Staff augmentation vs independent contractors

Staff Augmentation vs. Independent Contractors: Which Is Best for Your Company in 2024?

According to The Wall Street Journal, the next wave of remote work is outsourcing jobs overseas. The COVID pandemic and the rise of remote collaboration tools such as Zoom and Google Workspace made companies rethink their hiring strategies as they learned that employees and contractors could be productive from afar.

Moreover, filling positions from abroad allows tech companies to respond to U.S. labor shortages, add talented workers, and cut labor costs, easing pressure on inflation.

For its part, international tech talent increasingly values flexibility which can prevent burnout, and seek ways to remain culturally relevant by adopting the values and business ethics of its foreign employers.

Companies use flexible solutions, such as staff augmentation and hiring independent contractors, because they don’t have to pay for health insurance, bonuses, and other expenses for contract engineers as they do for in-house employees. We will review and compare these two hiring models and offer guidance on where to find international engineering talent or post a contract job.

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What is staff augmentation?

Staff augmentation is a hiring model using full-time software engineers from outsourcing agencies. These engineers temporarily join the development team led by the employer’s project manager. This means that, unlike assigning or handing over an entire project to an outsourcing agency, companies manage the programmers and communicate with them directly. Companies hire developers via staff augmentation to speed up the development process, reduce technical debt, and improve time-to-market.

Key benefits and unique features of staff augmentation

Staff augmentation is especially good for specific jobs — when businesses need to experiment or they have backlogged projects or tasks with limited planning horizons. If companies don’t know for sure how long these projects are going to take, then hiring people in-house may be inefficient because they have to spend a couple of months recruiting and integrating employees into the team. In contrast, hiring contractors using staff augmentation is a faster and more flexible way to close skill gaps.

Hiring speed and a global talent pool are even more critical for fast-growing startups that need to launch a product and close another round of investment in a short period. That’s where staff augmentation is most effective because contractors are readily available and much easier to replace than in-house engineers.

In addition, organizations don’t have to worry about retirement contributions, health insurance, office expenses, wellness reimbursements, or paid time off — these costs only apply to full-time employees.

Finally, staff augmentation services typically provide time-proven, locally-compliant contracts and invoicing to simplify the payment process, as well as secure IP transfer to protect companies from sensitive data leaks.

Hiring engineering contractors from outsourcing agencies typically involves:

  • Defining technical requirements.
  • Researching an agency that has experience in the required domain.
  • Discussing developer rates.
  • Conducting interviews with candidates.
  • Signing a contract.

Disadvantages of staff augmentation

It may take additional several weeks of sourcing and hiring developers if the agency doesn’t have available talent. Alternatively, companies may turn to a staff augmentation marketplace that partners with several outsourcing agencies to get a broader talent pool with faster hiring procedures.

In addition, contractors hired through staff augmentation may be less connected to the company culture. Managers need to set clear expectations and goals for contractors, as well as a detailed project description, because contractors may communicate less and share less knowledge with different teams within the company.

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Hiring independent contractors

An independent contractor, according to Investopedia, is a self-employed person contracted to provide services for a company as a non-employee. As a result, independent contractors do not have taxes withheld from their paychecks. Instead, they must track their income and pay income taxes through estimated quarterly payments.

Key benefits and unique features of hiring independent contractors

Hiring independent contractors is suitable for projects with a limited planning horizon. However, companies can also hire independent contractors through freelance platforms for short-term tasks.

Companies pay international contractors from their U.S. business accounts using payment methods like digital wallets or money transfer platforms like PayPal and Payoneer. They can also use global employment services providers to simplify paying independent contractors.

Hiring independent contractors requires a contract that complies with local regulations in the state where the foreign contractor is located. The contract must include the following items:

  • Description of services provided
  • The terms and duration of the project
  • Payment details
  • Non-disclosure and dispute resolution clauses

According to the Internal Revenue Service, a U.S. company should not withhold or report taxes if a foreign independent contractor meets the following conditions:

  • The contractor does not reside in the U.S. for more than 90 days during the tax year;
  • The total payment does not exceed $3,000; 
  • Payment for labor or services is made to a nonresident individual or foreign corporation that is not engaged in trade or business in the United States.

Finally, for short or occasional tasks, companies can turn to freelance websites such as Upwork to hire contractors and manage their payments.

Disadvantages of hiring independent contractors

Independent contractors, like freelancers, have no job security as their income is unpredictable. Therefore, many of them turn to multiple freelance platforms to ensure a steady flow of projects. However, such developers are less inclined to delve into the nuances of the work. Hence, clients need to think through a more detailed and clear project description to get a quality outcome.

Another way to get an effective result from hiring independent contractors is to build and maintain a pool of experienced developers who have already proven themselves.

In addition, independent contractors, like contractors hired through staff augmentation, are less engaged in the company’s culture.

Staff augmentation vs. independent contractors: Key differences

Staff augmentation Hiring independent contractors
Source of talent Staff augmentation involves software engineers working at outsourcing agencies. Independent contractors are self-employed.
Hiring process Staff augmentation agencies offer pre-screened software developers. The agency typically handles the matching process and may have HR managers that work alongside the contractors.

Staff augmentation marketplaces use a network of agencies. They have an advanced matching process and provide contractor onboarding, replacement, customer service, and simplified billing.

Hiring independent contractors involves contacting staffing agencies or freelance platforms. The employer needs to arrange interviews, onboard the developer, and manage the contract and billing process.
Benefits package Contractors from outsourcing agencies are not eligible for employee benefits such as health insurance, bonuses, and paid time off because they already receive these benefits from their agencies. Independent contractors are not eligible for employee benefits such as health insurance, bonuses, and paid time off, as they must arrange for their own insurance and retirement.
Scaling up and down The number of contractors hired through staff augmentation can easily be increased or decreased based on the project’s needs. The number of independent contractors can easily be increased or decreased based on the project’s needs.
Connection to the company’s culture Contractors hired via staff augmentation are less connected to the company’s culture. Independent contractors are less connected to the company’s culture.

While contractors who work for software agencies are employed by their software agencies, independent contractors are self-employed. Therefore, independent contractors are not eligible for employee benefits — they must provide for their own health insurance, vacation, and retirement.

In addition, independent contractors do not earn regular salaries. So, when business is slow, they earn less. As a result, their incomes can be unpredictable and more affected by the amount of available work in the market. Finally, the staff augmentation hiring process requires fewer resources because developers are already vetted and contracts are locally compliant.

There are also some nuances to guarantees. For example, you cannot guarantee that an independent contractor will not find a better offer and leave your project halfway through. A contractor hired through staff augmentation can also leave the project, but as a last resort, the agency or marketplace will provide a replacement. In addition to replacements, staff augmentation offers trial periods, developer onboarding, and customer success services.

While there are some differences, staff augmentation and hiring independent contractors offer similar benefits. Both models offer an extensive talent pool and full control over the development process because contractors work directly with the in-house team. It is also much easier to replace a contractor if the developer is not a good fit or wants to leave, compared to replacing in-house developers and paying them compensation.

The downside of both augmenting staff and hiring independent contractors is that remote contractors don’t come into the office and, therefore, are less connected to the company culture. Some companies require all their workers to come into the office as needed, even if they work remotely because working on-site increases knowledge transfer and allows for quick solutions to urgent problems. Finally, each new project is a chance to upskill the in-house team.

Where to hire a software developer as an independent contractor

In many cases, organizations use the same techniques to find an independent contractor as they use to find full-time employees. Companies can either contact staffing agencies and explain their needs or post a job on an employment website. For example, Indeed allows you to select job types such as part-time, contract, or temporary when you create a job posting. Here are some examples of where you can find independent contractors or post a contract job:

  • Hire headhunters or recruiting agencies that screen talent and earn a percentage of what companies pay contractors in the first year
  • Professional networking websites such as LinkedIn
  • Talent acquisition platforms like Hired and Dice
  • Global employment websites, such as Indeed
  • Local job boards popular with job seekers in a particular country, such as in Ukraine and in Poland
  • Freelance platforms, such as Upwork and TopTal

You can also post a contract job on your company’s website and promote it through social media platforms or contextual targeting.

Where to hire a software developer via staff augmentation

You can hire an outsourcing agency that offers staff augmentation services or find a talent marketplace that has contractors from various outsourcing companies in different countries.

The second option is a staff augmentation model with an emphasis on hiring speed and larger talent selection. One such marketplace is YouTeam, which leverages a network of software engineers from hundreds of outsourcing agencies. 

With YouTeam, a client doesn’t have to contact multiple agencies to find a professional with the right skills and experience. A greater choice of talent also means the employer has a better chance of finding the contractor that fits the company culture.

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Final thoughts

Both contracting models discussed in this article involve software engineers who temporarily join the development team led by the employer’s project manager. Unlike assigning or handing over an entire project to an outsourcing agency, companies manage programmers and communicate with them directly. In addition, it is much easier to replace the contractor if the engineer is not a good fit or wants to leave compared to replacing in-house developers, who typically need to assimilate into the company culture and receive a steady flow of tasks to keep them engaged for a long period of time.

Companies choose to hire independent remote contractors when they have established international payment procedures and work with global staffing and sourcing agencies to manage local tax obligations and working conditions. In contrast, staff augmentation typically offers a complete package of services, including the matching process, sourcing, pre-interviewing, automated billing, and customer service.

Written by
Artem Vasin

Artem Vasin is a content writer at YouTeam, blending a unique educational background from both the scientific and creative fields. He holds a bachelor's degree in Mathematics and secondary music education. The author's journey in writing began with a focus on business intelligence and OSINT. At YouTeam, Artem delved into topics surrounding recruitment and software development.

His pursuit of knowledge is reflected in his completion of courses like Reuters' Digital Journalism Foundations and Ravensbourne University London's Digital Marketing and Communication. This continuous learning journey allows him to bring fresh perspectives to the subjects he covers.

Artem's literary preferences include Philip Kotler's Marketing anthology, Daniel Goleman's Emotional Intelligence, and Isaac Asimov's Robot series.

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