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Companies use a variety of people to accomplish all the work they need done. Employees, consultants and contractors can all make contributions. Each has distinct advantages, limitations and purposes. Organizations need to understand the various classifications of workers and when each is appropriate. When it comes to employees versus consultants, there is a vast difference that includes legal and financial implications.
Employees work for a company directly. They are considered part of an organization, and their actions are legally considered actions of the company itself. Employees are paid from a business's payroll and are entitled to certain protections under state and federal labor laws such as breaks and lunches. Although not legally required in all states, best practice dictates that companies should have job descriptions defining each employee's role, scope of duties and performance expectations.
Employers and employees have fiduciary and ethical obligations to one another. Employees are supposed to serve their organization's interests and take care in the use of company resources. In theory, employees' success and the success of their organizations are linked. At the same time, because employees form the core of an organization, organizations have a duty to treat employees with fairness, care and respect. Labor laws require employers to maintain a safe environment and to provide for the basic human needs of their people. Benefits including paid time off as well as health, dental, life and disability insurance are common ways employers show extra concern for their teams and make their organizations more desirable to good talent.
Consultants provide services to a company, but don't work directly for it. In most cases, consultants are either part of a consulting firm or are their own incorporated businesses. Employers pay the consulting business, not the individual consultant. Consultants are contracted for specific projects and tasks. Although some get more involved, a consultant's primary purpose is to evaluate and advise. Client organizations can then choose whether to take advantage of consultants' expert opinions and suggestions.
Consultants do not act as agents of a company and their work does not constitute authorized action of their clients. In fact, consulting agreements frequently have clauses to separate the ownership of intellectual property -- dividing a consultant's ideas from clients' proprietary concepts and methods. Although consultants have a duty to work in their clients' interests for the duration of a project or job, their relationships are limited. Consultants may perform work for their clients' competitors. Likewise, organizations have no obligation to use a consultant's services and may even terminate a project at whim if they are unhappy with the services or decide they are no longer helpful or cost effective.
- IRS: Independent Contractor (Self-Employed) or Employee?
- Aligns; The Dark Side of a Consulting Relationship; April 2011
- Koch Group: Consulting Relationship
- "Inc."; How to Get the Most Out of Consultants, October 2010
- "Inc."; Employee or Contractor?; September 2008
- Tech Republic; Use the Consulting Relationship for Your Client's Good; Chip Camden; February 2010