Subcontractors vs employees — which actually costs more?

The comparison usually goes: "I pay my guys $32 an hour and the sub wants $55. Obviously employees are cheaper."

That comparison is wrong, and it has led a lot of contractors into hiring decisions that did not work out.

The short answer: compare fully burdened employee cost against the sub rate. Burdened cost runs 1.25 to 1.6 times base wage. Subs cost more per hour but cost nothing when there is no work, which makes them cheaper below roughly 60 to 70% utilisation.

What an employee actually costs

Base wage is somewhere between 60 and 80% of what an employee costs you. The rest is real money that leaves the business.

That is 1.41 times base wage before anything else, and it is a conservative version — workers' compensation in roofing runs at the high end of that range.

But there is a second adjustment, and it is larger.

The utilisation adjustment

You pay an employee for 2,080 hours a year. They do not spend 2,080 hours on jobs.

Subtract vacation, statutory holidays, sick days, travel between sites, loading, shop time, meetings, training, and the slow weeks in February. What is left is 60 to 75% of hours paid for most trades businesses.

Which means the burdened cost has to be spread across fewer billable hours:

$64.49. Against a sub at $55.

The comparison that looked like $32 versus $55 is actually $64 versus $55, and it points the other way.

Where the comparison flips back

That is not the end of it, because the employee number assumes 70% utilisation. If you have enough work to keep someone genuinely busy, the arithmetic improves fast.

The break-even against a $55 sub sits around 82% utilisation.

Which gives you the actual rule, and it has nothing to do with hourly rates:

• Consistent work above roughly 80% utilisation → employees are cheaper
• Seasonal, lumpy, or unpredictable work → subs are cheaper
• You do not know your utilisation → you cannot answer this question yet

That last line is where most contractors are, and it is why the decision usually gets made on feel.

The three things that matter more than the rate

Even when the arithmetic is clear, it is not the whole decision.

1. Risk transfer. A sub carries their own insurance, their own workers' compensation, and their own liability for their work. With employees, all of that sits with you. In high-risk trades that is worth real money and real sleep — but only if you actually verify the certificates. A sub whose coverage lapsed is an employee with extra steps and worse paperwork, and in many jurisdictions the authorities will treat them that way.

2. Control and quality. You can direct an employee. You can specify an outcome with a sub. If your differentiator is consistency and customer experience, employees give you far more control over both. If the work is commoditised and specification is straightforward, subs are fine.

3. Capacity that does not disappear. An employee is available next week. A good sub might be. In a busy season, the crews you can actually deploy are the ones on your payroll — which is why businesses that run entirely on subs often find their growth capped by other people's schedules.

The hybrid most established contractors land on

Very few successful trades businesses are purely one or the other. The common structure:

A core crew of employees sized to your reliable baseline — the volume you can count on in a bad month, not a good one. These people are highly utilised, which is where employees are cheapest, and they carry your standards.

Subs for the peak. The work above baseline is variable, so it should sit on variable cost. Paying a premium per hour for capacity you only need sometimes is correct.

Subs for specialist work you do not do often enough to keep someone sharp at.

The error most contractors make is sizing the core crew to their best month. Then February arrives and you are paying full burden for people with nothing to do, which is precisely the situation where employees are most expensive.

Size the permanent crew to the trough, not the peak.

Getting your own numbers

Three calculations, and none of them are difficult.

Your burdened rate. Take one employee's total cost for last year — wages, taxes, workers' comp, benefits, vacation, vehicle, phone, tools — and divide by hours paid. That is your real hourly, and it will be higher than you expect.

Your utilisation. Take job-coded hours for last year and divide by hours paid. If you do not code hours to jobs, this is the strongest argument for starting.

Your cost per productive hour. Burdened annual cost divided by productive hours. That is the number to compare against a sub rate.

Do this once and the decision stops being philosophical.

The classification line

One caution that is worth more than the arithmetic.

If someone works only for you, on your schedule, with your tools, under your direction, they are an employee regardless of how you pay them. Getting this wrong is not a grey area — it is back taxes, penalties, and potentially unpaid workers' compensation premiums assessed retroactively.

The rules vary by jurisdiction and the tests are specific. If a sub of yours looks a lot like an employee in practice, that is worth an hour with an accountant before it is worth an hour with a spreadsheet.

The decision, in one line

Employees are cheaper when you can keep them busy. Subs are cheaper when you cannot.

Everything else — the risk transfer, the control, the availability — modifies that, but does not replace it. And you cannot apply it at all until you know your burdened rate and your utilisation, which is why those two numbers are worth the afternoon it takes to find them.

The costs that sit outside the hourly comparison

Both numbers so far are labour costs. Neither captures what each arrangement costs you in management, cash and risk — and those differences are large enough to move the decision.

Subs cost you time. Finding them, checking certificates, scheduling around their other customers, chasing them when they do not show, and inspecting work you did not supervise. For a business running several subs this is comfortably a day a week of owner attention — and owner attention is the scarcest resource in a trades business. If the hourly comparison is close, the tiebreaker is usually whichever option absorbs less of your week.

Subs cost you cash timing. Subs generally invoice on completion and expect payment in fifteen to thirty days. Your customer might pay in forty-five. Employees are worse on one axis — payroll runs every two weeks regardless — but better on another: payroll is predictable, and a sub invoice for $38,000 landing three weeks before the customer pays is exactly the squeeze that empties an account.

Employees cost you commitment. The burdened rate quietly assumes you can end the arrangement if work dries up, and in practice you cannot do that quickly, cheaply, or without damage to the people who stay. Termination costs, notice periods and reputation in a small trades labour market are all real. A sub relationship ends when the job ends.

Employees build something; subs do not. Every hour an employee works, they get better at the way your business does things. That accumulates into consistency, into training capacity, and eventually into someone who can run a crew without you. Hours bought from a sub produce a finished job and nothing else.

That last point is the one that decides it for most owners planning an exit. A business whose capability lives in its employees is saleable. A business whose capability lives inside other people's companies is a broker with a truck — and buyers price it accordingly.

Common questions

What is a fully burdened labour rate?

Base wage plus payroll taxes, workers compensation, benefits, vacation and statutory pay, vehicle, phone, tools and training. It typically lands between 1.25 and 1.6 times base wage depending on trade and what you provide. Costing jobs at base wage understates labour on every job you ever price.

At what point do employees become cheaper than subs?

Around 80 percent utilisation for most trades businesses, though it depends on your burdened rate and local sub pricing. Below that, the cost of paying for unproductive hours outweighs the hourly saving. This is why the permanent crew should be sized to your slow season rather than your busy one.

What are the risks of treating employees as subcontractors?

If someone works only for you, on your schedule, with your tools and under your direction, authorities will generally treat them as an employee regardless of how they are paid. The exposure is back taxes, penalties and retroactive workers compensation premiums. The tests vary by jurisdiction and it is worth an hour with an accountant rather than a guess.