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Direct employee vs. contract employee

Advantages of hiring a direct employee

Disadvantages of hiring a direct employee

How does a direct employee get paid?

What is a direct employee

Direct employees are workers hired by a company and paid a salary or hourly wages through the company’s payroll.

A direct employee is a full- or part-time employee hired by a company and paid through the company’s payroll. Direct employees are also commonly referred to as direct hires. They are considered permanent employees because the intention is to work with them long-term rather than temporarily or as needed.

When workers are secured through a staffing agency and are established on the agency’s payroll for the hours worked at a business, they are considered indirect employees of the business. Independent contractors or freelancers who work with a small business on a per-project or temporary basis are considered contract employees.

Indirect and contract employees are not direct employees of a business because they are not on the company’s payroll. They are also not restricted by employment laws that apply to direct employees.

Direct employee vs. contract employee

Correct worker classification is important for all employees because it determines the rights, responsibilities, and legal protections of the employer and employee. The distinction between the independent contractor, direct employee, and common-law employee can get complicated, but it often comes down to who pays the employee and who controls the details of how work is performed.

Direct employment gives the employer the power to control the work details. Independent contractors or contract employees retain some of that power and are often able to select their own working hours, location, and processes.

For classification as a direct employee, the employment agreement must meet the following criteria:

  • The employer conducted the official hiring of the employee
  • The employee receives a salary or wages through the company’s payroll
  • The employer sets work expectations and determines when and how work is performed

When one of those factors varies, the status of the employee will most likely change. For example, an independent contractor who works with a small business on a per-contract basis may qualify as a common-law employee if the employer:

  • Provides the contractor with medical benefits and bonuses
  • Gives final approval for all work completed
  • Determines how the work is completed

That common-law employee would receive direct employee classification if officially onboarded as a full-time employee and placed on the company’s payroll in place of an independent contract.

Advantages of hiring a direct employee

  • Business owners can assume full-time employees will complete a certain amount of work on a consistent basis. The business doesn’t need to continuously outsource that work to freelancers or find independent contractors to complete projects
  • Employees are often more loyal to employers when hired directly. Contract workers are likely to work with multiple businesses, accepting work that best fits their needs at any given time
  • The employer has greater power to oversee the work of direct employees. They can determine the location the work is completed, the production process, methods of communication, the amount of time off authorized, and much more
  • Business owners have complete authority to select each new hire, according to their own standards

Disadvantages of hiring a direct employee

  • Processing payroll for direct employees is time-consuming, and accuracy is essential. Small businesses may need to outsource their payroll to ensure all payroll taxes are collected, government deductions are made, and other details are processed correctly
  • In the US, employers are legally obligated to follow all major laws established by the Department of Labor. Those laws provide direct employees certain protections and can pertain to wages and hours, workplace safety and health, workers’ compensation, and more
  • Employers must often offer employee benefits to remain competitive and secure the best employees. That comes at an increase in direct labor costs
  • Paying a direct employee through payroll is often more expensive than working with contract workers as needed. Small businesses should compare direct labor costs and indirect labor costs to determine the most cost-effective option for each employee hired or contracted

How does a direct employee get paid?

Direct employees are paid through the employer’s payroll. Payment for direct employment can come in multiple forms, including:

  • Wages
  • Salary
  • Bonuses
  • Commission
  • Fringe benefits

One of the biggest qualifications for direct employment status is payment from the employer directly. If another agency pays the employee, they are not a direct employee.

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