In today’s workplace, you often hear the terms “temp worker” and “contract worker” used interchangeably, leading to confusion among both employers and employees.
Understanding the differences between these two types of employment arrangements is crucial for fostering a healthy work environment, maintaining legal compliance, and ensuring fair treatment for workers.
“Temporary and contract workers can add value to your organization, but misclassification can land you in legal trouble,” says the U.S. Chamber of Commerce. “Understanding the distinctions and knowing when to hire one or the other can help your company avoid legal issues or an unexpected tax burden.”
What’s in the Name: Temporary vs. Contract
In today’s gig economy, there are more temporary employees and independent contractors in the labor force than ever before.
“If you’re considering hiring a temporary employee, you’re not alone. One in eight companies rely on temporary help, according to the Associated Press. The number of temps is the highest since 1990 when the government began keeping records on this trend. Experts don’t expect this trend to reverse,” said The Hartford Insurance Company. “That’s because temporary workers help fill in the gaps, especially for growing companies with an unpredictable workflow. The temporary workforce goes by many names: temps, contract workers, consultants, freelancers, seasonal workers, and interns.”
Let's examine the definition of a temporary employee vs. an independent contract employee:
- Temp Workers: Temporary workers or employees, often referred to as "temps," are individuals hired to fulfill short-term or seasonal roles within an organization. They are hired by an organization directly or employed through staffing agencies like PRT Staffing which will assign them to various companies based on their skills and the immediate needs of the client company. Temp workers might cover for absent employees, assist during peak workloads, or handle specific projects. Temp workers can work “at will” or under a contract and are typically paid hourly wages. The employer or staffing agency is responsible for the payroll taxes for these employees who will receive a W-2 form.
- Contract Workers: Independent contractors, also known as contract workers, are self-employed individuals or entities engaged by a company to provide specific services for a defined period. They work on a project-by-project basis and are responsible for managing their taxes, insurance, and other aspects of their work. Employers report these freelancers or gig workers pay on the 1099-NEC (if more than $600 is paid per year) for non-employee compensation.
“A temporary worker is your employee or an employee of a staffing agency, whereas an independent contractor is a business entity, such as a sole proprietor or limited liability company (LLC),” explains the U.S. Chamber of Commerce.
Key Differences Between Temp Workers and Contract Workers
Here are the key differences between temp workers and contract workers:
- Employment Relationship: Temp workers are often employees of staffing agencies or your company and have a direct employer-employee relationship with the agency or company. Contract workers are self-employed and maintain a client-contractor relationship. Basically, contract workers are their own business.
- Duration: Temp workers are engaged for short-term assignments, which can range from a few days to several months. Contract workers are hired for the duration of a specific project or task.
- Benefits: Temp workers often receive benefits like workers' compensation, unemployment insurance, and sometimes limited health benefits from the staffing agency or company hiring them directly. Contract workers are typically responsible for their own benefits, including health insurance and retirement plans.
- Expenses: Temp workers' expenses, such as tools, equipment, and uniforms, might be covered by the staffing agency or company. Contract workers bear their own expenses related to tools, equipment, and materials.
- Wages: Temp workers usually receive a regular paycheck from the staffing agency or company, which deducts taxes and other withholdings. Contract workers invoice the client company for their services and are responsible for their own tax payments.
- Supervision: Temp workers often work under the supervision and direction of the client company. Contract workers maintain a higher level of autonomy and control over how they complete their own projects.
- Work Habits: Temp workers adapt to the work culture and practices of the client company for the duration of their assignment. Contract workers operate based on their own methods and processes.
- Job Roles: Temp workers are often assigned to a variety of roles based on their skills and the client company's needs. Contract workers are typically hired for specialized services, such as consulting, design, or technical expertise.
- Job Security: Temp workers might experience uncertainty between assignments. Contract workers enjoy greater control over their workload and can secure multiple projects simultaneously.
- Termination: Temp workers can be released by the staffing agency or client company when an assignment ends. Contract workers complete their agreed-upon projects and can choose whether to renew contracts or seek new opportunities.
Despite all these differences, both contract workers and temp employees may complete similar tasks and work on or offsite.
Examples of Temp Workers and Contract Workers
Temp workers commonly serve as administrative assistants, event staff, and construction laborers.
They can be found in industries such as hospitality, construction, and manufacturing.
A great example of temp workers is those hired as extra staff during major sporting events such as the Super Bowl or World Cup. Temp workers are also utilized when conferences, festivals, and other large events are being hosted.
Contract workers often include freelance writers, graphic designers, and IT consultants.
They contribute to sectors like technology, creative arts, and consulting.
A great example of a contract worker is that many websites you visit on the Internet and the content that you read are designed and produced by contract employees.
Staffing firms such as PRT Staffing can help companies with seasonal staff or in times of temporary need of manpower.
“Retailers choose independent contractors to perform non-core business tasks, such as marketing, maintenance, or accounting. If a pipe breaks, your computer gets hacked, or your office needs cleaning, a contractor can step in and solve your problem,” says the U.S. Chamber of Commerce. “In contrast, you need a temporary employee if you're hiring extra help to stock shelves during the holidays.”
The Top 5 Reasons to Hire a Temp Worker or Contract Employee
It can still be confusing as to the proper time to hire a temporary employee and when to contract the services of a freelancer.
Here are the top 5 reasons to hire either:
Top 5 Reasons for Hiring Temp Workers
- Meeting short-term staffing needs during peak seasons.
- Addressing sudden employee absences or medical leaves.
- Managing temporary increases in workload.
- Testing potential candidates before offering permanent roles.
- Gaining flexibility in workforce management.
Top 5 Reasons for Hiring Contract Workers
- Accessing specialized skills for specific projects.
- Cost-effective solution for short-term projects.
- Avoiding the need for employee benefits and taxes.
- Enhancing workforce flexibility.
- Tapping into external expertise without long-term commitments.
Legal Considerations for Contract and Temporary Staffing
While hiring contract workers can save businesses and benefits and taxes, challenging employment standards must be navigated to make sure the business is compliant with local, state, and national laws.
“Contract labor is the use of independent contractors that is tax deductible. From a tax perspective, the difference between contract labor and an employee is like day and night,” says The Balance. “An employee is on the payroll and receives benefits. An independent contractor is not, and their wages are tax deductible for the business.”
The IRS says it often comes down to the employer-employee relationship (regardless of what the relationship is called).
“You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed,” says the IRS. “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
Misclassifying workers can lead to legal and financial repercussions. Employers should consult legal experts to ensure proper classification and adherence to employment regulations.
Contact PRT Staffing today to learn how we can optimize your workforce strategy by finding the right staffing solutions tailored to your industry.