Top Reasons Companies Hire Contractors

Unlike many countries, the US follows “at will” employment laws which means an employer can hire or fire an employee (or the employee can leave) for no reason with no liability or obligations. So why do companies hire contractors if it is so easy to hire and fire employees.
The major reasons companies hire contractor or consultants to come on-site and work in staff augmentation are
– Companies need a specialized skill-set that is not required long term or have a temporary high load of work.
– Some highly skilled contractors or consultants may not want to work full-time jobs and are only available on a consulting basis.
– The company needs someone temporarily as it requires more time to fill the full-time position as the interviews, offer acceptance, relocation, etc. take a lot longer.
– Contractors can cost less in terms of fully loaded costs as companies are not required to pay for benefits like vacations, medical insurance, etc.
– The temporary resource can be tested and can be converted to full-time if they meet the bar.(contract-to-hire)
– Sometimes the company is limited by its investor/owners/management to limit full-time headcount to maintain flexibility. It is easier to fire contractors without incurring a lot of HR/layoff ‘case building’ if business conditions deteriorate.
This also leads to a followup question then. “Why do companies hire contractors through staffing companies?”
– The main reason for this is co-employment risks. If a company gets similar work done by a contractor like an employee with the only difference being – not paying them benefits, then they can become liable for benefits, stock options, etc. if the employee takes them to court (IRS 20 factor test for independent contractors, Microsoft Ruling). By having a buffer agency in between companies reduce this risk. It is also the reason you won’t normally find HR or the company recruiters involved in the selection of contractors. Hiring of contractors is usually done by Procurement.
– The other reason is the staffing companies have the advantage of economies of scale and breadth. They have more recruiters hiring the same skills for multiple companies in multiple cities and can do a better job than a single recruiter or group within a large company.
So companies would rather pay a few extra bucks to outsource this hiring and administration of contractors in exchange for lower overhead and lower risk.

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