Business Glossary

What is a Contractor?

Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.

A contractor is a self-employed tradesperson or professional who performs services for a specific project for a specific length of time.

Contractors are often sole traders but could also be limited companies. In either case, they are contracted for their services rather than provided with a contract of employment.

Examples of contractors

An industry best known for employing contractors is the construction industry. Most construction work effectively consists of a series of projects. Sometimes these projects will be consecutive. Sometimes there will be gaps between them.

Each construction project will have its requirements in terms of the labour required. Some will require many different skills, while others only need a few core skills. Some may require many people and others only a few. Some may be long-term and others short-term.

These variables make it extremely difficult for construction companies to fulfil their requirements through permanent staff. This makes them heavily reliant on contractors. Often, construction companies will have a bank of contractors they use again and again because they have built up a good relationship with them.

Although the construction industry is well-known for its use of contractors, many other industries rely on them too. For example, IT, healthcare, and agriculture rely on contractors.

Find out more about how Square can help you manage contracts.

Why businesses use contractors

There are many reasons why businesses use contractors. Most of them essentially come down to flexibility. Some industries cannot accurately forecast what their labour needs will be. Using contractors means they don’t have to. They can simply hire the labour they need when they need it.

Other industries know what labour they are likely to need but only require it for the short term. For example, the agricultural sector requires extra workers around harvesting times. These are only at certain specific and relatively short times of the year. Therefore, it makes sense to use contractors.

Contractors are also often used to test the waters to see if it’s worth hiring a permanent employee and on what terms. In this situation, it’s not uncommon to see a contractor go from being self-employed, to being on a fixed-term employment contract, to becoming a permanent employee.

The drawbacks of using contractors

Using contractors has both advantages and disadvantages. Companies use contractors because they do not have to commit to them in the same way as they have to commit to permanent employees (or even temporary employees).

The flip side of this is that contractors do not have to offer clients the same commitment as employees. While employees can (and do) change employers, the barrier to doing so is typically higher than for contractors. Moving to a new employer is generally a fairly significant change in a person’s life. The pros and cons usually have to be weighed up with care.

Contractors, on the other hand, enter projects knowing that their time with the client will only last for a specific project or period of time.

Most contractors will do everything they reasonably can to maintain a good relationship with that client. However, they are not employees, and businesses cannot (and should not) expect them to behave as such.

For example, an employer has the right to insist that an employee performs their designated tasks themselves. A client, however, only has the right to demand that the contractor provides the agreed services to the agreed standard.

Contractors can and often do employ subcontractors to act on their behalf. This should benefit clients as it ensures continuity of service. If it is a problem, then it’s probably a sign that you should be looking to hire an employee.

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