Man’s best friend: Dog Not Wolf (Employees vs contractors)

“If one holds his state based on mercenaries, he will be neither secure nor peaceful; for they are divided, disloyal, ambitious and without discipline… they have neither fear of God nor are loyal to fellow men.” – Niccolò Machiavelli

Substitute state with company and mercenaries with contractors as you see that there is a misalignment of goals when you use contractors.  As with all decisions in life when in doubt choose the path that is more difficult in the short-term vs the path of least resistance.

  • Hire employees in your main revenue generating activity that you know best. 
  • Hire contractors for supporting activities that require a specialized targeted skill set and economies of scale (robo-accounting, plumbing etc).

After analyzing the CRA’s definition of employee vs. contractor, it is clear that contractors are independent tools you use to do a specific task, but in order to run a scalable business, you will need employees as gears in your machine, not just free-standing tools.

Life is about discipline or regret. You need the discipline to hire employees, discipline to manage your workflow as you have to pay employees even if you don’t have work for them.  This means you may need to sacrifice your short-term income/cash flow if there is not enough work for you plus your employees.   You will need to make the required payroll source deductions every time you pay them and remit these deductions in addition to your company portion contributions to the CRA in a timely manner.

50% of your costs (money/time) should be incurred in taking your product from conception to your customer.  Simplify your business into a process (see our 3-step robo-accounting system).  Be clear what your customers can expect and say no to anything that falls outside your process.

No one has ever gotten rich doing everything for everyone:

  • In 2016, we cancelled our #1 most popular category because the customers in that category (half of our total customers) was responsible for only 10% of our revenue.
  • In 2017, we went further to give up another category because we can save 37% of our costs (time/money) by giving up 14.67% of our revenue.  When you are dealing with high-value multi-year accounts of recurring revenue you must account for Dunbar’s #.
  • Today, 95% of our revenue comes from companies that are in the sweet spot of revenue: $300,000 to $6 million per year. Anything less does not scale and can not compete with the “working at Weatherford”, or the like. Anything more, as we have learned the hard way during our oil crash, is less anti-fragile.

Train disciplined people to handle the process. Hire 2, work them like 4 and pay them like 3.  The best employees have families (read: responsibilities including mortgage and SUV payments).  The 8 hour day was a product of the 18 century, so construction trades which remain fundamentally the same can continue with the 8 hour day, but knowledge workers should use the focused 5 hour day.  We had the focused 5 hour work day from 2010-2013 and started it again with one employee in March 2017. We have seen first hand that our focused 5 hour work day reduces absences, stress and increases efficiency.

Shifts under 5 hours, employees are not entitled to any breaks.  Lunch and breaks during the typical workday are not used to re-energize or restore attention.  In our office’s case, they are spent eating lunch late at our desks in front of the computer, while other workplaces time is lost strolling in late after getting caught in line at Tim Hortons. Back in 2010-2013, as owners, we worked 10+ hour days and we were much more efficient running two employees on separate 5-hour shifts (8am-1pm and the second person from 1pm-6pm).

Calculating the wage. If you pay someone $20 per hour, the employee should also “pay you” at least $40 per hour ($20/hour to pay for themselves and $20/hour for your).  You have to account for the payouts you are responsible for when you have staff: statutory holidays, 4% vacation and eventually termination pay.  Profit-per-employee is an important metric to keep your business on the right path.

Retention. A bonus, x should be paid contingent on a job well done. At the end of the year and an amount equal to x is put into a reserve which you invest risk-free.  After y-years of building the reserve, the employee is allowed to withdraw 1/yth of the reserve.  If they leave they could be walking away from y-years worth of bonuses sitting in the reserve.

Industry examples. 

  1. Fast food (dozen+ of our customers were awarded Golden Fork awards)- should hire employees and contract out hood fan/duct cleaning (every 6-months), Robo-Accounting.
  2. Salons– hire employees and if they pay exclusively commission they can contract out the cleaning to ensure the tools, equipment and furniture and cleaned and sanitized properly.
  3. Manufacturing/Engineering/Construction should hire employees for everything except the specialized trade work (plumbers, electricians etc.)
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