Your next hire: Employee or independent contractor?

With technology increasingly intertwined with all aspects of business, CNET@Work can help you -- from prosumers to small businesses with fewer than five employees -- get started.

When Saks Fifth Avenue agreed to stock coats and blazers made by startup Norwegian Wool, founder Michael Berkowitz needed to create a booklet to educate the big retailer's salespeople about the new line.

"Saks gets in brands all the time and so you need to set yourself apart," said Berkowitz, who left a career on Wall Street to start his New York-based company in 2014. "We wanted this to be good."

But Norwegian Wool didn't have that kind of in-house talent, so Berkowitz decided to outsource the work to a freelance designer based overseas.

"You can find really good design work using contractors," said Berkowitz, who was pleased with the results. "There are lots of them out there who just prefer to work as freelancers."

And there are a lot of businesses interested in going that route.

One recent study found that about one-third of US companies last year used freelancers while more than half intend to hire additional freelancers in 2017. In the much-chronicled era of the gig economy, it's now relatively easy to find people willing to work on a short-term basis.

Contract work also offers the chance to size up potential team members before making any longer-term financial commitments.

"We often start people out as contractors and work with them for a year or so to get a feel for whether or not they are a good fit for employment," noted Tim Hamilton founder and CEO of Praxent, a software and web development firm in Austin, Texas.

It also helps avoid hiring mistakes.

"I've found that no matter how good of a recruiter you are, you are going to make some hiring mistakes," said Anna Brockway, the co-founder and CMO of Chairish, a San Francisco-based online curated marketplace for vintage furniture and décor. "Maybe the person oversold their skills, or perhaps they are simply not a cultural fit. Working with potential new hires on a short-term, independent contractor project first can be a great way to validate your hiring assumptions."

At the same time, the organization is not on the hook for paying out health benefits, payroll taxes, severance packages or unemployment insurance to contractors.

But if your company is growing to the point where it needs freelance help, be aware of the potential pitfalls. Consider the experience of Max Agrad, who started Voxel Worlds, a developer of virtual reality mobile applications for the real estate industry.

Agrad relied initially on contractors but came to regret the decision after encountering some who overstated their qualifications or turned out to be frauds. He recalled emailing with a mobile developer in Singapore, asking the candidate to share samples of his virtual reality work. Instead, the developer sent back a video where he was filmed using an app that was made by another company.

Caveat employer

A worker cannot be both an employee and an independent contractor at the same company. They are one or the other; they cannot be both.

Unfortunately, there is no single test for determining whether a person actually is an employee or independent contractor. For instance, the IRS uses a 20-factor test for determining worker status, including things like the amount of training and instructions someone receives, the number of set hours of work and where the work takes place. Even then, the line sometimes gets blurred.

In fact, the US Labor Department has estimated that up to 30 percent of companies misclassify their employees. In certain cases, that's due to honest mistakes and confusion about the law; in others, business owners are trying to evade regulations such as the minimum wage or the payment of unemployment insurance taxes for full-time employees.

But it's not worth trying to get cute with the IRS by classifying certain employees as contractors. You may be trying to save a few dollars but you risk opening a Pandora's box of trouble with the government. 

Rules of the road

Obviously, the question of freelance versus full-time ultimately boils down to choices that vary by company and industry. At Cinch Financial, for example, the Boston-based software startup roughly doubled its headcount to 40 in the last year. Over that time, it applied different hiring strategies to fit its different business needs, according to Kerri Moriarty, who heads company development.

"For example, we generally seek to hire engineers as full-time employees," Moriarty said. "We know we have a long-term evolving need for those roles and it gives us a better return on investment to bring them on as full-time from the start. In other areas, we get more value from independent contractors, particularly for a short-term need."

But even in the absence of a one-size-fits-all approach, consider the following when it comes to rounding out your growing roster.

Take stock of your cash flow. Freelancers may be the best option for cash-conscious startups and small businesses during down periods in the business cycle when payroll may prove to be a burden. Even if a small company is growing rapidly, payroll remains a huge expense. Do the math to figure the likely return on investment by taking on more full-time employees. And before using any freelancers, make sure that their work is going to contribute to the bottom line.

How complex is the project? You can always find freelancers able to do simple tasks like designing marketing fliers. A cottage industry of companies such as Fiverr, Upwork, Guru and PeoplePerHour now exists that will connect companies with contractors. But keep in mind that more complex projects may involve extensive in-house training, which adds extra cost.

What's your timetable for completing the project? Businesses that tend to do a lot of one-offs may benefit by hiring contractors on a project-by-project basis.

Ask yourself whether there's a long-term benefit to developing this kind of talent in-house. If the work is not core to the business, farm it out to a professional with the experience to do the job. But if you need a software developer who can help roll out versions 1.0, 2.0 and 3.0 of the company's flagship product, that's someone you need to hire as a member of your team.

It takes time to integrate full-time employees into the organization and its culture. By contrast, a contractor is only responsible for the bottom-line results and ought to be sufficiently self-motivated to complete their assignments without any hand-holding. If you're not ready or willing to make a long-term commitment, contractors are the better bet.