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When differences are important

– also listen to Think180 podcast Managing Contractors Vs Employees

Companies are using more contractors and consultants to perform specialized roles, or supplement their workforce for varying workloads. Vendors increasingly influence outcomes and play a crucial role in the success of many activities.

The differences are clear when distinct work is outsourced to an external vendor. When a contractor or member of a vendor company works with a team, the distinction between them and an employee may be less obvious.

Key Differences

As managers, we must understand those key differences between employees and vendors or contractors, and what it means to manage them. Listed on the following page are 16 areas that should be taken into account and may require different management approaches depending upon whether you are working with an employee or a contractor.

The other key aspect to understand and apply is how the IRS defines an Independent Contractor and an employee. There are major legal implications in classifying a worker when that person does not qualify for Independent Contractor status set out by the IRS.
See summary of IRS requirements

Some of the differences may determine the latitude or limitations you as a manager have in directing another person’s work. Here are two examples:

  1. Compensation – When you manage an employee, you may have influence over what he or she is paid or at least the grade or level of the position. You may be able to work with the Human Resources (HR) organization to increase a salary or lobby for a position to be re-evaluated. As the manager, you typically perform the evaluation and make a recommendation on a salary increase. You can discuss salary issues with the employee, and act on their behalf, if warranted.

    With a self-employed contractor, you agree on the contractor’s hourly rate if it fits your project budget, is in line with market rates, and the rate falls within company guidelines for contractors.

    Many corporate employees who engage contractors or consultants are surprised at how high they feel the hourly or daily rates are, in a raw comparison with employees. However the equations for costs of employees versus contractors shows how to arrive at a comparable figure.
    Download PDF with Comparisons of Employee Vs. Contractor/Consultant Costs

    Where a contractor is employed by a vendor company or agency, then typically any hourly rate is established as part of the overall contract negotiated between your company and the vendor. The contractor’s compensation is agreed upon between the vendor and the contractor (since the contractor is an employee of that vendor or agency). As the client manager, you have no influence over what a contractor is paid.

  2. Direction – With an employee, you may directly oversee his or her work and manage by reviewing work product and watching their performance of tasks and activities. The employee may need to adhere to established office hours, perform specific company procedures (such as filling out a timesheet), and attend company activities as part of the job.

    With a contractor, you manage by reviewing outcomes and results of their work rather than managing the day-to-day activities or their performance. Contractors typically focus on achieving contracted outcomes or results without needing to adhere to specific company procedures and attend company meetings.

16 Areas of Difference

Compensation Established by manager & company Established by vendor
Work Definition By job description By contract
Work Measurement

By achievement of objectives for review period, and team contribution

By milestones or service levels established in agreement or contract

Terms & Conditions

Set out in ongoing employment contract

Set out in agreement or contract for specific work

Benefits & Taxes

Paid by company

Paid by vendor


Permanent work, not time bound

Engaged for period of time or phase


Around role, career, responsibilities, growth, salary

Around deliverables, standards, timing, cost


By delegation

Granted and authorized in writing


Company assumes

Vendor carries

Provided by manager as required

Provided by client, per contract

Performance Review

Performed periodically on role, includes behaviors & skills

Performed upon delivery, against milestones or services levels


Is part of the job

Expected to be proficient; learn at own cost (or vendor cost)

Commitment To the company To project or program

Responsibility for Performance

Manager shares responsibility for poor performance or failure. Company assumes liability

Vendor responsible to deliver according to agreement. May be legally liable for failure


Manager has discretion

Specified in contract with requisite conditions

Termination In accordance with employment law and for acceptable reason(s)

Subject to requirements of contract, and prevailing commitments


Use this list to assist you in determining the level of management you will need to provide to a contractor or consultant before you bring them on to a project. Discuss with the vendor or contractor how you will manage them, then establish your role and style of working early in the relationship.

Your understanding of these differences will assist you in managing appropriately and delivering the results you are seeking.

© 2001 Endeavour Business Learning, 2009 Think180™

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