Cost Pros and Cons: Employee vs Contractor

Hiring a new worker is a major financial decision for any business. Whether engaging an employee or a contractor, employers must assess costs, cash flow stability, and long-term business goals before committing. While employees provide reliability and long-term growth potential, contractors offer flexibility and lower administrative costs. Understanding the financial implications of both options ensures businesses remain compliant and financially sustainable.

One of the key considerations is ongoing versus variable costs. Employees require a stable wage, superannuation contributions, paid leave entitlements, and workers' compensation insurance, creating fixed financial obligations. In contrast, contractors are typically paid per project or task, with no additional costs for entitlements. This flexibility can benefit businesses with fluctuating workloads or seasonal demands. However, if a contractor is consistently working in a role similar to an employee, there may be legal risks of misclassification under the Fair Work Act 2009.

Businesses must also evaluate administrative and compliance costs. Employees require payroll processing, tax withholdings (PAYG), and compliance with workplace laws, which increase HR and accounting expenses. Contractors, on the other hand, manage their own tax and insurance, reducing administrative burdens for the business. However, businesses must still ensure contractors meet Australian Taxation Office (ATO) criteria, as some may still be entitled to superannuation under specific conditions.

Before deciding, business owners should assess their budget, long-term plans, and legal obligations. If steady growth and staff retention are priorities, hiring an employee might be the right investment. But if the business requires specialised skills for short-term projects or needs to manage costs more flexibly, engaging a contractor may be the better option. Conducting a thorough financial analysis and seeking professional advice can help businesses make an informed and legally compliant choice.

How to Know What Your Business Can Afford When Hiring

Before hiring, assess:

1. Revenue & Budget – Can your business sustain the ongoing cost of an employee, or is a contractor more financially viable?

2. Workload & Demand – Is the work consistent enough to justify an employee, or is it project-based and suited to a contractor?

3. Legal & Compliance Risks – Do you fully understand your obligations to avoid misclassification penalties?

4. Growth Plans – Will hiring an employee support business expansion, or is flexibility more beneficial at this stage?

5. Cash Flow Stability – Can you meet payroll obligations every month, or would a contractor’s variable costs be safer?

Use these insights to make an informed decision that aligns with your business goals.

Employers must correctly classify workers to comply with the Fair Work Act 2009, ATO regulations, and WorkSafe requirements. Misclassification can lead to penalties, back payments, and legal disputes.

When deciding between hiring an employee or contractor, some things to consider are:
✔ What your business can afford
✔ The level of control required
✔ Rostered Hours
✔ Do  they take any financial risk
✔ The long-term vs short-term benefits

Check out our Contractor V's Employee article for helpful information on employment classification.

Seek professional advice if in doubt, and ensure contracts are clear and legally sound.