Differences between contractors and employees: explored

Making the decision to jump from full-time employment to contracting can be thrilling, in IT and other key sectors of the economy.

It opens up a world of possibilities and offers a level of autonomy that many people find impossible to go back on -- once ‘the genie is out of the bottle,’ writes John Wood, a manager at STEM recruiters Matchtech.

You won’t be alone 'going it alone'

And if you do find the differences between contractors and employees looking weighted in favour of contractors, you won’t be alone. In the UK, 4.2 million professionals have chosen the self-employed path -- a clear testament to the allure of this solo career.

Yet the jump from permanent employment -- where you have a regular 9-to-5 job, to contract work -- which may be just for three months at a time and at hours you must decide, isn’t to be underestimated.

As a contractor, you need to be flexible, resilient, resourceful

While contracting offers flexibility, it also demands a great deal of resilience.

For instance, more than half of contractors report that ‘finding work’ is a significant source of stress, and exactly half struggle with the ‘irregularity of income.’

If you’re considering this freelance career path, it’s crucial to weigh the pros and cons carefully.

Differences between contractors and employees

And the starting point for that weighing up process is to know the differences between contractors and employees.

As a contractor, you typically get to take control of your career, whereby the reins of your professional life are held by you and you alone, as you singlehandedly navigate through the temporary jobs market and non-permanent roles at organisations, potentially facilitated by recruitment agencies.

So while there are negotiations to be had, fees for your skills and services to be set, and contracting structures to consider -- such as limited company and umbrella company, you have much more freedom than an employee.

Contracting: Freedom (of choice) is a big draw

Typically, you get to choose your own working hours, pick your clients, and pursue projects that genuinely stimulate you.

You can tailor your work-life balance to suit your needs; whether that means taking on fewer hours to enjoy more free time or filling your schedule to maximise your income, and in turn what contractors call their ‘take-home pay.’

As a contractor, the choice of when and where you work is entirely in your hands. Whether you thrive in a bustling office, prefer hands-on site work, or enjoy the convenience of working remotely, contracting allows you to shape your work environment to fit your likes, dislikes, and lifestyle.

Better pay potential as a contractor, usually anyway...

Contracting can be very financially rewarding.

While there are no guarantees, many contractors find that their specialised skills, plus the short-term nature of their work, command higher daily (or hourly) pay than the nearest equivalent role carried out as a full-time employee would, in annual salary terms.

For instance, in the technology industry, contractors who operate via a recruitment agency earn an average of £76,000, compared to £72,000 for full-time employees in the same field, according to a Dice Salary Survey.

Experience, expertise, and self-marketing ability matter as a contractor

If you offer valuable experience and expertise – and crucially, are good at marketing your skills as a service, you can often set anything from a competitive rate to a high rate, assuming the market agrees your skills are sought-after and in-demand.

So-called ‘direct-to-client’ roles, where you do not operate via an agency but work directly for the organisation (the ‘engager’ or ‘end-user’), can have premiums attached, too.

The Financial Services industry is traditionally the most likely to offer such premiums, whether direct-to-client or via a recruiter, so competition for tech contracts with major ‘FS’ players can be fierce. Banks, financial institutions and fintech start-ups tend to be the most popular clients in this wage-rich space.

Skills autonomy is a prized part of being a contractor

As a contractor, you have the freedom to hone the skills that interest you the most.

Unlike in a full-time role where your skill development may be dictated by the company’s needs, or whatever the internal training programme offers up, contracting allows you to focus on areas that you find engaging, beneficial and lucrative.

For example, if you’re a software developer, you might choose to learn a new programming language to open up additional job opportunities. If you identify a gap in the market, you can tailor your skillset to meet that untapped demand, making yourself more attractive to clients and potentially boosting your take-home.

People power

Contracting can significantly expand your professional network, and not just on LinkedIn!

Unlike a permanent role, where you typically work with the same team over extended periods, contracting exposes you to a variety of clients, recruiters, fellow technologists, stakeholders, and interesting decision-makers.

Each new project brings opportunities to connect with different professionals, often for a defined period of time, at a set workplace or site.

This can be invaluable for building a strong network and it’s this network which in future you can leverage to find yourself hidden gem opportunities.

In fact, if you establish a reputation as a reliable, efficient and value-add contractor, you’re likely to receive recommendations, repeat business, and invitations to new opportunities, creating a robust pipeline of work. These sorts of ‘testimonials’ aren’t off-limits to employees but they matter to them a lot less.

Office politics? Invariably as an employee

Full-time employment comes with its own set of challenges, and navigating office politics is often one of them!

In a permanent role as an organisation’s employee, you might have to deal with difficult colleagues, manage contentious projects, or adhere to rigid career progression paths.

By contrast, contracting usually allows you to bypass such office politics. You have the freedom to choose your roles, follow your professional interests, and advance your skills without the constraints of hierarchy or performance reviews.

Diversity, declining roles you dislike, and specialisation  

If you’re feeling stuck at your desk, or in a loop in your current 9-to-5, perhaps with limited career progression or prospects to boot, the variety offered by contracting can be a breath of fresh air!

As a contractor, you can specialise in areas that you’re passionate about, rather than being assigned tasks that don’t interest you. You can do the same with roles offered by agencies – choosing those opportunities which speak to your skillset and declining those which don’t.

Finding a niche and sticking to it to become a specialist is a tried and tested course for IT contractors (who can earn very handsomely as a result). They often leave generalist IT tasks to their full-time, payrolled colleagues.

As an employee, you get tax and pensions all taken care of

While contracting offers numerous benefits, it also requires you to take on significant financial responsibilities.

In a full-time job, your employer handles income tax, pension contributions, and other deductions automatically.

As a contractor, especially if you work totally independently (i.e. outside IR35), you’ll need to manage these aspects yourself through your own limited company, which in turn has a list of responsibilities and requirements you’ll need to fulfil as the company’s director.  

HMRC, accounting help and umbrella fees -- they each cost contractors

As well as ensuring you pay the correct amount of tax, and abide by HMRC’s many rules and deadlines in any expenses you wish to claim, areas like business insurance, pension provision and insurance also fall on your shoulders. An accountant or adviser can help with some of these areas, but appointing such a professional is itself another burden in some contractors’ eyes!

To reduce the hassle of contracting, some contractors choose to operate via HMRC’s PAYE system by using an umbrella company or recruitment agency, as they can manage these tasks on your behalf, albeit for a small fee.

Contracting can feel isolating to staff who like being part of a team

If you thrive on collaboration and the social aspects of teamwork, contracting might feel isolating at times.

Contractors often work independently, focusing on specific projects across different businesses. While you may occasionally collaborate with teams, contracting is generally a more solitary endeavour.

While you can make up some of that social currency you invariably lose as a contractor by building your professional network, your day-to-day can lack the bustle and structure of working 9-to-5 as a member of an organisation’s workforce, more often than not in an office for most if not all of the working week.

Employees' rights and workplace benefits from employers aren't to be sniffed at

Full-time employees typically enjoy a range of rights and benefits that contractors may not have access to, such as medical cover, sick/holiday pay, and employer pension contributions.

However, operating through PAYE with a contractor umbrella company can mitigate some of these challenges, as they often provide benefits like holiday pay and handle your tax contributions, allowing you to retain some advantages of being an employee.

How important is job security to you?

As touched upon at the top, perhaps the most significant downside of contracting is the lack of job security.

In a permanent role, you have the stability of a long-term position, with notice periods typically built into your contract. As a contractor, the notice period will vary with each and every contract you secure, but it will typically be much shorter than if you were an employee.

Then remember, once your contract comes to an end, the search for a new temporary role is your responsibility. But of course, this is where a good recruiter can come in to play, as the best agents will line up a new contract for you, just as your old contract is approaching its end.

Top signs your days as a full-time employee might be numbered

In a full-time role, there’s usually a clear career ladder to climb, with structured promotions and professional development opportunities.

As a contractor, there’s no course mapped out for you, and if appraisals are part of your current job which you enjoy or look forward to, freelance contracting probably isn’t for you.

But if you want to research, look into and sign-up to training courses, obtain certifications and hunt down corresponding ‘gigs,’ while keeping up with the latest market demand and technologies pertaining to your skills, then your days as a full-timer might be numbered!

Deciding whether to switch from full-time employment to contracting is a significant choice that requires careful consideration. However, it will often come down to your personality type, character and career objectives. It also often comes to down to your appetite for risk and reward.

First-hand evidence on the differences between contractors and employees

Talking it over with someone whose done it, or is doing it right now -- whether it be working independently as a top contractor or succeeding as a respected corporate employee -- can be enormously beneficial.

Many contractors we know say contracting offers them unparalleled control over their professional lives. Being effectively your very own boss (even though you’ll have to execute client-briefs), provides flexibility and freedom to choose projects that interest you, as part of a wider opportunity to steer your skills, professional experiences and achievements in the direction you want.

Crave structure, security and regularity? Join a full-time workforce today

Other individuals want the structure, security and regularity more synonymous with being an employee. They want to be a full-time member of staff where the focus can be totally on the job and on serving a single organisation (‘the employer’), because there’s no limited company to manage or agency to negotiate with or project to source.

There’s also no additional responsibilities -- such as managing your own taxes, pension contributions, and insurances, which contractors typically have to do themselves.

Keep in mind, these areas are manageable; they may even interest you, but some people just don’t want to take them on!

Ready to make the jump to contractor from employee? Then reach out…

If you’re planning to make the jump from full-time employment to contracting, it doesn’t have to mean you’ll be completely ‘going it alone.’ We can help.

Our staffing business specialises in connecting ambitious contractors with forward-thinking clients. Whether you’re just starting out or looking to take your contracting career to the next level, we can connect you to projects that best suit your aspirations, aptitudes and skills.