A contractor must choose whether to hire a sub or use their own employees.
A breakdown of the pros and cons
In the construction industry, the battle for profits is greater than ever. Contractors are motivated to reduce overhead costs in order to maintain their competitive edge. The greatest cost in any construction project is, with rare exception, labor. The skilled worker carrying out the work is the most critical aspect of the project. You could choose the highest end product, but without the right installer, you will end up with a lousy embarrassment and intense frustration – possibly even a lawsuit. And so, hiring the right worker often means paying a greater sum.
Sure, an owner of a construction company could do the work themselves and reduce that burden significantly. But being an owner-builder is neither sustainable nor growth minded. And often times, it simply isn’t possible to do a project alone. At some point or another, a contractor is faced with a decision: “Do I hire an employee or do I retain a subcontractor?” According to the IRS, an employee is defined as anyone who performs services for you if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
Let’s explore the pros and cons of each.
Employee: With an employee, the contractor has total control over their work schedule. They can manage (and even micromanage, when necessary) every detail every aspect of the work performed, and therefore have better control over the quality of the construction. Typically, the cost of hiring an employee is less than hiring a sub; the subcontractor will be doing the same work but walking away with a profit for the company they work for.
Subcontractor: With a sub, the contractor may give guidelines for the timeline of the needed work. “When can you begin, and I need the work to be completed by such-and-such a date.” Whether or not that contractor will be able to work within those guidelines is questionable, but when you have a good working relationship with a sub, especially when residual work is likely, this gets more and more smooth. A subcontractor generally bids a job with an overall price, and then carries the burden to get the job done and still make a profit. They carry the burden of getting the work done in a timely manner so that they can get paid and still make money. For example, if a sub says they can do the work for $1,000 and they estimate it will take them 15 hours, they make more money per hour if they get it done more quickly… and less if they go beyond that 15. Here’s where quality control can get sticky. The general contractor of the project carries the overall responsibility to assure the work is done correctly and timely – but when a sub doesn’t follow through on their end, there is no one to blame but the general.
Employee: A long-term minded employee is committed to learning and growing. The hope with a good employee is that they will lessen the burden of the company they work for and grow with the company the longer they stay. This attitude is never a part of the mindset of a sub. Their best interest is for the company they represent, as well it should be.
Subcontractor: Using a sub to perform a job may be the only logical choice. If a contractor’s typical scope of work is building decks, then hiring a subcontracted plumber to install a hot tub would make much more sense than hiring a plumber that you cannot assure work for. However, when the scope of work is common, retaining a subcontractor is a very expensive choice. And perhaps a lazy one. And, it is not in the best interest of your customers. While the paperwork for retaining a sub is simple – a contract and a payment – the cost and risk of poor quality is exorbitant. Additionally, any contractor working on your jobsite must carry their own general and worker’s compensation insurance. They must also be properly licenses (state, municipal and specialty). If they’re not, your company is liable for damages and mistakes.
Employee: One of the greatest “cons” in the mind of a contractor for hiring an employee to perform work within their company’s regular scope of work is the paperwork. Without proper (and yet simple) training, withholding and matching taxes, reporting quarterly and annual state and federal wages, submitting W-2’s, covering required insurances, and should your employee demand grow, paying health insurance and retirement, is daunting to say the least. And yet, the subcontractor is most likely doing this very thing – and making a profit for their company at your cost! With basic resources available today (ie. QuickBooks and such), paying an employee fairly and properly should no longer be overwhelming to a bright business owner.
Subcontractor: Many contractors believe that if they hold their employees at “arms length” by making them retain their own business licenses and insurance, they can reduce their overall cost burden. This may be true in some cases, but the IRS does not appreciate companies redefining “subcontractor” to carry the same definition of “employee”. If a company has subs working exclusively for them, and that company can control the way the work is performed, that “sub” is, in fact, an “employee”. And while a company may be able to fly under the radar for awhile, that euphoric “loophole” will inevitably come back to haunt and destroy.
So what’s the right choice? After a company has considered each option – employee vs. independent contractor – a decision has to be made. A subcontractor is meant to be used to perform work outside of the regular scope of work of a construction company. It is not meant to be a substitute for employees. When a contractor hires subs to perform the majority of the work, they set themselves up for greater cost, increased liability, and suspicious interest from the IRS.
