The differences between hiring contract vs permanent employees

The job market is much different from it was ten years ago. This is especially true in the tech industry (IT and software development). As work in general and work particularly in the tech industry continues to move to contract- and project-based ways of working, evaluating whether hiring a contractor or a permanent employee becomes more difficult. In this article we will explain the pros and cons of hiring contractors and permanent employees, so you can make an informed decision about who to hire for your organization.

Before we continue, we must, however, provide some understanding as to what differentiates these two types of employees.

Contractors

Contractors work on a project basis for a predetermined time frame or number of man-hours. They are typically subject matter experts (SMEs) in specialized roles that aren’t usually fully utilized in most businesses. In the tech industry, roles like quality assurance testers, system analysts and technical writers are often hired on a contract basis, depending on the business. Unlike true freelancers, our contract employees at spriteCloud are permanent employees of spriteCloud.

This means that they;

  • received the same benefits (paid holiday, sick leave, pension) of a permanent employee
  • spriteCloud handles the negotiation of contracts
  • spriteCloud handles the taxes
  • our testers can focus on the job, not finding the job.

Permanent employees

Permanent employees represent the traditional way of working and employment. Though things are changing as in 2018, Google employed more contractors than permanent employees. Due to a permanent employee being permanent, it often takes longer to evaluate their suitability for the organization and the role. Permanent employees can be assigned to projects within the organization and once completed moved to other areas that require their work.

Hiring a contractor

 

Contractors pros and cons

Pros

Short-term and on-demand

A big advantage to hiring a contractor is the ability to bring in an expert with a specific skill set right when it is needed. This person is an expert who is able to hit the ground running and immediately begin increasing the productivity of the project and team. They are paid to deliver and their mindset is to deliver results.

Development projects and the tech industry are in a constant state of flux with contractors adding the flexibility that help enable those periods of growth and decline. For this reason, contractors are extremely well suited to ramping up and ramping down projects. Due to the fact that contractors work for short periods on a contract basis, they are much quicker to hire than a permanent employee. Also, equally important, they are quicker to replace. This means finding the right expert contractor can be easier and provide more room for mistakes in the hiring process than with permanent employee.

Specialized niche and diverse work experience

Contracting is common for highly specialized work. spriteCloud contracts out its software testers that specialize in areas like test automation, functional testing, devops, and other highly specialized niches in the development sphere. Each new contract has them working with a new client on a new project, adding more knowledge and expertise to their skill set.

This high level of specialization and frequent contracts also means that contractors have very diverse work experience. This experience can add to your project due to the contractor’s knowledge of recent trends and technologies, their insights on competitors that they have worked with (though NDAs are common), their ability to introduce new innovations from other industries and niches.

More cost-efficient

Contractors charge a higher hourly rate than permanent employees, but what makes them more cost-efficient is that you are only paying for their work when you need it. No paying for holiday days, no paying for sick leave, no paying into a retirement plan or pension. Also, when there is a downturn in hours required for the project, you don’t pay for that downtime as the project is done and the contract stopped. From a development project perspective, a contractor’s cost can be associated with the project budget.

There may be a bit of “sticker shock” at the cost of hiring a contractor but due to not paying the hidden costs of the benefits associated with a permanent employee you may save up to 30 percent by hiring a contractor. Contracts typically last from 9 to 12 months and usually entail 2 to 3 days per week with the client.

Cons

Availability

Once a contractor leaves a project they move on to the next project. This can mean that if you aren’t quick to negotiate another contract, a great contractor, one that did an incredible job and knows your team/systems well, could be working for someone else. Working with an organization that contracts out their experts, like spriteCloud, is a good solution as they are possibly able to re-assign the contractor or provide a suitable replacement quickly. This is one of the advantages of working with an organization like spriteCloud than hiring freelancers.

High initial cost

Contractors charge an hourly rate that is higher than what a permanent employee might cost, at least initially. There is a trade-off between this higher initial cost, and the delay and costs associated with recruiting and training a permanent employee.

Not suitable for all positions

Contractors are specialists which means that they are not suitable for all positions. If your project requires a “jack of all trades”, for example, a full-stack developer, you may be better off hiring a permanent employee who can move around projects easily, instead of constantly looking for contractors to temporarily fill these various roles.

Hiring a permanent employee

 

Permanent employees pros and cons

Pros

Grow with the business

Your organization can only grow with a core of permanent employees. Contractors can help to develop a particular role before a permanent employee is hired, but you’d be crazy to run your organization with only contractors.

Whereas contractors are meant to provide expertise or increased capacity on a temporary basis, permanent employees can grow with the organization to fulfil roles and functions in the future. Knowledge is gained through training and development and organizational knowledge is generated over time. This development over time can create a great employee. This training and development are not without its costs, as it can be expensive, time-consuming, and provide no assurances that the employee will not take this knowledge elsewhere.

A great permanent employee can do incredible things for a business, but in some countries with tough employment laws, a permanent employee could also hinder the organization.

Vested Interest in the business

Permanent employees rely on the organization for their income but also their careers. Adding the need for their long-term employment to this equation creates a vested interest in the organization and its success. Permanent employees become indoctrinated (in a positive way) with the organization’s values, vision, and its culture. A vested employee that is encouraged to develop through training, can create a lot of synergy in an organization and having a person on your team that really cares about the success of the organization can have a massive impact. In practice, we can also find a lot of employees that don’t care so deeply about the organization.

They are reliable

With permanent employees you can be sure that if your workload increases or you need urgent help, someone is there to step in, in most cases. They are reliable in that way because they have a vested interest in the organization providing long-term career opportunities and because they are there regardless of if there is a high workload or a lot of downtime. Not to say that contractors aren’t reliable, but they may not be available for urgent work and will charge more for a higher workload.

Cons

Training and development costs

Permanent employees require training and development to help them reach their full potential. Once a permanent employee is hired they need to be trained before they start fully contributing to the organization. Employee development can cost your organization a lot of money and take a long time before it starts to show benefits. If you want to train a permanent employee to become an expert for a particular project, you may be better off using a contractor in the short-term unless you know you will be utilizing that role fully in the future

More expensive than you think

As mentioned earlier, hiring a permanent employee is initially less expensive than a contractor but in the long-run these costs can add up. These costs should be considered when hiring for a project, as a short to medium term need may be better served by a contractor. Hidden costs of permanent employees include;

  • Recruiting and HR spend on recruitment
  • Contributions to pension
  • Paying for sick leave, maternity leave, and holiday leave
  • Paying during slow times
  • Can be costly fire a permanent employee in countries like the Netherlands

These hidden costs are rarely properly taken into account and typically mean that a contractor is the cheaper option.

Difficult to find the right employee

It is hard to discover if a candidate is the right fit for the role and the right fit for the team based on a CV and a few conversations. The fact that the organization could be stuck with a mismatched employee for a long time, is what makes finding the right employee and committing to them so difficult.
Aside from the possible mismatches in personality and skill, an organization may have a difficult time during the recruitment process as larger organizations may have more pulling power or your region simply doesn’t have a large enough pool of qualified candidates.

Contractors vs permanent employees: the bottom line

An organization should contain a healthy mixture of contractors adding their knowledge and expertise temporarily to the team and projects, and permanent employees keeping the wheels turning constantly while developing to become those experts once there is sufficient long-term need.

Considering that hiring a permanent employee requires such a commitment in time and effort, a very practical solution is to use contractors when working on short- to medium-term projects, evaluating whether to commit to a new project or business line, or as temporary position fulfilment while a permanent employee is being found. You should leverage the expertise of the contractor where and when it matters most. Once you believe there is enough organizational knowledge gained from the contractor, processes have been setup, and/or the permanent employee has learned the skills required, then a contractor is no longer necessary.

Cost should not be your main consideration as the differences in costs between contractors and permanent employees can be misleading and at times negligible. You should focus instead on evaluating 1) at what stage the project or organization is in; 2) whether there is a sustainable need for long-term expertise now and in the future, and 3) if the in-house knowledge is at the level required to accomplish the goals.

With this greater understanding of contractors and permanent employees, you are armed with the ability to choose the best type of employee for your project and organization. If you feel that the right choice is to hire a contractor for your quality assurance and software testing needs, consider employing a spriteCloud tester via a contract.

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