QUESTION: Mike, I am looking at expanding. What are your thoughts on using contractors, or here in the States 1099 employees, to do sourcing?
ANSWER: Personally, never, and I never use the term never. I am using the term never for a variety of reasons. One, I am not a legal expert here, but a contractor cannot be held accountable, which is one of the main reasons I do not advise hiring contractors.
Two, in my recruiting firm and in speaking to clients, I have not found anyone who has had success hiring recruiters that have already been recruiters or people who have hired 1099 contractors. Have people had an occasional person that worked out? Yes, but I have not seen a replicable system of bringing a seasoned recruiter or 1099 contractor onboard.
Here is what I have seen happen with the contractors that have worked out, a year to 18 months down the road, they have figured out the business, and they go off and compete with you. The contractor takes all those relationships because they are a contractor.
A contractor is hired because of their expertise. I always ask recruiting firm owners why they want to hire a contractor, and it is because they want to save money on the salaries. If that is the case, with all due respect, you are not in a position to really grow your business. When growing your business, you want to invest in your team members. You can do it for $2,500 or $3,500 a month, plus some payroll taxes, which could be $3,500 or $4,000 a month, all in.
When you grow your team the right way, by hiring, not using contractors, you will know if that person will work out in the first two weeks. The challenge with most people is they throw a new recruiter on a desk with very inadequate training and very weak accountability and expect them to produce results. One in 10 new recruiters has enough resolve, persistence, self-confidence that allows them to push through and be successful. I do not want to do something with a 90% failure rate and where I am setting somebody up to compete with me.
Three, you can set yourself for issues with the IRS. Unless the person has multiple contract jobs, if you get audited on the payroll through the state or federal, they can say that you control this person’s hours. It appears that working with you is their only source of income.
Again, I am not a legal expert with this, but there are a variety of tests. Hiring someone as a 1099 contractor puts you in the dark gray territory and not in your favor. If you have somebody and they work out for a few years, and let’s say you go through a payroll audit, what they can do is they can say, okay, you paid them $200,000 over the last few years. Even if the contractor paid their self-employment taxes, the IRS or State would say your payroll taxes were X amount. The amount of money you should have withheld was X amount. The penalties and interest on that are X amount. I have seen owners get hit with multiple six-figure bills because they wanted to save a few thousand dollars a month when the person started.
Once you get past the initial 90 to 120 days, salaries pay for themselves because the recruiter will make placements, and you are going to make a commission. Your commission plan should factor in their salary; I never call a salary a draw, but a salary. My commission structure had a base salary with a lower commission rate so I could recoup the salary.
The best way to put this is, I never hired contractors, and I never recommended it. I have never seen it work consistently. There might be somebody out there that this is their business model. I would like to talk to you. One, did you retain them long-term? Two, did you ever get audited by the IRS? Three, do you have a successful system in place? Because I will probably license it. But it is just not worth all of the risks involved.
P.S. Whenever you’re ready… here are 4 ways I can help you grow your recruitment business:
1. Grab a free copy of my Retainer Blueprint
It’s the exact, step-by-step process of getting clients to give you money upfront. https://get.therecruiteru.com/lm
2. Join the Recruiter Think Tank and connect with firm owners who are scaling too It’s our Facebook community where smart recruiters learn to make more money and get more freedom. https://www.facebook.com/groups/there…
3. Join me at our next event
3x a year, I run a 3-day virtual intensive, sharing the 9 key areas that drive a 7-figure search firm. Click here to check out the dates of our upcoming event: https://get.therecruiteru.com/emerge
4. Work with me and my team privately
And if you ever want to get some 1:1 help, we can jump on the phone for a quick call, and brainstorm how to get you more leads, more placements, and more time. https://get.therecruiteru.com/scale-now