The pros and cons of hiring an independent contractor

Do you need a skilled, experienced worker for a new project? Hiring a contractor may save you time and money.

A business owner at their laptop talking to an independent contractor

Short-term workers for short-term projects

You don't always have to hire a permanent employee for every role. If your small business needs someone with specific skills for a short-term project, it could make sense to hire a contractor instead.

Contractors are not part of your permanent workforce. They aren't your employees. They are one-person businesses who work for organisations for a short period of time. Whether it's for a couple of weeks or a few months, hiring a contractor could help your small business to grow in a more flexible way.

But contractors aren't suitable for every role. Here are some important points to consider before you decide whether hiring a contractor is the right move for you.

What defines a contractor?

A contractor is someone who works for you on a short-term basis, usually on a project. You can find a more detailed description in our other guide about independent contracting.

Contractors are sometimes referred to as freelance workers or consultants. These terms can mean slightly different things, though, and legal definitions may vary from country to country.

The most important thing to remember is that a contractor is not an employee. Contractors are independent businesses working for you, sometimes on your premises.

If you treat them as employees you run the risk of losing money through unnecessary extra taxes. So always follow local, legal guidelines to make sure you get this right.

Why hire an independent contractor?

The easiest way to find out if you should hire a contractor is to see why other companies hire them. Here are some of the reasons:

  • Access to skills: A key benefit of hiring contractors for many companies is being able to quickly adapt to changing demands for skills
  • Organisational flexibility: It's useful to be able to increase or decrease your staff numbers based on changes in the market and the wider economy
  • Fast access to new tech: Companies are struggling to hire employees in fast-growing fields, especially in the technology industry, so if you're hiring in such an area you can probably get a consultant more quickly than an employee
  • Ease of termination: When you hire a contractor, there's usually a get-out clause so you can end the contract with a few weeks' notice, without giving a reason – that's rarely the case when you need to fire someone or make them redundant
  • Lower overheads: There's no need to provide company benefits, holiday pay, sick pay, employer taxes, or pension or superannuation payments to contractors
  • Cost savings: It's worth playing around with the figures in your accounting software to see what you might save if you hire a contractor
  • Reduced legal liability: Employers are often required by law to insure against liability for injury to their employees – contractors are their own employers and have to provide their own insurance

Skills and experience are the big plus points here. Becoming a contractor is a major life decision because it's a step outside the 'safety' of full-time employment. So people who take up contract work are likely to be confident about their skills, with experience to match.

When not to hire a contractor

Contractors aren’t replacements for employees. Both have their place, but there are situations where hiring a contractor could be the wrong decision.

When you’re building a team

Stability is important for good team dynamics. Having contractors come and go is fine if they're outside your core business, but it can be a big distraction otherwise.

When you want to invest for the future

Do you know where your small business is going to be two years from now? You'll want to make sure you have people on board who you can trust to develop the business with you. Hiring contractors for long periods rarely makes good business sense. Contractors can help your business through periods of growth or difficulty, but they don't add value to the core business. Investing in employees could pay better long-term dividends than spending a lot of money on contractors.

Use good quality accounting software to test different growth scenarios – with and without contractors. And make sure you talk to your accountant or financial advisor for a clearer picture.

When you want to develop key HR assets

Employees are assets. Like sports teams, it's great if you can find someone with talent and then develop their skills and attitude so they become increasingly valuable. But it can be annoying and expensive to train a contractor to do a task, then watch them leave and take their skills and knowledge elsewhere.

What to consider when hiring contractors

Here are some of the practical points you should think about when hiring contractors:

  • Read their references: Read what the contractors' other clients have written about their work – don’t just look at the scores
  • Interview carefully: You're not looking for an employee but you should still make sure the key boxes are ticked: skills, experience, attitude and ability
  • Use video-conferencing if necessary: Even if you have to hire someone remote and can’t meet them in person, try to interview them via video link
  • Use an Integrated CRM or Project Management platform: Make sure the contractor is integrated into your team and projects, and keep track of their work
  • Pay on time: Your payment strategy could affect whether other contractors will want to work for you in the future
  • Be inclusive: Try to include the contractor in meetings, emails, and other operational tasks
  • Get everything in writing: Make sure the contract, NDA (non-disclosure agreement), service agreement, schedules and any other required documents are clear and legally binding. The contractor should have a full written description of their role.
  • Do it in the cloud: Wherever possible, use cloud-based software so that your contractors can work online from anywhere. They can be a part of your team even when they're not on your premises.

Where do I find the right contractor?

The simple answer is: go where they go. There are specialised websites for people seeking and offering contract work.

Look at sites such as Upwork and Freelance. Use LinkedIn and other social networks to tell people you're looking to hire a contractor. And talk to friends, family and business acquaintances to see who they might recommend.

Get the best out of the contractors you hire

Some contractors might have a different attitude to work than your employees. They tend to be more focused on their projects and less team-oriented.

This doesn't have to be a problem. In fact it can work to your advantage. As with anyone else who works with you or for you, if you understand and accept their differences you'll be able to get the best out of them.

Be sure to keep track of your contractors' hours and how much they're costing you. Use your accounting software to produce reports so you can see whether you're getting value for money. In time you'll discover the right mix of employees and contractors that works for your small business.


Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

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