Visualizing the Impact of Contractors

January 24, 2025

8:20 AM

By OrgChart Team

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Visualizing the Impact of Contractors

According to Argentus (Canada’s Leading Recruiters in Supply Chain and Procurement), an estimated 40% of the global workforce now works under contract. And, ADP cites that a vast majority of them (70%) are contractors by choice, rather than out of necessity. 

So, not only are organizations experiencing the benefits of hiring contract workers – including on-demand access to specialized skills, reduced overhead costs, and increased agility – they are also participating in working agreements that benefit both parties. 

In this blog post, we’ll delve into the pros and cons of hiring contractors and how to effectively manage them within your organization. We’ll also discuss strategies for adequately accounting for their contributions and ensuring their work aligns seamlessly with your overall business objectives.

woman working on glass table with female colleague in background

What Is Contractor Management: Core Elements

Contractor management is the strategic process of overseeing and managing external workers. 

Contractor management encompasses all aspects of the contractor lifecycle – from initial engagement to project completion to end-of-year tax filings – ensuring compliance, productivity, and alignment with organizational goals.

Understanding the Role of Contractors in Today’s Workforce

Most companies today balance a workforce of employees and contractors. A recent NPR/Marist poll showed that one in five jobs is held under a contract. 

Loosely defined, an “employee” often works exclusively for your organization, generally works at your place of business, is entitled to benefits, and has defined working hours. A “contractor” has the flexibility to work for numerous employers, can work on their schedule, and has specific experience and qualifications in a field that is not covered by many aspects of employment law.

The stakes are high as leaders determine who to employ and who to retain on contract, as healthcare laws and other legal aspects significantly differ. This is a crucial consideration for organizations when managing their workforce composition.

Independent Contractor vs. Employee

The true distinction between an employee vs. contractor lies in the level of control an organization has over the worker. 

An employee is someone who works for a company on a regular basis and receives benefits (e.g., health insurance, PTO). They are typically subject to an organization’s control and direction.

An independent contractor, on the other hand, is a self-employed individual who provides services to a company on a contract basis. They are responsible for their own taxes, insurance, and work arrangements. 

Review the independent contractor vs. employee chart below for more details about the difference between a contractor and an employee.

EmployeeContractor
Employment TypeTraditional, full-time, or part-timeSelf-employed or contract-based
Company ControlCompany has high level of control (e.g., hours, tasks, methods)Company has limited control
Benefits PackageEligible for benefits (e.g., health insurance, PTO, retirement)Ineligible 
TaxesTaxes withheld by employerResponsible for their own taxes
Legal Protected by employment laws (minimum wage, OT, etc.)Limited protections from employment laws
Costs to CompanyHigher overhead costs for employers (benefits, taxes, etc.)Lower overhead costs for employers; costs directly tied to services
Workforce FlexibilityLess flexibility to scale workforce up or downHigh flexibility to quickly scale up or down

While a company can retain control over any work that the contractor performs, and can mandate a certain level of confidentiality, the company does not have much control over the contractor themselves. 

The prevalence of independent contractors has skyrocketed in recent years. The COVID-19 pandemic drastically accelerated this trend, prompting many organizations to embrace more flexible work arrangements, including contract-based hiring.

In recent years, companies have lost even more control over contractors. Previously, many companies were able to mandate that a contractor sign a non-compete clause. However, as of September 2024, the FTC banned most non-compete clauses in the US (although, there are ways to circumvent this, by way of trade secret laws and NDAs).  

Core Elements of a Successful Contractor Management Process

Since compensation, legal agreements, and contractor access to the organization may vary greatly compared to regular employees, here are some things to understand about how to manage contractors:

Independent Contractor Onboarding Process

This includes thorough contract reviews and providing access to necessary resources like company intranets and project management tools. 

Clear communication of project scope, deliverables, timelines, and performance expectations is crucial. Finally, effective onboarding integrates contractors seamlessly into existing workflows and team structures.

Performance Monitoring and Evaluation

To effectively manage contractor performance and value, it’s essential to define and track Key Performance Indicators (KPIs) relevant to each role. 

Regular check-ins with contractors provide opportunities for feedback, address priorities, and ensure project milestones are being met. Periodic performance reviews assess contractor contributions and identify areas for improvement.

Contractor Compliance

Contractor management compliance is very different from managing your regular employees. Be sure to thoroughly understand relevant labor laws, tax regulations, and employment classifications ahead of hiring.

Protecting sensitive company data and maintaining confidentiality through appropriate security measures is also crucial. And in some cases, verifying that contractors have the necessary insurance coverage (e.g., professional liability, general liability) is required.

Communication and Collaboration with Contractors

Effective contractor management relies on clear and consistent communication channels between contractors, project managers, and other stakeholders. In some cases, your contractors will need to be integrated with your communication tools and given access to internal files. 

Regular project updates and status reports keep contractors informed and engaged. Plus, it will help keep projects moving at a steady pace. 

Encouraging open and constructive feedback from both contractors and internal teams fosters a collaborative and productive working environment.

Strategic Org Chart Planning and Integration of Contractors

Aligning contractor roles with overall business objectives and strategic priorities is crucial to the success of the project. After all, the cost and value your contractors bring can have a significant impact on your resources, project needs, and operational efficiency. 

Within your organizational charts, it’s important to visually account for contractor roles and their relationships within the company structure. While their financial impacts to the organization will differ from employees, be sure to use an org chart tool that can accommodate these nuances.  

The Strategic Value of Contractors

Contractors provide organizations with a way to obtain specialized skills on demand without long-term commitments. This flexibility delivers a strategic advantage, especially in industries where specific skills are only required for a limited duration or for particular projects. 

Here are some additional benefits to consider if you’re looking to build a successful team.

Efficiency and Cost-Effectiveness

Contractors are responsible for their own expenses, such as taxes, insurance, and even equipment in many cases. This can significantly reduce your company’s overhead costs, allowing you to stretch your budget even further.

Another benefit? With contractors, you only pay for the work performed, making it an ideal solution for short-term projects or fluctuating workloads. This flexibility allows you to manage your expenses more effectively and avoid unnecessary costs.

For example: A marketing agency might hire a freelance graphic designer for a specific campaign instead of adding a full-time position. This allows them to manage their budget effectively while still delivering high-quality creative work.

Added Flexibility and Agility

Compared to adding or subtracting employment positions from your organizational structure, hiring contractors enables you to quickly scale your workforce up or down as needed. 

For example: A software development company can quickly assemble a team of freelance developers to meet a tight deadline for a new product launch, ensuring timely market entry and a competitive advantage.

This agility is crucial for any business looking to respond quickly to changing market demands, project needs, and resources. 

Access to a Wider Talent Pool

Businesses can also use contractors to access specialized skills that may be necessary for a specific project but may not be needed on a daily basis. 

For example: A manufacturing company can hire a freelance industrial engineer to optimize production processes for a limited period, improving efficiency without needing a permanent hire.

Contractors are also a great solution to quickly fill skill gaps within your employed workforce, especially if a key employee leaves unexpectedly or you’ve had difficulties finding the right candidate for an employed position. 

The Future of Workforce Management: Contractors in the Digital Economy

The landscape of contract hiring has undergone a dramatic transformation in recent decades. From a once-perceived auxiliary workforce, independent contractors have emerged as a pivotal force in the modern economy. 

The digital economy is rapidly unraveling traditional workforce models, and we’ve already experienced significant shifts within the last several years. Contract work will likely continue to expand over the next few decades, so understanding how to manage contractors is essential to learn now

With a growing reliance on freelancers, gig workers, and independent contractors vs. employees, these shifts pose both significant opportunities and challenges for businesses. 

Changing Workforce Mentalities and the Gig Economy

The definition of “contractor” itself has recently been scrutinized with the emergence of companies such as Uber and Lyft and the “gig economy.” California legislators in 2019 approved a bill that forces these app-based companies to treat their contract workers as employees. The argument is that these companies exert control over contractors’ tasks and that the work is part of their regular business.

The digital gig economy provides access to a global talent pool, enabling businesses to tap into specialized skills and expertise from around the world. For many individuals, the gig economy offers a valuable source of income and the opportunity to be their own boss, fostering greater financial empowerment.

Legislative Impacts

The rise of the gig economy has also led to significant legislative changes. Laws like California’s AB5 have redefined the classification of workers, making it more difficult for businesses to classify workers as independent contractors. 

These legislative changes have significant implications for businesses, requiring them to carefully evaluate their workforce models and ensure compliance with evolving regulations. It’s exceptionally important for businesses to build and maintain an accurate independent contractor vs. employee chart so they stay compliant and understand what controls they have over their workforce. 

OrgChart Helps You Adapt

OrgChart is designed to adapt to the evolving dynamics of the modern workforce.

Flexibility and Customization 

OrgChart offers a high degree of flexibility and customization, allowing you to easily adapt your organizational charts to reflect the changing composition of your workforce. 

You can easily add, remove, and modify roles and relationships to represent your evolving team structure accurately.

Compliance Solutions

OrgChart can help you ensure compliance with evolving labor regulations by providing a clear and auditable record of your workforce.

You can easily track employee and contractor classifications, ensuring that your organizational structure accurately reflects your employment relationships.

Challenges in Managing Contractors

Despite the benefits, it’s no surprise that managing a contractor workforce can present some unique challenges for HR and organizational leaders, especially if their previous workforce has been mostly employees.

To remedy these challenges, organizations should implement dedicated processes and tools for managing contractor relationships, including onboarding, performance tracking, and issue resolution.

Incorrectly classifying workers as independent contractors can have significant legal and financial repercussions. Misclassification can result in hefty fines, back-pay obligations, and even criminal charges.

The tax implications can also challenge businesses that do not proactively educate themselves on contractor hiring. And, ensuring compliance with tax regulations and contractor withholding requirements can be complex and time-consuming since it varies significantly from your employment taxes.

Potential for Consistency and Quality Issues

Effectively onboarding and training contractors can be challenging, especially if they are also remote independent contractors. 

Not to mention, due to the short-term, transient nature of some independent contractor agreements, businesses may need to carefully monitor the work and communicate their expectations. 

One way to mitigate these risks would be to dedicate time to hiring long-term independent contractors who will learn how the business operates and what is expected of them.

How to Effectively Manage Your Contractors: A Step-by-Step Process

Organizational leaders can use this guide to independent contractor management, regardless of industry or contracted position.

Step 1: Clearly Define the Role or Project Requirements

Before engaging with any contractor, clearly define the specific roles, responsibilities, and project scope. 

Conduct a thorough needs assessment to identify the skills and expertise required. Doing so will help you save time during the recruiting, hiring, and interviewing process since you will know exactly what skills and services to look for. 

Develop detailed job descriptions that outline the key deliverables, expected outcomes, and necessary qualifications.

This upfront clarity minimizes misunderstandings and ensures that contractors are well-equipped to fulfill their roles effectively.

Step 2: Create Comprehensive Contracts

Drafting comprehensive contracts is crucial for a successful contractor relationship. Since companies have less control over contractors, these contracts can offer some company protections, especially if the contractor underperforms or has a breach of contract. 

Include detailed descriptions of deliverables, timelines, payment terms, and intellectual property rights. Ensure that the contract outlines clear expectations regarding confidentiality, data security, and compliance with relevant laws and regulations.

Legal review of the contract is highly recommended to protect both the company and the contractor.

Step 3: Onboard Your Contractors

As we mentioned before, a smooth onboarding experience sets the stage for a successful contractor engagement.

Provide contractors with all the necessary tools, access, and information to effectively perform their work. This may include access to company intranets, project management software, and relevant documentation.

Conduct a thorough orientation to familiarize contractors with company policies, procedures, and expectations. It’s best to offer a dedicated point of contact (POC) for contractors to address any questions or concerns.

Step 4: Set Clear Expectations

Clearly define KPIs that align with project objectives. This also includes establishing clear milestones and deadlines for deliverables.

Communicate reporting requirements upfront, including the frequency and format of progress reports. Regularly review and update expectations as needed to ensure alignment with evolving project needs.

Step 5: Establish Communication Protocols

Communication is the lifeblood of a successful contractor relationship. Regardless of which communication tools you use (e.g. Slack, Asana, Monday.com), clear, ongoing communication will ensure that everyone is on the same page and issues are quickly resolved.

Schedule regular check-ins with your contractor, their POC, or their manager to discuss progress, address any challenges, and provide feedback.

Encourage open and honest communication between contractors, project managers, and other stakeholders.

Step 6: Monitor Contractor Performance

Continuously monitor contractor performance against established KPIs and milestones. Doing so will ensure the value your contractor provides is worth the cost of their services. 

Utilize project management software and tools to track progress and identify any potential roadblocks. Regularly analyze performance data to identify areas for improvement and make necessary adjustments.

This ongoing monitoring ensures that projects stay on track and that contractors are meeting expectations.

Step 7: Provide Feedback, Support, and Next Steps

Regularly provide constructive feedback to contractors on their performance. While you should acknowledge and appreciate their contributions, be sure to proactively address any challenges or roadblocks that arise.

Offer support and guidance as needed to ensure contractors are successful in their roles. However, there may be instances when the contract needs to be terminated early due to underperformance or a poor fit. 

Step 8: Ensure Compliance with Contractors

Regularly review contractor classifications, tax obligations, and contract terms to ensure compliance with all applicable laws and regulations.

Stay informed about any changes in legislation that may impact your contractor relationships, as new laws are emerging every year.

Consult with legal and tax professionals to ensure proper compliance and avoid potential penalties. Doing so is crucial for mitigating legal and financial risks.

Step 9: Review and Optimize the Contractor Management Process

After each contractor engagement, conduct a thorough post-project review. Analyze contractor performance, project outcomes, and the effectiveness of the management process.

Initially, you may recognize several areas for improvement and make necessary adjustments to future arrangements. 

This continuous improvement approach ensures that your organization maximizes the value of its contractor relationships and minimizes potential risks.

Step 10: Keep Your Org Chart Updated

It’s vital to have your org chart up to date with all the employees and contractors. To effectively manage them, you need to understand who reports to who, in a clear and concise view.

Some org chart software can integrate with other HR tools to ensure all changes and updates are accounted for in near real-time. 

For example: Org Chart integrates with 50+ tools including popular HRIS, financial, and payroll databases. So, when an employee or contractor enters or leaves the organization, updates in your org chart are often automatic. 

Visualizing Contractors with OrgChart Software

Given the distinct differences by which employees and contractors must be handled from legal and strategic perspectives, visualizing how they fit into your organization is advantageous. 

OrgChart lets you highlight contractors and their positions, from key managers to individual contributors, allowing you to see their impact across your organization. 

Highlight Contractor Roles and Responsibilities

With OrgChart, you can visually identify key contractors and their relationships with other team members and departments. You can also determine which key contractors are making significant contributions to organizational goals.

Visualizing the Impact of Contractors

Visualize Contractors Alongside Full-Time Staff

Easily map contractors alongside full-time staff, providing a clear and comprehensive picture of your entire workforce. Once set up, you can track contractor performance and contributions by visualizing their project assignments and deliverables within the org chart.

How to manage contractors in OrgChart:

  • Step 1: Upload your workforce data into OrgChart. With 50+ HR integrations, you can incorporate various data sources such as your HRIS, payroll and/or HRO systems to name a few.
  • Step 2: Set up filters to easily distinguish contractors from employees. Plus, you can customize colors, formats, branding, and more so your org charts are ready to share with key stakeholders.
  • Step 3: Create custom views for role-specific analysis. OrgChart enables endless customizations and filtered views so you can visualize the exact perspective you need.

The Power of “What-If” Scenarios in HR Management

Future planning is a crucial responsibility of HR management. The dynamics of the workforce continuously evolve with changes in employment practices, legislation, and the economic environment.

In this context, the use of organizational charts, or org charts, becomes a powerful tool for strategic workforce planning. An org chart offers a visual representation of the structure of your organization, showing the relationships and ranks of its parts and job positions.

OrgChart software takes this a step further by offering the capability to model “what-if” scenarios. This is particularly valuable in times of change, whether that change is driven by internal factors such as a restructuring or external factors such as new legislation impacting contract workers.

The “what-if” scenarios allow you to experiment with key metrics such as benefit costs, salary, and tenure, and visualize potential changes in your organizational structure. For instance, you could model the impact of hiring more contractors versus permanent staff or explore the effects of changes in employment legislation on your staffing costs.

Moreover, this tool can help measure the financial impacts of freelance workers. By modeling scenarios, HR professionals compare the cost-effectiveness of their employment strategies and make decisions accordingly.

Moreover, the visual nature of an org chart makes it easier to communicate these potential scenarios to others in the organization, aiding in collaboration and decision-making. By offering a clear, visual way to explore potential scenarios, OrgChart helps facilitate strategic discussions and planning in your organization.

Partner with OrgChart for Successful Contractor Management

Independent contractors have become an integral part of many organizations. While offering significant benefits such as cost-effectiveness, flexibility, and access to specialized skills, understanding how to manage contractors requires careful planning and strategic execution.

Just like your regular employees, independent contractors working alongside your organization need effective management to perform their roles successfully. 

Visualization tools like OrgChart play a crucial role in this process. 

When you have a clear and comprehensive view of your entire workforce, you can visualize and measure contractor impacts on organizational goals, quickly adapt to new business needs, and maintain compliance.

Book a free demo with our team. We’ll show you how to model “what-if” scenarios to experiment with key metrics such as benefit costs, salary, and tenure to help you gain a better understanding of your workforce.

Schedule a free demo of OrgChart today!