Step-by-Step Guide on How to Hire a Contract Employee

how to hire a contract employee

In today’s dynamic business landscape, many organizations are turning to contract employees as a strategic staffing solution. Contract employees, also known as freelancers, consultants, or independent contractors, are professionals hired on a temporary basis to complete specific projects, tasks, or assignments. This guide aims to provide comprehensive insights on how to hire a contract employee and the benefits they can bring to your organization.

Understanding Contract Employees

Contract employees are distinct from regular full-time or part-time employees. They work for a fixed period, often for the duration of a particular project, and are not bound by long-term employment agreements. These individuals, experts in their respective fields, bring specialized skills and knowledge to the table, making them valuable assets when you hire a contract employee.

The demand to hire a contract employee is on the rise as employers aim to reduce labor costs and maintain staffing flexibility. Listings for contract jobs increased by 26% from May to November 2022 compared to the same period in 2021, as reported in LinkedIn’s Future of Recruiting report.

How to Hire a Contract Employee: Key Tips

1. Defining Your Contract Employee Needs

Before embarking on the process of how to hire a contract employee, it is crucial to clearly define your organization’s needs and requirements. This section outlines the essential steps to identify the specific project requirements, determine the scope of work, and assess the duration and timeframe for the contract engagement.

A. Identifying Project Requirements

Start by thoroughly understanding the project or task for which you need to hire a contract employee. Engage with relevant stakeholders, such as project managers, department heads, and team members, to gather comprehensive information about the project’s objectives and deliverables. Consider the following questions:

  • What is the main goal of the project, and what outcomes are you looking to achieve?
  • What specific skills and expertise are necessary to accomplish the project’s objectives?
  • Are there any technical or domain-specific requirements that the contract employee must possess?
  • What level of experience or qualifications are necessary for the role?
B. Determining the Scope of Work

Once you have a clear understanding of the project requirements, it’s time to determine the scope of work for the contract employee. Define the specific tasks and responsibilities that the contract employee will be responsible for during the engagement. This involves breaking down the project into smaller, manageable components.

  • List the individual tasks, activities, and milestones that the contract employee will be accountable for.
  • Identify any deliverables or tangible outcomes that the contract employee should produce.
  • Clarify the project’s timeline and deadlines for each task or milestone.
C Assessing Duration and Timeframe

The next step is to assess the expected duration and timeframe of the contract engagement. This involves determining how long the project is expected to last and how much time the contract employee will be needed.

  • Consider the project’s complexity and scale to estimate the overall duration. It’s essential to be realistic in your time estimations.
  • Decide whether the contract employee will be required on a full-time or part-time basis. This will depend on the project’s intensity and the scope of work.
  • Be mindful of any critical deadlines or milestones that must be met during the project’s execution.

2. Legal Considerations

Legal Considerations

The process of how to hire a contract employee involves various legal considerations that businesses must address to ensure compliance with relevant employment laws and regulations. This section explores the key legal aspects of hiring a contract employee and provides guidance on differentiating between employees and contractors, complying with employment laws, and drafting a clear and comprehensive contract.

A. Differentiating Between Employees and Contractors

One of the critical legal considerations when hiring a contract employee is correctly classifying them as independent contractors and not regular employees. Misclassifying workers can lead to serious legal consequences, including potential fines and liabilities. To differentiate between the two, consider the following factors:

  • Nature of Control: Employees are usually subject to more direct control by the employer, who dictates how and when they perform their work. Contractors, on the other hand, maintain greater control over their methods and schedules.
  • Degree of Independence: Employees typically work exclusively for the employer, while contractors may have multiple clients and offer their services to the public.
  • Tools and Equipment: Employees often use company-provided tools and equipment, while contractors generally use their own resources.
  • Taxation and Benefits: Employees have taxes withheld from their paychecks, and employers provide benefits such as health insurance and paid time off. Contractors are responsible for their taxes and do not receive employee benefits.
  • Duration of Engagement: Employees usually have an ongoing relationship with the employer, while contractors are engaged for a specific project or timeframe.
B. Complying with Employment Laws

Even though contract employees have a different legal status from regular employees, employers must still comply with employment laws and regulations that govern contract engagements. This includes:

  • Non-Discrimination Laws: Ensure that the hiring process and treatment of contract employees are in line with anti-discrimination laws and do not discriminate based on race, gender, religion, age, or other protected characteristics.
  • Work Hour Regulations: Comply with laws regarding maximum working hours, rest breaks, and overtime pay for contract employees, if applicable.
  • Payment and Taxes: Ensure that contract employees are paid correctly and on time, and comply with tax withholding and reporting requirements for contract workers.
  • Worker Safety: Provide a safe working environment for contract employees and comply with health and safety regulations.
  • Intellectual Property and Confidentiality: Clearly outline ownership of intellectual property and include confidentiality provisions in the contract to protect sensitive information.
C. Drafting a Clear and Comprehensive Contract

A well-drafted contract is essential for defining the terms and conditions of the engagement and protecting the rights and interests of both parties. When drafting a contract for a contract employee:

  • Clearly Define the Engagement: Outline the scope of work, specific tasks, and deliverables expected from the contract employee.
  • Terms of Payment: Specify the payment structure, including the amount, method of payment, and any additional expenses or reimbursements.
  • Duration and Termination Clause: Clearly state the start and end dates of the contract engagement and the conditions under which either party can terminate the contract.
  • Intellectual Property Rights: Clearly define who will retain ownership of any work or intellectual property created during the engagement.
  • Confidentiality and Non-Compete: Include provisions to protect sensitive information and prevent the contract employee from engaging in activities that may compete with the company during and after the engagement.
  • Independent Contractor Clause: Explicitly state that the contract employee is an independent contractor, not an employee, to reinforce the proper classification.
  • Dispute Resolution: Include a clause outlining how any disputes will be resolved, whether through arbitration or legal action.

3. Sourcing Contract Employees

Sourcing Contract Employees

Once you have defined your contract employee needs and addressed the legal considerations, it’s time to explore various sourcing strategies to hire a contract employee. This section will cover the different approaches to sourcing contract employees, including considering in-house resources, leveraging freelance platforms and job boards, and engaging staffing agencies.

A. In-House vs. Outsourcing

Before looking outside your organization for contract employees, consider whether you have suitable in-house resources available. Assess the skills and expertise of your current employees to see if any of them can take on the contract roles. Utilizing in-house resources can offer several advantages:

  • Familiarity with Company Culture: Existing employees are already familiar with the company’s values, culture, and processes, which can lead to smoother integration into the project.
  • Cost Savings: Reassigning existing employees to contract roles may be more cost-effective than hiring external candidates, as you avoid recruitment and onboarding expenses.
  • Consistency and Continuity: In-house contract employees can provide greater consistency and continuity in project execution, as they already have knowledge of the company’s operations.

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B. Using Freelance Platforms and Job Boards

Freelance platforms and job boards have become popular resources for sourcing contract employees with specialized skills and expertise. These online platforms connect businesses with a vast pool of freelance professionals from various industries. When using freelance platforms and job boards:

  • Create Detailed Job Listings: Craft clear and comprehensive job postings that outline project requirements, scope of work, duration, and desired qualifications. Providing specific details will attract more suitable candidates.
  • Review Portfolios and Reviews: Freelance platforms often allow candidates to showcase their portfolios and receive reviews from previous clients. Take the time to review these materials to assess their capabilities and professionalism.
  • Communicate Clearly: When interacting with potential candidates, communicate the project’s details, expectations, and timelines clearly to gauge their interest and availability.
  • Use Multiple Platforms: Utilize multiple freelance platforms and job boards to reach a broader pool of candidates and increase your chances of finding the right match.
C. Engaging Staffing Agencies

Staffing agencies specialize in talent acquisition and can be valuable partners in sourcing contract employees. They have access to a network of pre-screened candidates, making the hiring process more efficient. When engaging staffing agencies:

  • Define Your Requirements Clearly: Provide the staffing agency with a detailed description of your project’s requirements, including specific skills, qualifications, and any other essential criteria.
  • Evaluate the Agency’s Expertise: Choose a staffing agency that has experience in recruiting for your industry or niche. A specialized agency is more likely to understand your unique needs and find suitable candidates.
  • Review Candidate Profiles: The agency will present you with candidate profiles that match your criteria. Take the time to review these profiles and conduct interviews to ensure a good fit.
  • Discuss Contract Terms: Clearly communicate the terms of the contract, including compensation, duration, and any other relevant details, to the staffing agency.

4. Evaluating and Selecting Contract Candidates

Evaluating and Selecting Contract Candidates

The process of evaluating and selecting contract candidates is crucial to hire a contract employee who can successfully contribute to your project. This section outlines the steps involved in the selection process, including reviewing resumes and portfolios, conducting interviews, assessing technical skills and expertise, and checking references.

A. Reviewing Resumes and Portfolios

When you receive applications from contract candidates, begin by reviewing their resumes and portfolios. Look for the following key aspects:

  • Relevant Experience: Check if the candidate has relevant experience in the specific domain or industry related to your project. Prior experience in similar projects can be a valuable asset.
  • Accomplishments: Look for achievements and results in their previous work. Assess how their contributions led to successful project outcomes.
  • Skills and Expertise: Identify the skills and competencies highlighted in their resume and portfolio that align with the requirements of your project.
  • Consistency: Ensure that the candidate’s resume matches the information provided in their portfolio and other application materials.
  • Quality of Work: Evaluate the quality of the candidate’s previous work samples in their portfolio to gauge their professionalism and attention to detail.
B. Conducting Interviews

The interview stage is an opportunity to interact directly with the shortlisted candidates and assess their suitability for the contract position. During the interview process:

  • Prepare Relevant Questions: Develop a set of interview questions that delve into the candidate’s skills, experiences, problem-solving abilities, and alignment with the project’s goals.
  • Evaluate Communication Skills: Observe how effectively the candidate communicates their ideas, as clear communication is vital for seamless project collaboration.
  • Cultural Fit: Assess how well the candidate’s work style and values align with your company’s culture and values.

Related Article: Hiring for Cultural Fit vs Hiring for Skills

  • Project Understanding: Gauge the candidate’s understanding of the project’s objectives and how their expertise can contribute to its success.
  • Flexibility and Adaptability: Inquire about the candidate’s ability to adapt to new challenges and work within the project’s scope and timeline.
C. Assessing Technical Skills and Expertise

Apart from interviews, it’s essential to assess the candidate’s technical skills and expertise directly related to the project. Depending on the nature of the work, you can conduct skill assessments, practical tests, or technical assignments to evaluate their abilities. These assessments should align with the specific tasks and responsibilities of the contract role.

  • Coding Challenges: If the project involves software development or coding, provide coding challenges or review code samples to evaluate their programming skills.
  • Design Tasks: For creative projects, request design samples or ask candidates to complete a design task that aligns with the project’s requirements.
  • Problem-Solving Exercises: If problem-solving is critical to the project, present hypothetical scenarios and observe how candidates approach and solve them.
D. Checking References

Before finalizing your decision, conduct reference checks to validate the candidate’s claims and gain insights from their previous employers or clients. When checking references:

  • Contact Relevant Referees: Reach out to individuals who have directly supervised or worked closely with the candidate on similar projects or tasks.
  • Ask Relevant Questions: Inquire about the candidate’s performance, work ethic, communication, ability to meet deadlines, and any other relevant attributes.
  • Feedback Verification: Cross-reference the information gathered during the reference check with the candidate’s resume and interview responses to ensure consistency.

5. Negotiating Contract Terms

Negotiating Contract Terms

Negotiating contract terms is a critical step in the process of how to hire a contract employee. This stage involves reaching a mutual agreement between the hiring organization and the contract employee on various aspects of the contract engagement. This section covers key elements of contract negotiation, including compensation and payment structure, deliverables and milestones, intellectual property rights, and non-disclosure and confidentiality agreements.

A. Agreeing on Compensation and Payment Structure

Compensation is a fundamental aspect of the contract engagement and should be agreed upon before the project commences. When negotiating compensation:

  • Market Rate Analysis: Research the market rates for similar contract roles with similar skill sets and expertise. This ensures that your offer is competitive and attractive to potential contract employees.
  • Hourly vs. Project-Based Pay: Determine whether the contract employee will be paid on an hourly basis or based on completing specific project milestones. Each approach has its advantages and may depend on the nature of the project.
  • Payment Schedule: Agree on the frequency of payments (e.g., weekly, bi-weekly, or monthly) and the mode of payment (e.g., bank transfer, PayPal, etc.).
  • Invoicing and Terms: Outline the process for invoicing and the payment terms, including any applicable late payment fees or penalties.
B. Outlining Deliverables and Milestones

Clearly defining deliverables and milestones is essential for ensuring that the contract employee’s work aligns with the project’s objectives. During negotiation:

  • Specificity: Clearly specify the expected deliverables, outlining both the quantity and quality standards.
  • Milestones and Deadlines: Set measurable milestones and deadlines that help track progress and ensure timely completion of the project.
  • Revision and Approval Process: Agree on the process for reviewing and approving deliverables, including feedback loops and potential revisions.
C. Defining Intellectual Property Rights

Intellectual property (IP) rights are vital, especially when contract employees create original work during the engagement. During negotiation:

  • Ownership of Work: Clearly define who will retain ownership of the intellectual property created during the contract engagement. In most cases, the hiring organization will want to retain full ownership.
  • License and Usage Rights: Specify any licensing or usage rights that the contract employee may retain for their portfolio or personal use, while still granting the organization necessary usage rights.
  • Third-Party Materials: Address the use of any third-party materials or pre-existing intellectual property in the project and ensure that proper permissions and licenses are obtained if needed.
D. Establishing Non-Disclosure and Confidentiality Agreements

Non-disclosure and confidentiality agreements are essential for safeguarding sensitive information shared during the contract engagement. During negotiation:

  • Confidential Information Definition: Clearly define what constitutes confidential information, which may include project details, client information, trade secrets, or proprietary data.
  • Duration of Confidentiality: Specify the duration for which the contract employee must maintain confidentiality, even after the contract ends.
  • Restrictions on Disclosure: Prohibit the contract employee from disclosing or using confidential information for any purpose other than the project’s execution.
  • Enforcement and Remedies: Outline the consequences for breaching the confidentiality agreement, including potential legal action and remedies.

6. Onboarding and Integration

Onboarding and Integration

Once you have successfully negotiated contract terms and selected the right candidate to hire a contract employee, it’s time to focus on the onboarding and integration process. Effectively onboarding contract employees ensures a smooth transition into their role, fosters collaboration with the existing team, and sets the stage for a productive working relationship. This section covers key steps in the onboarding and integration of contract employees, including introducing them to the team, providing necessary resources and tools, clarifying communication channels, and setting expectations and goals.

A. Introducing the Contract Employee to the Team

Making contract employees feel welcomed and integrated into the team is essential for building a positive work environment. Facilitate the introduction by:

  • Team Introduction: Organize a team meeting to introduce the contract employee to their new colleagues. Encourage team members to share their roles and responsibilities and offer a warm welcome.
  • Role Explanation: Clearly outline the contract employee’s role within the team and the project’s overall objectives. Emphasize how their contributions will be crucial to the project’s success.
  • Designate a Buddy: Assign an existing team member as a buddy or mentor for the contract employee. This person can help with any questions and provide guidance during the initial days.

Related Article: Stages of Team Development

B. Providing Necessary Resources and Tools

Ensure that the contract employee has access to all the necessary resources and tools they need to perform their job effectively. This includes:

  • Equipment and Software: Provide the required hardware and software, such as laptops, specific software licenses, or any other tools relevant to their role.
  • Project Documentation: Offer access to relevant project documentation, guidelines, and any other reference materials.
  • Training and Onboarding Materials: If specific training or onboarding is required, make sure the contract employee receives the necessary materials and support.
C. Clarifying Communication Channels

Effective communication is vital for seamless collaboration between the contract employee and the team. Clarify communication channels by:

  • Point of Contact: Designate a point of contact within the team who will act as the main communication link for the contract employee. This person can address questions and facilitate communication.
  • Team Meetings and Updates: Ensure that the contract employee is included in relevant team meetings and updates to stay informed about project progress and changes.
  • Communication Tools: Identify the primary communication tools the team uses, such as email, messaging apps, or project management platforms.
D. Setting Expectations and Goals

To ensure that the contract employee’s work aligns with the project’s objectives, set clear expectations and goals. This involves:

  • Project Overview: Provide an overview of the project’s scope, objectives, and desired outcomes. Reinforce how the contract employee’s role contributes to the project’s success.
  • Performance Expectations: Communicate the specific performance expectations, quality standards, and key performance indicators (KPIs) for the contract employee’s work.
  • Project Timeline: Clarify any critical milestones and deadlines the contract employee needs to meet.
  • Feedback and Evaluation: Establish a feedback mechanism for regular check-ins and evaluations to monitor progress and address any concerns promptly.

7. Managing and Monitoring Contract Employees

Managing and Monitoring Contract Employees

Effectively managing and monitoring contract employees is crucial to ensure the successful execution of the project and the achievement of desired outcomes. This section covers key strategies for managing contract employees, including establishing progress-tracking mechanisms, maintaining regular check-ins and updates, and addressing performance issues and concerns.

A. Establishing Progress Tracking Mechanisms

To keep the project on track and monitor the contract employee’s progress, establish effective progress-tracking mechanisms. This involves:

  • Project Management Tools: Utilize project management software or tools to track task progress, deadlines, and overall project status. This enables real-time visibility into the project’s advancement.

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  • Milestone Reviews: Regularly review milestone achievements and deliverables to ensure they align with the project timeline and quality standards.
  • Key Performance Indicators (KPIs): Define KPIs for the contract employee’s work and regularly assess their performance against these metrics.
  • Reporting and Documentation: Request periodic reports or updates from the contract employee to document their progress and activities.
B. Maintaining Regular Check-ins and Updates

Regular communication with contract employees is essential for fostering collaboration and addressing any concerns. Maintain consistent check-ins and updates by:

  • Scheduled Meetings: Set up regular meetings with the contract employee to discuss project progress, challenges, and upcoming tasks.
  • Feedback Sessions: Provide constructive feedback on the contract employee’s work, acknowledging achievements and offering suggestions for improvement.
  • Open Dialogue: Encourage open communication and be receptive to any questions or concerns raised by the contract employee.
  • Team Involvement: Involve the contract employee in team meetings and updates to ensure they are informed about changes and developments.
C. Addressing Performance Issues and Concerns

Addressing performance issues and concerns promptly is essential for maintaining project productivity. If you observe any performance challenges or receive feedback from team members, take the following steps:

  • Identify the Issue: Determine the root cause of the performance issue or concern and gather relevant information to assess the situation objectively.
  • Private Discussions: Hold private discussions with the contract employee to discuss concerns and offer support and guidance.
  • Provide Resources: If necessary, provide additional resources, training, or support to help the contract employee improve their performance.
  • Performance Improvement Plan: If performance issues persist, work with the contract employee to create a performance improvement plan with clear goals and timelines.
  • Termination (if necessary): In extreme cases, when performance issues cannot be resolved, follow the termination process outlined in the contract.

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8. Renewal or Termination of Contract

Renewal or Termination of Contract

As the contract engagement for a contract employee nears its end, it’s essential to assess whether to renew the contract or proceed with its termination. This section covers key considerations for evaluating the contract period, assessing the need to hire a contract employee for renewal, and effectively handling contract completion or termination.

A. Reviewing the Contract Period

Before making any decisions regarding renewal or termination, review the contract period to understand the timeline and duration of the engagement. Take note of the following:

  • Contract Expiration Date: Identify the exact date when the contract is set to expire.
  • Notice Period: Check for any notice requirements stated in the contract, which may dictate the timeframe for communicating renewal or termination decisions.
  • Performance and Deliverables: Evaluate the contract employee’s performance and the quality of deliverables produced during the engagement.
B. Assessing the Need for Renewal

The decision to renew a contract should be based on various factors, including project progress, the contract employee’s performance, and ongoing project needs. When assessing the need for renewal:

  • Project Progress: Evaluate how much of the project has been completed and whether additional time is required for the successful achievement of remaining objectives.
  • Performance Evaluation: Consider the contract employee’s performance and their contributions to the project. Assess whether their skills and expertise are still necessary for project completion.
  • Project Extension: Determine if any changes or modifications to the project scope warrant an extension of the contract.
  • Budget and Resources: Review the available budget and resources to determine if a contract renewal is financially feasible.
C. Handling Contract Completion or Termination

When the contract period is complete or a decision is made to terminate the contract, follow these steps to ensure a smooth process:

  • Notice and Communication: If the contract is ending, provide the contract employee with the required notice period, as specified in the contract. Communicate the decision clearly and professionally.
  • Project Handover: If applicable, facilitate the handover of any ongoing tasks or responsibilities to other team members.
  • Performance Review: Conduct a performance review with the contract employee, acknowledging their contributions and offering constructive feedback.
  • Feedback and References: Offer feedback and, if appropriate, provide references for the contract employee’s future engagements.
  • Legal and Financial Obligations: Ensure that all legal and financial obligations, including final payments and settlements, are addressed as per the terms of the contract.

9. Handling Legal and Financial Obligations

Handling Legal and Financial Obligations

As the contract engagement concludes, it’s essential to fulfill your legal and financial obligations to the contract employee. This section covers key considerations for making timely payments and invoicing, providing necessary documentation for tax purposes, and understanding liability and insurance.

A. Making Timely Payments and Invoicing

Timely and accurate payments are critical to maintaining a positive relationship with the contract employee. To handle financial obligations effectively:

  • Invoice Review: Review the contract employee’s invoices promptly and ensure that they align with the agreed-upon compensation and payment terms.
  • Payment Schedule: Adhere to the agreed-upon payment schedule and make payments on time to avoid any delays or disputes.
  • Expense Reimbursement: If the contract employee is entitled to expense reimbursements, ensure that their expenses are reimbursed in a timely manner.
  • Record Keeping: Keep meticulous records of all financial transactions related to the contract engagement for accounting and auditing purposes.
B. Providing Necessary Documentation for Tax Purposes

Contract employees are typically responsible for handling their own taxes. To facilitate this process:

  • Provide Tax Forms: Furnish necessary tax forms, such as 1099 forms in the United States, that report the contract employee’s income for tax reporting purposes.
  • Income Statements: If required, provide income statements or pay stubs that summarize the contract employee’s earnings during the engagement.
  • Tax Information Sessions: Offer information sessions or resources to help contract employees understand their tax obligations and filing requirements.
C. Understanding Liability and Insurance

During the contract engagement, it’s essential to clarify liability and insurance matters to protect both parties. Consider the following:

  • Liability for Deliverables: Determine who bears liability for the quality and accuracy of the deliverables produced by the contract employee during the project.
  • Insurance Coverage: Check whether your organization or the contract employee needs to maintain liability insurance for the project.
  • Indemnification Clause: Review the indemnification clause in the contract, which addresses liability for potential losses or damages.


Effective contract employee management is the key to harnessing the full potential of contract engagements and maximizing the benefits they offer to your organization. By following the best practices outlined in this guide, you can successfully hire a contract employee, build strong working relationships with them, seamlessly execute projects, and achieve long-term business success.

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