What Is Contract Labor?

Hiring & recruitingHuman resources
January 24, 2023

A company or firm hires Contract laborers to work on a temporary or seasonal project. The contract written between the laborers and the company is called contract labor.

These contracts clarify agreements between laborers and company such as project expenses, project deadlines, payments, and compenations. 

Companies use contract labor when they want to reduce costs because, normally, it is less expensive and more productive to hire a temporary team for a one-time project than a full-time employee. 

For example, when a company is running a production line and needs a team for packaging and distributing, they will hire contract workers and say goodbye to them when the task is done. 

The contract’s terms and conditions should be clear for both the company and the contract workers to avoid disagreements or misunderstandings.

This is one of the most cost savings strategies for businesses. Many companies would contract labor instead of long-term employers.

Contract labor involves employing a group of employees instead of just one person. Firms mostly use contract labor for one-time work or seasonal jobs. Companies hire contract workers through labor agreements.

An overview of contract labor

Many organizations prefer to hire contract laborers or “independent contractors” even during economic growth. Because these workers never work as full-time employees and organizations can take advantage of this situation in many ways. 

Independent contractors should sign a predetermined agreement before starting the project, and based on the industry, the contract’s terms and conditions can be different as below:

  • The highest amount of working hours per week or month.
  • Conflicts of interest.
  • A copyright agreement.
  • An injury accountability right.
  • Violation of contract terms.
  •  Details about early termination terms in case any complications happen. 

A contract worker or an “independent contractor” refers to a self-employed contractor. Contract workers usually work in an independent firm, profession, or business. Many doctors, dentists, and lawyers do fit this definition. 

The difference between an employee and a contract worker is about the specifications of job performance, for example, who has the responsibility for work or who is the one who pays federal income tax and health insurance.

Definition of independent contractor

independent contractor

An independent contractor is an individual who works under contract terms to carry out different tasks for a firm or business.

Contract workers, also known as freelancers and the, number increasing daily. These workers get paid piece by piece or will receive their payment when the job is done. Their fees are usually lower than employees, and they don’t receive benefits.

It is excellent to hire contract workers if you prefer them to be long-term employees. But suppose this is the case, and you are running a business. In that case, you must follow strict instructions, and you can treat them differently than employees.

Difference between a contract worker and an employee

contract worker vs an employee

There are different independent or contract workers. Some of them own a business and might offer various services, such as IT services. Other professional contractors could be lawyers, doctors, or dentists.

When a company gives some responsibilities to a contract worker, some complications can happen because employees usually do these tasks. The contract laborers will receive a lump sum payment and should handle their own taxes. 

Contract employees are considered self-employed based on contract labor laws, and they are not covered by federal employment taxes and must pay self-employment tax. 

When you hire contract labor, their payment will be subtracted from your income. You should offer independent contractors the 1099-MISC and IRS form 1096, which explains how they want to get paid, and if this is the case, you should let your accountant take care of this so you can make sure you are moving forward based on the law.

Contract workers should carry on with evaluated tax payments. There are some deductions that contract laborers can use, and they are as below:

  • Home office
  • Travel expenses
  • Car expenses, when it is used for business purposes
  • Health insurance premiums
  • Contributions to retirement accounts
  • Property and equipment depreciation
  • Educational expenses

An employer-employee relationship involves income tax withholding and health insurance withholding Employers. Employers provide half of the employees’ Medicare tax and Social security tax.

But contract labor or an independent contractor should pay their own taxes fully. Also, contract workers are not qualified for unemployment benefits or receiving compensation. 

Contract workers aren’t protected from employment discrimination, or they are not qualified for FMLA leave or the Family Medical Leave Act. 

For example, you don’t receive paid vacation or job protection if you need to take some off because of a disease or a family problem. You can leave a project or be removed by the person who hired you.

But on the other hand, you have the freedom to work on a specific amount of time or days you want, as you wish.

Based on IRS instructions, if you are under an employer’s control and receive orders about how to do your job, you are no longer considered a contract worker.

For example, suppose an employer needs you to be at a specific location or do a job for 40 hours a week. In that case, you are not an independent worker anymore. Then under the IRS law, you are an employee, not a contract laborer.

If you pay someone a paycheck regularly as an employer, the person receiving the payments is your employee. An independent contractor will work based on a particular contract, and when the job is finished, they will send you an invoice for the costs.

You are an independent contractor if

  • You provide your own equipment.
  • The employer only gives you some of what you need to do the job.
  • You can let go of a project at the employer’s discretion.
  • If you can choose to go to work or not without the worry of being fired 
  • If you control how many hours you can work each week.
  • If the job is permanent or temporary.

 Advantages and disadvantages of hiring contract labors

Advantages and disadvantages of hiring contract labors

Contract labor is a perfect choice when employers have particular needs because it is more flexible. Both big and small businesses can take advantage of hiring contract workers, which will also favor employee benefits. But all employers should acknowledge the key differences between full-time employees and independent contractors. 

The benefits of hiring contract laborers are as below:

  • Save up to 30% on the company’s payroll expenses. 
  • More control over the number of your staff
  • Less obligation—after the contract terms are met, there are no expectations from the independent contractor when the job is done. 
  • Less legal requirements—independent contractors aren’t covered by many state federal laws (minimum wage, overtime, sick leave, etc.) 
  • Less cost and energy for training— you don’t need to spend time and money on training and expanding talent when you can offer the job to an independent contractor with the expertise.

While contract labor has some advantages, it might also have some disadvantages:

  • Less control over workers and their output—workers are independent
  • The turnover level is high because there’s less motivation to stay and no reason to be loyal to the company
  • Possible liability—less obligation doesn’t mean any obligation if someone faces an injured on the job 


Based on the advantages and disadvantages of hiring contract labor, employers can decide if they want to work with long-term employees or prefer hiring independent contractors.

After the job is done, they will look for another contractor based on the industry and tasks. Firms should consider hiring contract laborers when they face a situation that does not favor the business and its improvement.

For example, if the employers don’t have the necessary skills to perform the job or when a company is looking to decrease expenses, hiring help from outside companies can be more affordable. For example, most independent contractors are not qualified for standard benefits like paid time off or retirement.

As an employer or a firm holder, you should decide about hiring contract laborers by evaluating factors such as job requirements, staff expertise, business expenses, and many more elements considering your industry.