The number of independent contractors and freelancers employed by businesses of all kinds is on the rise, but what’s the difference?
Today’s workforce is more diverse than ever before. Using freelancers and contractors can be an effective and affordable way to tap into new skills and talent within your team and drive more value for customers. However, as with so many things you need to ensure they are classified in the right way and that you set the best working relationship for all sides.
Freelancers
A freelancer is an independent professional who works with multiple clients on a case-by-case basis. They will be engaged on a short-term basis and will present invoices as soon as their work is finished.
A freelance professional will typically work with many clients. Some will be on a short-term basis, while others may be more regular and recurring engagements. However, crucially, the working relationship is loose. It’s like working with a service provider. You hire them for a certain set of skills, negotiate a fair price and, once the work is done satisfactorily, they will submit an invoice which you will pay within an agreed time.
Freelancers set their rates, payment terms, and working patterns and have complete independence over how they work and when they work. Deadlines will be set in negotiation with the freelancer who will generally have to fit your work in and around their other commitments.
Independent contractor
An independent contractor will have a more regular working relationship with you as a business but will still be separate from your company. They effectively sit between freelancer and employee and will likely perform certain services and functions on a regular or semi-regular basis.
For example, your business might have a regular need for marketing services. However, the need might not be so regular as to justify a full-time employee. You’ll work with a contractor to come in and perform that role on a contractual basis.
Contractors will often be working on much larger and long-term projects and may work onsite at your office. In many situations, they may start to look and feel like any other part of your team.
However, as with freelancers, they are still fully independent of your company. While employees work for a regular salary, they will perform the contracted role, submit an invoice, and leave.
Freelancers and contractors are both independent which means they will handle their taxes. All you have to do as a company is make sure you abide by the payment terms and satisfy invoices when they become due. Payment can be delivered in a variety of ways such as bank transfer, check, money order, or cash. Whatever option you go for you should make sure it’s recorded and the worker correctly classified.
Advantages of freelancers and contractors
Both freelancers and contractors offer advantages to businesses including:
• Flexibility: You only have to engage them and pay for their services on a case-by-case basis. Some companies will have a pool of freelancers enabling them to reach out as and when they need to.
• Simplicity: Because they are not employees you don’t have to worry about withholding deductions, managing PAYE, or making sure you meet all employment regulations. It’s fast simple.
• Affordability: With freelancers, you only pay for what you get. Every dollar you spend can be linked to a piece of work. With employees, you’re paying them every month whether they are busy or not.
• Skills: Engaging freelancers enables you to reach out beyond the confines of your business to the wider market. You can access a wider talent pool and specific skills or certain tasks. With in-house employees, you’re often asking people to adapt to tasks that are not in their central skillset.
Disadvantages of freelancers and contractors
While there are many advantages there are some challenges:
• Cost per hour: While you only pay for specific services the actual cost per hour of their work can often be slightly higher. As work becomes more regular, you may look at whether it would be more cost-effective to hire them as employees.
• Control: With employees you control where they work and when they meet deadlines. Freelancers can work from anywhere and will generally fit your role around their other commitments.
• Compliance issues: Authorities have become much hotter on practices that they see as disguised employment. If you’re working with people regularly and if they are on site they may start to look and feel like regular employees. In a world in which most businesses have a hybrid workforce correct classification of workers can be very difficult.
Working with independent contractors overseas
As technology becomes faster and more agile businesses can find it easier to engage with professionals from all over the world. Thanks to the internet it is possible to hire a freelancer from anywhere and have them collaborate quickly and easily with your own domestic team.
This has many advantages including:
• The ability to widen the talent pool: Traditionally, businesses were constrained by their geographical area. However, today you can easily tap into a rich and diverse talent pool.
• Affordability: Outsourcing operations to freelancers overseas can reduce your operating costs. By working with people in countries with a lower cost of labor, you can get services at a more competitive price.
• Working culture: Engaging with a more international workforce can have all sorts of surprising benefits that ripple across your entire business. Working with people in other countries brings fresh knowledge and perspectives that can be immensely beneficial.
Certain countries such as South Africa offer a particularly appealing proposition. A diverse and highly qualified workforce coupled with a matching time zone for the UK and Europe and a low cost of living make it a perfect location to source affordable but high-quality freelancers.
However, whatever country you choose it pays to make sure you understand the market and find the right people.
How to hire contractors and freelancers
When working with independent workers – especially if they are located overseas – you will have to decide on how to engage with them. Most companies will start by directly engaging the services of freelancers. There are a host of freelance platforms available that can help you connect with talented professionals across the world.
This can be quick and simple and involves no intermediary fees, but you will have to handle all administrative details including getting the right classification and treatment of workers.
When hiring freelancers and contractors overseas, it can be easy to run into regulatory difficulties. Adhering to the rules of a foreign and unfamiliar country is far from straightforward. Keeping up with changing regulations can also be extremely challenging.
For this reason, it’s worth partnering with a specialist firm dedicated to classifying your workers in another country. There are various options for doing this.
• Employer of Record (EOR): An EOR handles all the regulatory and logistical challenges of dealing with your employees overseas. They can make sure all legal requirements are met and avoid any compliance issues.
• Agent of Record (AOR): An agent of record is better suited to independent contractors and freelance. They can help you with sourcing talent, onboarding, and making sure everyone is classified correctly.
Last but not least your relationship with freelancers and contractors can be very fluid and will likely evolve. For example, you may start by hiring a freelancer on a one-off basis. If things go well, you may hire them on a more regular contractual basis. At some point, they may spend so much time working with you that you need to classify them as a full-time employee. Understanding where the lines are drawn between employee and contractor is critical and difficult in a foreign country.
At Future Teams, we provide support for all your outsourcing needs in South Africa. If you’d like to know more download a PDF of our guide and feel free to contact a member of our team.
