Should your agency hire contractors or employees?

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Chip Griffin: Hello, and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin.

Gini Dietrich: And I’m Gini Dietrich.

Chip Griffin: And today I don’t have a really exciting intro. I’m just going to say, we’re going to talk about employees versus contractors for agencies right after this.

I had a big fat nothing today.

Gini Dietrich: Yeah. I’m kind of surprised there’s no creativity coming out of you today.

Chip Griffin: No, it’s kind of sad.

Gini Dietrich: It’s because you used your segue, your creative segue in our banter beforehand. That’s why.

Chip Griffin: That’s true. I did. Yes. So what are you going to do? It is what it is. I apologize to you listeners that we didn’t give you the usual entertainment at the start of the show, but we might have some during the show because Gini has some audience members who are wandering in and out.

Gini Dietrich: Audience members in the form of children and dogs.

Chip Griffin: So if you hear something, that’s what it is. But we’re keeping our fingers crossed that all will be calm.

Gini Dietrich: I did tell them, I said, I’m going to record a podcast. So go downstairs. So hopefully they understand that that means do not come up here.

Chip Griffin: If I recall correctly, you told them that about 10 minutes ago and they got noisier right after you did that.

Gini Dietrich: That’s that’s fair. They were singing at the top of their lungs, but they were, did not come upstairs, so.

Chip Griffin: Okay. Well.

Gini Dietrich: We’ll see. Also we gave up 10 minutes of recording time for that. So we should probably hurry.

Chip Griffin: Well, you know, who can sometimes be like children?

Gini Dietrich: Who?

Chip Griffin: Employees and contractors.

Gini Dietrich: It’s true. Yes. That is true.

Chip Griffin: It’s not the best segue to the topic at hand. But I do often say that employees and clients at times are like children. And in some ways you need to treat them as such in order to get what you’re looking for.

We’re not talking about that today, though. What we’re talking about today is whether you should have employees or you should have contractors, or you should have a mix, how you decide which you should have and when you should have them.

Gini Dietrich: Yes. So I think it’s important to start with what is the law, especially in your state.

Chip Griffin: The law?! Come on, Gini. Let’s not get wrapped up in what the rules are. Let’s just do what we want.

Gini Dietrich: Come on. Let’s follow the rules. I’m a rule follower. I’m an oldest child, that’s what I do. I follow the rules. So what is the law?

Chip Griffin: Well, it depends on the state. Sure. But in general, well, there’s a whole series of tests. So if you Google, there are plenty of tests that you can look at that look at different criteria for individuals to see if they qualify in the United States, at least as an independent contractor.

And some of the key things that you need to look at are whether that individual is out there and actually trying to operate their own business, whether it’s freelance or otherwise. Right? So if you have, if you are their only client and they’re not trying to find any other clients, chances are they don’t qualify.

Typically you have to give them flexibility over when, where, and how they perform their work. In other words, you can give them a project assignment or something like that, but you can’t say typically, you know, I need you in the office from nine to noon, you know, three days a week or something like that.

You know, unless it’s for particular meetings, obviously you can require their presence at particular meetings and that kind of stuff. But in general, you can’t tell them, you know, where they are, what to do. And most importantly, generally speaking, almost every state will frown on contractors who do the core business of your business.

So if I’m a media relations agency hiring a contractor who does media relations is a trickier sell if you’re ever audited than hiring a graphic designer. Or a web developer or something like that. Right. So, generally speaking, the further away the skill is that you’re hiring for outside of the main thing that you sell your agency as doing, the safer you will be.

It doesn’t mean that you can’t have someone who’s working on the core portion of your business. You just have to be a whole lot more careful with the other criteria. And really understand because some states, you know, it’s just black and white. Like in California. And again, I’m not, as I always say, I’m not a lawyer and accountant tax blah blah all that kind of stuff, but if you’re in California, you don’t, do not want to hire a contractor who walks talks and looks like an employee.

That’s just, that is not good.

Gini Dietrich: Yeah. And so I think it’s really important to understand your state requirements and also understand if you’re hiring contractors in other states, understand those state requirements. So I tend to shy away from hiring contractors in California for that very reason, because you just, they are very strict on what your contractors look like and tend to audit smaller companies for that reason. So I tend to stay away from, from California as much as I can, unless of course it is not important business. So if we are doing content, if we’re hiring writers, I have to be very careful about that because that’s what we do, we do content marketing, right? If we’re, if I’m hiring somebody to implement the PESO model, has to be an employee.

It can’t be a contractor. But if I’m hiring somebody to help with, with web development or paid social or PPC, then I can, I can do that because that’s not core to our business.

Chip Griffin: Right. And the biggest thing to watch out for is, do not make a former employee a contractor, especially right after they were an employee.

This is a very popular thing at times to do, particularly when the early days before we had remote work as a common thing. So you just had an employee in another state and it was, you know, a pain or something like that. So you, you would say, okay, well I’ll just have a contractor. Fantastic.

Those are the easiest ones for the state authorities to discover because they’re typically filing their business taxes under the same taxpayer identification number as you did payroll, and a lot of states will compare those two lists. And if someone goes off of the employee list with the same entity to being a contractor for that entity, they’re going to knock on your door and say, Hey, kind of curious, how did you, how do you justify this?

So, you know, you have to be aware of those kinds of potential sticky situations, that may be even outside of what kind of work they’re doing. Because even if they’re a graphic designer, you don’t do graphic design, you could run into problems with that. So you really want to make sure that when you’re hiring a contractor, it’s truly someone who is committed to being a contractor.

They’re actually trying to operate a business. Right. You know, one of the easiest ways to, to check on that is, Hey, do you have a website? Right? If they’ve got a website, that’s got marketing material on it, that goes a long way. If you’re ever audited, cause you can point to it and say, Hey, look, they’re clearly holding themselves out as being in this business.

Ideally, they have an actual business name and you’re paying the business name and not the individual. Right? Those are all things that will help. And if you talk to your lawyers and accountants, they will help you on those things. But no, I don’t want to get too tied up in the regulatory piece because we have talked about that previously on the show.

But now it’s really a question of, you know, as agencies are looking to the future and trying to figure out what’s my best growth strategy. How do I to make, how do I make sure that I have flexibility to go where I want to go? Or maybe where I’m forced to go, particularly with all the talk about a potential recession or other hiccups, you know, concerned about, you know, is there going to be another wave of COVID that’s going to cause a problem and have some economic fallout?

How do I have flexibility? And so a lot of people are saying, Hey, let’s just hire contractors because that gives me flexibility. So how do you address that question?

Gini Dietrich: Yeah, I think, I mean, certainly a contractor versus an employee does give you flexibility. For sure. And there are lots of consulting firms that have consultants on the bench, so to speak.

So it’s a good place to look for the structure and the setup for those kinds of things is a consulting firm to figure that piece of it out. Now, you may be paying somebody to quote unquote, sit on your bench and not have any work for them. So you have to kind of figure those pieces out too, but for the most part, you know, we tend to look at contractors versus employees in all the areas that, that we’ve just discussed, but also look at it from the perspective of, do we have certain projects that have a beginning and an end?

So, like, for instance, we’re doing a podcast for a client, right? And it has a very specific, it has very specific deliverables. It has a very specific beginning and end. And so we’ve outsourced that because that allows us to, for my core team, to be able to continue to do the work that they’re, that they need to do, but have this project that’s really focused, too. We’ve outsourced that to contractors. So I always look at it from that perspective. Is it something that’s ongoing and evergreen as part of our retainer, or is it a special project that we can, that we need the extra arms and legs for? Because we don’t have the capacity internally and it’s going to, you know, it lasts three months or whatever it happens to be.

Chip Griffin: Right? Yeah. I think anytime that there is greater uncertainty over the work, that’s the best time to have contractors. So whether that’s because it’s a defined length project or it’s because it’s work that you don’t typically do, and it sort of ebbs and flows within your agency business. So, you know, not to continue to pick on graphic designers, but maybe you only need graphic design work for a couple of days out of the month.

It doesn’t make sense to hire someone on as an actual employed graphic designer. So that makes sense, just contract that work out. And so, you know, that kind of work where it ebbs and flows, peaks, and valleys, all that kind of stuff. Contractors are a great way to give you that kind of flexibility without locking you into the fixed costs associated with an employee.

Gini Dietrich: I also think, you know, there’ve been several situations in my own business where we’ve started a certain skillset with a client based on what they need. And it’s been, you know, 10 hours a week or 12 hours a week. And so we’ve outsourced that, but then as it’s grown or we’ve added that, that tactical piece to other client work, then it’s grown with that contractor and they’ve ended up becoming a full-time employee.

So they’ve gone from 10 hours a week or 10 hours a month to 40 hours a week, and then they become a full-time employee. So we’ve looked at those, those kinds of project-based to full-time employee opportunities as well. But yeah, I think you’re right in that you really look for things that have a defined deliverable or defined length of time. And those are the kinds of things that you can start to outsource.

Chip Griffin: Yeah. And certainly those kinds of relationships where someone goes from being a contractor to an employee do happen with some degree of regularity. At the same time I think it’s important not to count on it because I’ve talked with agency owners who were like, well, you know, I’ve got a contractor, you know, I’ll just make them an employee.

That’s not a one-way street. You don’t get to just say you’re an employee. And I think a lot of folks incorrectly assume that contractors would prefer to be an employee. And many times they don’t. Many times contractors are contractors cause that’s what they want. That’s how they want to structure their professional lives.

And, you know, unfortunately some states are making it harder for them to make that choice, but you know, we in the agency world shouldn’t be adding to that. We should be clear with the contractors that we’re working with, how they view things, you know, what’s their outlook. Just ask them, let’s have conversations.

Don’t assume things. If, ideally you’d like to be able to hire them down the road, tell them sooner rather than later. So that, so that you both know where this thing is headed. And is it going to the right place or not? Because if you don’t, you’re going to run into a lot of uncomfortable conversations just as, and we’ve talked about this on the show before, you know, when you think you’ve got an employee that you’d like to have take over your agency.

Well, what if they don’t want to do that? So just as you shouldn’t assume there, don’t assume that a contractor would be happy to become an employee if you made them an offer.

Gini Dietrich: Yeah. I think that’s really sage advice because there have been situations with some of my clients in the past where they just assumed, and then they’re like, I don’t want to have the conversation and it’s uncomfortable.

And I’m like, why? Just say, Hey, I love the work that you’re doing. I love working with you. I can depend on you all the time. At some point are you interested in working with me full time? Right? That’s it. There’s no conflict to that. That’s not a hard conversation to have.

Chip Griffin: Right. Well, and unfortunately, agency owners as again, we’ve talked about before shy away from difficult conversations of all kinds.

Gini Dietrich: Yes.

Chip Griffin: And it’s one of the reasons why a lot of agencies prefer to hire contractors when they can, instead of employees, because it helps them, at least in their mind avoid a potential future difficult conversation. If they cannot continue to employ an individual, right? That it feels somehow easier to let go of a contractor than to let go of an employee.

And I will tell you that this is in my view in all the agency owners I’ve talked to, I’m not sure that’s actually true. I’ve seen a lot of agency owners struggle to cut loose contractors who should be cut loose. So, you know, you still have that human element, no matter whether they’re a W2 or a 1099 here in the US.

Gini Dietrich: Right, right, right, right. Right. Yeah. I mean, I do think there’s something to be said for, especially if you’re, if you’re using contractors for the ebbs and flows. I mean, it’s easy to say, you know, the project is over and we love working with you. We’re going to come back to you later when we have something else. That’s an easier conversation than having to lay off an employee. For sure.

Chip Griffin: But you went into it with that expectation, right? So if you have a contractor though, that you you’ve got, you know, doing, you know, 10 hours a week of work for you on a consistent basis, and it’s kind of, open-ended, that’s just as difficult a conversation to have. The consequences may be less, right?

Because with the contractor, generally you can end it almost immediately to aren’t worry about severance or unemployment benefits or, you know, any of those kinds of issues that you have with an employee. But the human component again, which is, I think more people are concerned about the human component than the, you know, all of the other stuff.

Although I have seen some folks get too wound up over, you know, unemployment costs. If they let an employee go, you know, that’s a cost of doing business, right. That’s something that you just have to factor in to the work you’re doing and you can’t be afraid to lay off or let someone go for non-performance simply because gee, your unemployment insurance premium may go up.

Gini Dietrich: Right. And it’s not even that much. Like don’t. Don’t let that guide your decision making because…

Chip Griffin: Yeah, I will say it does vary substantially from state to state. So some states are much more onerous when it comes to unemployment insurance.

Gini Dietrich: In Illinois it’s not that big of a deal.

Chip Griffin: But in general, but whatever it is, you just need to know what it is in your jurisdiction and just factor it into the cost of doing business.

But the cost of having someone around, who you can’t afford or who shouldn’t be there because of their performance far outweighs any additional costs you might have with UI.

Gini Dietrich: 100%. Yeah. I think, you know, it’s like anything else. It depends. Right. And certainly we’re all listening to the news right and it’s not, not a pretty sight and some of us are doom scrolling.

I refuse to get on the internet right now, but so I don’t doom scroll, but, it’s not good news out there right now. And I think everybody’s looking at it and going, okay, well, if we are going to have a recession or the economy is going to tank, what do I need to do to be prepared? Should I start to lay employees off and transfer them to contractors?

Should I hire only contractors? Those conversations are definitely happening right now. So you should be weighing your options for sure. But like you said, there are, you can’t take an employee and make them a contractor. And you can’t take a contractor and have them do things that an employee would do, and certainly you can’t have a contractor working for you 40 hours a week and not doing anything else.

So there are lots of things that you should weigh and understand about how this works. And yeah, I mean, we’re due for a recession and if it happens, it happens, but guess what? You’re going to survive it, we all survive. It might not be super fun, but we all just did get through a really bad pandemic. So I think we’re going to be ok.

Chip Griffin: Pandemic, what? But I didn’t, I didn’t notice, was there something going on? I think listeners know that I am a big fan of contractors in general for giving you that elasticity. And so I believe that you should have a strong bench of contractors. If you’ve got one graphic designer, you should definitely have two, because that gives you the ability to, if that contractor is not available for a project or you’ve got more work in a given time that than one individual can handle, it gives you flexibility.

So, you should absolutely have a very strong contractor bench. At the same time, contractors are not the only answer. They shouldn’t be your first stop on everything. There are good reasons why you may want to have an employee instead, because there are advantages to having employees just as there are advantages to having contractors and you need to know what the right mix is for your business.

So I, I get just as concerned with agencies who are over-reliant on contractors as those that don’t use them to the utmost to get that flexibility.

Gini Dietrich: Yeah. And, and with employees, you do have, you do have the flexibility to have things like staff meetings, where they’re not going to quote unquote charge you like a contractor would. If a contractor comes to a staff meeting, that’s considered administrative work, they’re going to charge you for that because they’re required to come to a meeting. So you do have the flexibility to have an employee, if they’re, if they’re not fully utilized from a capacity standpoint, they can work on stuff for the agency. They can do blogging. They can create, you know, work on website updates. They can do some social media.

There are things that you can have an employee do during really slow months, like for most of us right now, the summer months are very slow. They can work on those kinds of things. You can’t have a contractor do those kinds of things. So there are pros and cons to both for sure. And I always liked to have somebody just write it down.

What are the pros to having an employee and what are the cons, what are the pros to having a contractor and what are the cons? And let’s figure out what the right mix is.

Chip Griffin: Right. And, and with, you know, as a good rule of thumb, if you’ve got a contractor that you’re usually using half of their time, that’s generally the point where you would almost certainly want to be looking at having that role filled by an employee instead.

Right? Because, because typically what you pay a contractor for half of their time is roughly equivalent to what you pay for a full-time equivalent employee. And so that then allows you to tap into all of those things that you were just talking about as far as taking advantage of that excess time and excess capacity.

And with employees, they’re there, they’re available to you. You don’t have to go out and find them and see if they’re available when a new client comes in. They’re there, you know, what their availability is.

Gini Dietrich: And they can go to new business meetings with you. They can help craft plans. They can help be involved from the beginning.

They can help you so that you’re not the sole person the client relies on, there’s all sorts of pros to it. There’s certainly cons as well.

Chip Griffin: Yeah. It also helps you to grow, right? So a lot of agencies like the idea of – in fact, I’ve talked to a number of agencies just in the last week or so, who are enamored with the idea of building contractor-only agencies.

So no employees whatsoever. And I think that those can certainly work, but they tend to have a ceiling on where they can go to because you need to have people within your agency who can manage accounts and do all the day-to-day stuff. That’s hard to hand off to a contractor. I mean, if you’ve got someone who’s not really an employee, you gotta be careful about saying, okay, they’re going to be the person who is the face of our agency.

It can work. It’s not ideal. And it also may run afoul of some of those tests depending on how you’re structuring it. So if you’re looking to, to really build some scale into your organization, that’s much easier to do with employees than it is for contractors. Contractors are more for the elasticity rather than the ultimate scale.

Gini Dietrich: And I will say too, that unless the person, which wouldn’t in this case have to be an employee, is in it every single day, it’s harder. I mean, certainly contractors can do specific things, but they lose the context. They don’t -because they’re not in it every day. So working with contractors, you have to be really specific about the work that you need them to do, because they’re not in your business every day and they don’t understand. They’re missing nuance and context and all those kinds of things that happen, you know, in daily stand-ups or in weekly staff meetings or things like that.

It just, they just miss that. So it takes a different level of management with a contractor than it does an employee.

Chip Griffin: Yeah. And I think ultimately if people go through the exercise that you described of working through the pros and cons, not for contractors versus employees generally, but for the specific role that you’re trying to fill, that will help lead them to the right decision for their agency.

And ultimately, that’s what we all are hoping for. That we make the right decisions at the right time. And I think my decision right now is that we’re going to bring this episode of the Agency Leadership Podcast to a close. So I’ve gone through the pros and cons decided it’s time for me to hit that, that end recording button. So.

Gini Dietrich: I feel like we’re on borrowed time because it’s been very quiet too.

Chip Griffin: So yes. So, so thank you to the kids for cooperating and, thank you all for listening and with that I’m Chip Griffin.

Gini Dietrich: And I’m Gini Dietrich.

Chip Griffin: And it depends.