As a business consultant I am often asked by business owners whether they should employ ‘employees’ or ‘independent contractors.’ Despite the legal fundamentals a business owner must consider if they are employing an ‘Employee’ or ‘Contractor,’ business owners and operators must also look at the advantages and disadvantages of each type of “worker” and determine the best ‘fit’ for their business.
Many small businesses work on tight margins and will often choose cost over quality of production output. However, it is valuable to look at figures and scenarios carefully, to consider when it is perhaps advantageous to consider an employee over a contractor and vice versa.
Case Study: Employee v. Contractor
The Customer:
Brisan Hospitality Consulting, recently completed an analysis of staffing costs of a hotel with adjoining accommodation.
The Scope of our Analysis:
- With the accommodation to consider we looked at the current costs the hotel was spending on employing staff to work every day to clean the public areas of the hotel and to service the motel rooms.
- We then asked for prices from three contract cleaning companies to get an idea of pricing structures, enabling us to compare “apples with apples.”
- To do these comparisons we also had to factor in employee costs such as WorkCover, Superannuation and employee entitlements (e.g. leave entitlements), even though the cleaner’s employment status was ‘casual.’ After all, even casual workers fall sick or go on holiday so there must be a substitute while that employee cannot work.
- We also looked at the indirect costs of employing employees over contractors in this scenario.
- Lastly, we ensured that all peripheral costs were also considered. If a business has cleaners on their payroll, invariably that business must also pay for all the cleaning chemicals which can prove to be costly. Many cleaning contract companies bring in their own equipment and chemicals, leaving the business to carry small quantities and minimal equipment for every-day uses.
The Outcome:
Therefore, with these factors to consider as well as ensuring the business owner was not breaching the Fair Work conditions of “Employee Vs. Independent Contractor,” it was concluded that while the hourly rate of a cleaning contractor was higher than the pay rate of an employee, there were little if any additional costs associated with hiring a contract company.
Nor was there the “headache” of having to ensure constant re-ordering of chemicals, maintenance of equipment as well as the general requirements of managing staff. The business owner not only knew the exact costs associated for cleaning the hotel on an hourly basis, they had also engaged the work with a reputable cleaning company specialising in hospitality.
This led to quality output of work because the contractors knew exactly what areas to focus on, and also greater customer satisfaction with an increase in positive reviews online from hotel guests due to cleanliness and ‘attention to detail.’
This simple yet effective change not only increased occupancy rates for accommodation it also had a flow on effect with an increase in the food and drink service areas of the hotel.
Although this scenario paints a positive picture for independent contractors, there still remains advantages for employing staff. You have loyalty (well, most business owners would like to think so!), you can train your staff to your requirements, and often employees will work diligently if there is good management of staff and perhaps incentives such as bonuses, promotions, etc.
Business owners and operators should not just look at the monetary costs associated with employing employees over independent contractors (& vice versa).Comparing both options for each individual situation, and determining the scenario that best fits with their business model and work culture is important, to enhance the overall profitability and sustainability of the business.
