Why startups should consider hiring consultants over employees
One of the major challenges that startups face is getting new employees on board. Apart from the struggle that is associated with getting a full-time employee on board, here are few reasons why hiring a consultant over an employee makes complete sense.
What are the benefits of hiring a consultant?
1) You get what you pay for: You can discuss deliverables with the consultant you plan to hire and only pay on completion of the task. This means you can decide how much a task is worth and only spend that amount. In the case of full-time employees, fixed compensation is not directly linked to performance or achievement of certain goals. Regardless of how an employee performs, he/she is still eligible for that salary cheque at the end of the month.
2) Greater flexibility:Since contractors are not technically employees of your company, it gives your greater flexibility to control the conditions of their work and remuneration. Minimum wage policies don’t apply to independent contractors, and their terms for employment can be tailored to your company’s specific needs.It takes a longer timeframe to hire full-time employees as compared to consultants. Also, in case their services are no longer required, it’s easier to terminate a consultant than an employee.
3) Lower liability risk for their actions: Again, since consultantsaren’t technically employees, your company does not bear full responsibility for their actions on the job. This may sound like a perk only in extreme cases, but any reduction in your company’s risk profile is always a positive.
4) Lower employee benefit costs:As an employer in India, you might be liable to pay your permanent employees certain benefits such as leave encashment, gratuity, provident fund (PF) and employee state insurance. By classifying a worker as a consultant rather than a full-time employee, you can avoid many of these liabilities, which can be significant amounts in the long run.
5) Fewer compliance headaches: It is common knowledge that once an organisation grows beyond 20 employees, it is on the hook for both PFand ESIC compliance. While a growing organisation will inevitably have to take the PF and ESIC plunge, classifying employee number 20 as a consultant, is certainly a way for resource to avoid the short-term compliance headache.
6) Greater salary take home for employees: For thosewho are looking to maximise their take-home wages, a consultant classification becomes useful. Typical statutory deductions like PF, PT, ESI, and LWF will no longer apply. Moreover, for higher income employees, the tax deducted at source will often be lower relative to the tax the worker would pay, if he/she was classified as a full-time employee.
Reading these benefits, you might be wondering why organisations don’t always designate all their workers as consultants instead of employees. The Labour Department has been smart about this, and has laid down guidelines on the distinction between full-time employees and consultants. We have addressed this below.
How do I know if my worker qualifies as a consultant?
1) Unique set of skills:Consultants should provide your company with a service that is backed by a specific set of skills; skills that are not commonly found in other employees of your company. In addition to that, the consultant should also have some experience in the field in which he/she is providing guidance to the company.Generally, consulting is more experience based rather than work oriented.
2) Organisational subordination: If you hired an independent contractor whom you are guiding in the form of instructions on when, where, and how he/she has to consult you, thenyou might want to reconsider the contractor classification. There should be no degree of subordination between a consultant and the hiring company. They work for your company, yes, but from the outside. In the eyes of the law, consultants should have an equal footing with your company. Hence, the levels of hierarchy and chain of command that you have built in your organisation should not apply to them. A consultant may be hired to train your employees, but his/her execution of the activity would not depend on the rules that apply to your employees.
3) Consultants generally come pre-loaded: Have you ever heard of someone training a consultant? Probably not too often. More importantly, consultants are called in because they bring a certain amount of functional expertise to the table, which they can utilise to create benefits for your organisation. While you may, and probably should give your consultants an in-depth briefing about the company, you are not obligated to train them in the function they are to perform. Let’s say you engage with a consultant to manage SEO on your website. The expectation is that this individual brings with him/her an understanding of how SEO works and how it is implemented. As the "client", you are not obligated to train this individual. That would sound more like sponsoring the development of an employee.