Hiring a Consultant v/s an Employee: What You Need to Know

Often at Quikchex, we receive queries from our clients who want to know if they can classify their employees as consultants. The reasons for doing so vary from operational flexibility to financial liability management. Sometimes, it might also be driven by the employee.

Far too often, there tends to be confusion with regards to the benefits of classifying a worker as a consultant, as well as the legalities of the process. In our piece below, we address both these aspects.

What are the benefits of classifying a worker as a Consultant?

1) You get what you pay for:  You can discuss deliverables with the consultant you plan to hire and only pay on completion of the task.  This means you can decide how much a task is worth and only spend that amount.  In the case of full-time employees, fixed compensation is not directly linked to performance or achievement of certain goals. Regardless of how an employee performs, he/she is still eligible for that salary cheque at the end of the month.

2) Greater flexibility: As these contractors are not technically employees of your company, it gives your greater flexibility to control the conditions of their work and remuneration. Minimum wage policies don’t apply to independent contractors, and their terms for employment can be tailored to your company’s specific needs.  It takes a longer timeframe to hire full-time employees as compared to consultants. Also, in case their services are no longer required, it’s easier to terminate a contract than let an employee go.

3) Lower liability risk for their actions: Again, since contractors aren’t technically employees, your company does not bear full responsibility for their actions on the job. This may sound like a perk only in extreme cases, but any reduction in your company’s risk profile is always a positive.

4) Lower Employee Benefit Costs: As an employer in India, you might be liable to pay your permanent employees certain benefits such as Leave Encashment, Gratuity, Provident Fund and Employee State Insurance. By classifying a worker as a consultant rather than a full time employee, you are able to avoid many of these liabilities, which can be significant amounts in the long run.

5) Fewer Compliance Headaches: It is common knowledge that once an organisation grows beyond 20 employees, it is on the hook for both Provident Fund & ESIC compliance. While a growing organization will inevitably have to take the PF & ESIC plunge, classifying Employee number 20 as a consultant, is certainly a way for resource to avoid the short term compliance headache.

6) Greater Salary Take Home for Employees: For workers who are looking to maximize their take-home wages, a consultant classification becomes useful. Typical statutory deductions like PF, PT, ESI and LWF will no longer apply. Moreover, for higher income employees, the tax deducted at source will often be lower relative to the tax the worker would pay, if he/she was classified as a full time employee.

I’m sure that on reading these benefits, you might be wondering why organisations don’t always designate all their workers as consultants instead of employees.  The Labour Department has been smart about this, and has laid down guidelines on the distinction between full time employees and consultants.  We have addressed this below.

How do I know if my worker qualifies as a consultant?

1) Unique set of skills: Consultants should provide your company with a service that is backed by a specific set of skills; skills that are not commonly found in other employees of your company. In addition to that, the consultant should also have some experience in the field in which he/she is providing guidance to the company. Generally, consulting is more experience based rather than work oriented.

2) Organizational subordination: If you hired an independent contractor whom you are guiding in the form of instructions on when, where and how he/she has to consult you, then you might want to reconsider the contractor classification. There should be no degree of subordination between a consultant and the hiring company. They work for your company, yes, but from the outside. In the eyes of the law, consultants should have an equal footing with your company. Hence the levels of hierarchy and chain of command that you have built in your organisation should not apply to them. A consultant may be hired to train your employees, but his/her execution of the activity would not depend on the rules that apply to your employees.

3) Consultants generally come pre-loaded: Have you ever heard of someone training a consultant? Probably not too often. More importantly, consultants are called in because they bring a certain amount of functional expertise to the table, which they can utilize to create benefits for your organisation. While you may, and probably should give your consultants an in depth briefing about the company, you are not obligated to train them in the function they are to perform. Let’s say you engage with a consultant to manage SEO on your website. The expectation is that this individual brings with him/her an understanding of how SEO works and how it is implemented. As the “client”, you are not obligated to train this individual. That would sound more like sponsoring the development of an employee.

While classifying a worker as a consultant can be a bit of a grey area, hopefully the above 3 bullet points can provide a degree of clarity, to steer you away from misclassification violations. To make things easier, we’ve created a contract template that you can use when hiring a consultant. You can download this agreement by visiting the link below: