Employee, Contractor or Consultant. How to hire the best fit.

shallow focus photography of red and white for hire signage

I’ve built a dozen companies in my career, and I know that human resources decisions can be complicated. In my early businesses, I used contractors because payroll was a pain. It wasn’t just the tax burden; it was that calculating and managing payroll was a “non-value” effort. That’s not much of a problem anymore, since there are so many services that make payroll simple. Personally I use Gusto. As far as the additional tax burden — it’s the cost of doing business, so get over it. And there’s legality to consider, too. Last night there was a lot of activity on Twitter around California’s AB5.

If you’re not familiar, AB5 codifies the 2018 California Supreme Court decision known as Dynamex. The Dynamex decision established what is known as the ABC test: workers are presumed to be employees (rather than independent contractors) unless they meet all three of these conditions: a) “the person is free from the control and direction of the hiring entity in connection with the performance of the work,” b) “the person performs work that is outside the usual course of the hiring entity’s business,” and c) “the person is customarily engaged in an independently established trade, occupation, or business.” In simple terms: if you’re treating a worker like an employee, then they should be a W-2 employee. The bottom line: follow the laws and rules as they apply. There’s always something to complain about, but just do the right thing.

But assuming you’ve come to terms with all of that: how do you know what type of human resource you need at any given time? You need to look at the specific job and see what type of worker fits. Here are some things to consider about each category:

W2 employees

Core positions should be W-2. These are the people who make your company unique. They’re 110% committed to your mission and to the problem you’re solving. The business is on the top of their mind. Our CTO always says that the reason you need an in-house product team is because you get their “shower time.” They’re always thinking about how to solve the latest code problem. You occupy their headspace. That is why you NEVER outsource core product development. Of course, this is a whole topic on its own. I’ve encouraged Matt to write a bit on this, but unfortunately he prefers writing code to writing blogs. Good for him. Bottom line is: an employee is all-in. And you’re developing them to be able to create more value. So if you’re worried about the extra taxes, then you’ll really be scared of the ongoing investment in your team.

Part-time W-2 employees

Another category that I use a lot lately: the part-time W-2 employee. With systems like Gusto, onboarding and releasing employees is just a click away. This is also how we pay our interns. (Yes, you pay interns. If I find out that you aren’t paying your interns, I will call you out on Twitter. All 300 of my followers will be mad.) I like part-time because it helps you work with new talent that has the potential to come on full-time. I initially leverage part-time employees for more tactical tasks. As they prove that they don’t require a lot of management time, then we start evaluating them for full-time. But they will initially require a good amount of management time, so mitigate that by putting them on tasks that have a defined process.

Consultants

Value-add but variable positions belong to consultants. The difference between a contractor and a consultant? You pay a contractor to execute a highly defined task. You’re paying for that fraction of their life, frozen in time. You pay a consultant for that piece of time, but you get the value of their life/career experience. When I work as a consultant, I charge a very high hourly rate. A consulting client doesn’t pay me for the hour; they pay for my 28 years of experience and the “hacks” and shortcuts I’ve developed. A consultant isn’t needed full-time. There isn’t enough work in your organization for their skills. When evaluating a consultant, you should be direct about their value add and why they aren’t just contract labor. Some areas where I like using consultants are graphic design, some writing (I have a stellar firm I use), public relations, and research. A consultant should require very little management time and should in fact be managing you and your team.

Contractors

Contractors provide a qualified resource to execute a highly defined task that you don’t need full-time or that you don’t have the management resources to manage full-time. There could be parts of your business that have variability in resourcing. Maybe you’re launching a new product and you need some data entry folks to support your customer success team. One benefit of using contractors is that it really helps you operationally define your training and business processes. I use contractors for bookkeeping, fund administration, etc. These resources should require limited management time since their tasks are highly process-driven.

People are an expensive resource. You can find people with aptitude and you can find people with the right attitude, but you rarely find a person with both. The real bottleneck is management time, so when choosing a type of human resource, think “fit” first and then money second. As a general rule of thumb, I do not use off-shore resources.

I hope this helps you in your next HR decision. Any questions? Email me at kpr@shadow.vc.