More small businesses are starting to hire freelancers instead of employees. Why? Because it saves them a TON of money! Not only can the total cost of the freelancer sometimes come out to a third of an equivalent employee’s, but the freelancer (if they’re good) will often bring bigger and quicker results because they are a true expert in their field.
If you live in California where AB5 has gone into effect, then you’ll need to find some workarounds to build up a freelancer work force, and I encourage you to support efforts to get rid of that bill. A similar bill is coming nationally, and it’s called The PRO Act. If you want to continue to have an easier time growing your small business by hiring freelancers, The PRO Act cannot pass. And by the end of this blog post, I’m certain you’ll be convinced that you want to start hiring more freelancers. You can learn more about the PRO Act in my video by clicking above.
So, for those who aren’t being prevented from hiring freelancers thanks to government laws, how exactly do businesses save money when they hire more freelancers to be on their team?
- Employees cost more time and thus money to hire. According to a study by the Society For Human Resource Management, the average cost to hire an employee is $4,129. The average cost to hire a freelancer is the hourly rate of your recruiter times about 5 hours, especially when you use platforms like Upwork that make it easy to target the right talent quickly.
It’s difficult to have a targeted approach to finding employees. You post a job and receive way too many resumes, many of which aren’t qualified or relevant. The larger the business, the more resources you have to help hire recruiters and find expert talent. Nonetheless, it’s still a much more arduous process to find the right person, and the stakes are higher. Because hiring costs so much, you want to find someone who will stick around for a long time, and someone who is reliable and skilled.
But it’s not easy finding that person because most job-seeking workers, being millennials, career hop much more than previous generations. That’s why they tend to be more attracted to freelancing. The lack of skilled employee talent is largely in part because the highly skilled ones have decided to freelance. They know they can make more money and have more flexibility in how they work.
- Employees cost more time and money to fire.
If an employee doesn’t turn out to be what you had hoped or your company hits a rough patch and must downsize, letting go of employees requires a lot of administrative time and can be very costly if you’re including any payouts or severance packages. And on top of it, there are laws you have to comply with in regard to why you’re firing an employee. When you’re dealing with freelancers and you need to downsize your team, or when a freelancer doesn’t turn out to perform well, you can easily end the contract (if you didn’t commit to a long-term contract) and say goodbye. The freelancer isn’t as put out because he or she likely has other clients and is in a good flow to replace you with someone new. That’s good for you, because they are less likely to try and smear your business for bad feelings.
- You likely need to provide health insurance, paid time off, retirement contributions, and other benefits to your employees. You could be spending an additional $2,000/month per employee for all the benefits.
- You’re paying half of the employee’s social security tax (which amounts to 6-7%) in addition to Medicare (around 1.4%) and federal unemployment tax.
- Workers compensation insurance.
- The more employees you hire, the more equipment and space you must purchase for them to do their job. Freelancers, on the other hand, pay for their own office space, internet and computers and anything else they need.
2020 showed many businesses how much money they can save when their employees are working at home, but it’s more difficult to manage an employee working at home, whereas you’re not managing a freelancer at all. Instead, you’re paying them to deliver a specific task, project, or result, and it doesn’t matter when they work or how many hours they put in etc.
Here’s a graph courtesy of Upwork that shows displays how much more expensive employees are:
Going back to why the average cost to hire an employee is around $4,000. It is because of these tasks that you must do that you don’t have to worry about when hiring freelancers:
- Numerous job interviews
- Paying an HR team
- Background checks
- Time enrolling employees into your benefit programs
- Training programs and costs (Freelancers show up pre-trained in their area of expertise, you just need a brief kickoff meeting to help them understand your business. Employees often have larger learning curves)
- Signing up the employees for all the accounts you pay for. Any time you add a new employee to your Microsoft or account or any other account, the cost of that software goes up.
This isn’t a complete list, it’s just an overview. But you get the point. You’re saving tens of thousands of dollars per year when you hire freelancers over employees, and there are a lot of jobs you can hire freelancers for that you may not even realize. Everything from creative roles like video production and website design to computer programming and web development, and even leadership roles like project managers.
If you ever get stuck comparing a freelancer’s $100/hour rate with an equivalent employee’s $50/hour rate, you’re missing some key factors in your calculation when you’re thinking you’ll be paying more for the freelancer. The additional costs we just discussed overpower the higher hourly rate of the freelancer by a landslide. And you need to remember that most of the freelancers you hire will only need to be paid for a few hours of work per week. I pay my freelancers on average 2-10 hours per week, 10 being the max because they have other clients they’re working for, too.
In addition to cost savings, you have enhanced flexibility that allows you to shrink, expand, or pause working with freelancers if your business priorities change or if you need to cut expenses. You don’t even have to completely let go of a freelancer, you can just reduce their hours to 5 per week and get away with it. You can’t pay an employee 5 hours per week, so you end up just needing to fire them when these things happen.
Are there some disadvantages to hiring freelancers, and when is it best to just hire an employee? We’ll discuss that in another video.
Small businesses and startups who aren’t hiring freelancers are seriously missing out. If you have any questions, be sure to comment below. Also, please subscribe to the channel if you want more videos like this that can teach you how to hire and work with freelancers on your team.