostering a positive working relationship that encourages their best work.

Managing freelancers and contractors well fosters innovation, adds fresh perspectives, and enhances the company’s adaptability in a dynamic business landscape. This effort builds a robust network of skilled professionals and creates a talent pool that can be tapped into for future endeavors. By adhering to these best practices, organizations can cultivate a dynamic ecosystem where both in-house teams and external contractors thrive.

Steps to hiring and managing freelancers and contractors

Engaging and onboarding contractors smoothly is pivotal for successful project outcomes. To put this process into perspective, below is a concise guide outlining simple steps and tips for hiring freelancers and contractors:

Identify project needs. Begin by assessing whether a freelancer or contractor is suitable for your project. Consider the project scope and duration, required skills and expertise, budget constraints, and in-house capabilities versus external needs.
Define the role and requirements. Clearly outline the project details, including specific tasks and deliverables, timeline and milestones, required qualifications and experience, and necessary tools or software.
Market research and compliance requirements. When considering international contractors, thoroughly investigate local labor laws, tax regulations, and compliance requirements in the business’s home country and the contractor’s location. Consider time zones, cultural differences, and payment methods that work across borders.
Source talent. Utilize various platforms to find the right contractor. Explore freelance marketplaces like Upwork and Fiverr, professional networks such as LinkedIn, and industry-specific job boards, and seek referrals from trusted contacts.
Evaluate candidates. Review applications and portfolios to create a shortlist. Assess relevant experience and skills, check client reviews and ratings, and conduct interviews or skills tests if necessary.
Draft a clear contract. Develop a comprehensive agreement that includes a detailed project scope and deliverables, payment terms and schedule, intellectual property rights, confidentiality clauses, and termination conditions.
Establish communication expectations. Set up a communication framework by choosing appropriate communication tools, establishing regular check-in points and meeting cadences, and defining reporting structures and progress updates.
Onboard the freelancer or contractor. Provide necessary resources and information by granting access to relevant systems and tools, sharing company guidelines and best practices, and introducing key team members or stakeholders.
Manage the project. Oversee the project’s progress by monitoring milestones and deadlines, providing timely feedback and guidance, and promptly addressing any issues or concerns.
Handle payments. Implement a smooth payment process by setting up secure payment methods, processing invoices promptly, and ensuring compliance with tax regulations.
Evaluate performance. Conduct regular assessments by providing constructive feedback throughout the project, assessing the quality of deliverables against agreed-upon standards, and considering the potential for future collaboration.
Project closure. Wrap up the engagement professionally by ensuring all deliverables are received and approved, completing final payments, gathering feedback from the freelancer or contractor, and documenting lessons learned for future projects.

This structured approach helps ensure that projects are completed successfully while building positive relationships with talented professionals for future collaborations.

Hire compliantly with Velocity Global

Navigating the complexities and misclassification risks of global talent acquisition is daunting. Partner with Velocity Global to take the worry out of global hiring.

As an industry-leading EOR, we offer a full suite of global workforce solutions that handle talent onboarding, pay, and management; risk mitigation; local labor requirements; and compliance in over 185 countries. This allows you to focus on building a high-quality, distributed workforce that helps you meet your present and future business goals.

Contact Velocity Global today and let our global workforce solutions and expertise guide your every step to building a global team.