What Is a Contract Employee?

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

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.

Read more: Should You Hire a Contractor or an Employee? 

Benefits of hiring contract employees

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

• Access to a wider talent pool. Companies can hire talent with the most relevant skills for their specific needs, regardless of their location. Global 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. 
• Quick and easy onboarding. Employers hire contractors temporarily based on their skills and expertise, so contractors do not require the same training or onboarding associated with long-term employee investment. Onboarding global contractors for payroll is also more straightforward because they handle their own taxes and benefits.
• Workforce scalability. Global contractors are typically short-term hires and allow employers to grow or reduce their workforce as needed quickly. Employers can easily scale up teams during peak periods and downscale during slower times without the long-term commitments associated with traditional employees.
• 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. 
• Cost savings. Contractors do not require the same expenses as full-time employees, which allows businesses to allocate those resources toward other strategic investments.

Disadvantages of hiring contract employees

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

• Limited control. Contractors manage their tasks, tools, and timelines, making it more difficult for companies to control 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 contractors for short-term projects may lead to frequent turnover and potential workflow disruptions. A contractor 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. 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.

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

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 international expansion while mitigating misclassification risks. An EOR provides local expertise and in-country insight to engage and manage contractors. An EOR works on your behalf to manage contractor 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.

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 employment solutions that handle all risk mitigation, local labor requirements, and compliance so you can focus on building a high-quality, long-term distributed workforce that helps you meet your future business goals.

And when you’re ready to convert your contractors to full-time employees, Velocity Global helps you stay on the right side of labor laws.

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