The Real Reason Small Businesses Aren’t Hiring

Economists and politicians who are waiting for small business owners to resume their role as job creators are likely to be waiting a long time. The oft-touted role of small businesses as job creators is changing.

not hiring

Here’s how a friend of mine (also a small business owner) puts it, “This may be blasphemous to say,” he said in a recent email conversation with me, “but today’s small businesses don’t generate jobs like they used to.”

He had recently talked to several entrepreneurs about when and why they hired staff and found that every single one of them contracted out as much work as possible until they had absolutely no choice but to hire full-time employees. (In fact, one of the few people who had recently hired hire full-time employees said he hired them only to manage all his contractors.)

This approach makes a lot of sense to me and, apparently, to lots of other small business owners. The latest Global Business Survey 2012 from online hiring company Elance found small business’s use of independent contractors in general, and online contractors in particular, continues to grow. Nearly three-fourths of businesses Elance surveyed plan to hire more contractors in 2012 than 2011, with online contractors accounting for the bulk of the new hires.

A whopping 84 percent of business owners in the survey say hiring online gives them an advantage over their competitors. Cost savings averaging 53 percent compared to hiring a full-time employee was the number-one advantage cited, but small business owners also appreciated the speed of hiring online and the ability to access talent not available locally.

Specifically what types of talent are these entrepreneurs looking for? The most in-demand professionals were Web programmers (cited as most valuable by 70 percent of respondents) and designers (61 percent). Close behind were content developers (38 percent) online marketers to handle search engine marketing/SEO or social media (32 percent) and mobile developers (28 percent). I’m willing to bet mobile developers start zooming up that ladder pretty quickly.

The online contractor trend is not going away. Far from it.  On average, survey respondents predict that in five years, more than half (54 percent) of their workforce will be online workers. Cost savings isn’t the only reason for that change.  For 40 percent of the respondents, “the quality of talent online is better than they can find locally.”

If they didn’t have access to online talent, two-thirds percent of small business owners say they would have found different means to hire a contractor. And about 33 percent say they would have either done the work themselves or not done it at all (face it: You know how often things you don’t have time for get put on the back burner…sometimes permanently). A mere 3 percent would have hired a permanent employee.

How about you? Are you planning to hire this year and, if so, will it be a permanent employee or a contractor?

Not Hiring Photo via Shutterstock


Rieva Lesonsky Rieva Lesonsky is a Columnist for Small Business Trends covering employment, retail trends and women in business. She is CEO of GrowBiz Media, a media company that helps entrepreneurs start and grow their businesses. Visit her blog, SmallBizDaily, to get the scoop on business trends and free TrendCast reports.

20 Reactions
  1. As a small business owner myself I fully agree. Work with contractors associates etc is the way I go. I would love to hire but it is just not cost effective with all the red tape. Hiring someone to manage the contractors is not a bad idea. Taxes and lack of loans for small businesses are the main reasons it is not cost efficient these days.


  2. “every single one of them contracted out as much work as possible until they had absolutely no choice but to hire full-time employees”

    This single statement should be researched as to the why’s?

    I do believe in the right economic climate small businesses would hire more part time and full time employees than the current climate.

    While I don’t believe that any single one issue (i.e. taxes being one single issue, health care another single issue) makes or breaks a decision to hire, the current U.S. policies combined push small businesses to do more with less.

  3. What I find is that the regulations(yes most often govt)and costs related to hiring (as in health care) a full time employee are often prohibitive for a small biz. That’s why so many are choosing the contractor route. This is true with several biz I mentor. Reduce regulations and give tax incentives to small biz for hiring; I’ve said this 1000 times.

    • CASUDI, agreed. Reduce regulations, reduce paperwork requirements, and give tax incentives to hire (scaled incentive based on part time to full time).

    • Nailed it. Hiring a contractor means you pay only for their work on the projects you give them. Hiring an employee means you have to start paying payroll taxes, disability insurance, health care, unemployment and a litany of other costs that regulations impose.

  4. I don’t think it’s specifically about too many regulations. While that might be a factor, the nature of work has changed. Why pay for a full-time person, if you have more project-based needs. Obviously this applies to service-based businesses, but technology has really enabled business owners to get the work done without hiring.

  5. Regulations and paperwork are an issue. But what’s changed is that it’s easier to find contractors and easier to hire them at a distance, at least for certain types of work. I mean 10 years ago, you didn’t have an Elance. Knowledge workers lend themselves readily to contract work virtually. When it’s so easy to bring on a contractor, versus the headaches of dealing with onboarding employees and setting up systems to comply with paperwork, who wouldn’t choose contractors, at first?

    The challenge becomes later on, where it’s hard to get continuity from contractors — and hard to grow your internal collective intellectual capital when you’re constantly hiring hired guns. At that point, hiring employees doesn’t seem like such a bad deal because you realize you have a lot more to lose by NOT hiring employees.

  6. All the comments above are true: outsourcing and technology automation is less expensive for certain project activities – website design, marketing collateral, graphic design, and sometimes online trouble ticket systems. But these activities still require people to design and develop these tools and services as well as people (contractors) to perform the services. I think the key trend is that small businesses are using “economies of scale” techniques that large companies have been using for years, and thus driving down their costs of operations. And in the process, creating new jobs for entrepreneurial minded people to hang out a shingle and become their own small business.

  7. Well said Rieva and I fully agree with Anita’s insights too. Hiring for “project-based” jobs and needs are where contractors are great. We use elance all the time but we also have hired about 15 new employees in the last year so there’s a balance – at least for us. Web programmers and designers are great ways to utilize online contractors and services like elance and odesk make it even easier since you can plug into that large community quickly. We’ve done several hires for small projects of $100 and less on elance and had great success…it’s perfect for those areas where you need some expertise that your current staff may not exactly have so it allows a job or project to be completed with a level of excellence that may not have been achieved if you relied solely on your employees. Great stuff and I like the statistics you included about the most in-demand professionals for contract jobs/work.

  8. Yes, outsourcing makes a whole lot of sense for small biz owners and entrepreneurs just starting out. Especially when you consider that you can hire skilled American expats living abroad, for 50% less than the usual staffing costs. The fact is that there are highly qualified (even over-qualified) North American expats living in Mexico, happy to work for far less than they were earning back home. This is a HUGE advantage for American businesses, and one that hasn’t been truly realized yet.

  9. At 12.31 I posted a simple data scraping job on

    At 12.35 I reviewed the first 3 bids

    At 12.36 I awarded the job

    At 12.51 I had a 67 page document with quotes scraped from 137 web pages

    If you have simple repetitive work doing post it on elance so your team can get on with more interesting work and make you more money.


  10. I would argue that hiring contractors IS still hiring as it permits many more to have the freedom to work for themselves while earning enough to actually live on. There would be more employees hired if there weren’t so many requirements forced upon all of us on both sides of that equation.

    The reason some businesses – primarily those that are larger – will still hire employees is for control and keeping pay low. It is easier for consultants to choose to replace them and move on if those who hire them try to impose unrealistic expectations or reduced compensation on them or fail to appreciate their contributions.

  11. Lots of great comments. I agree Gail, it is still hiring. And the more contractors who get hired, the more money they make, and subsequently spend in their communities. Good for the economy.

    I want to point out one stat though. Regarding the contractor who starts a solo business: That business is not counted by the BLS as a job created.

    • Thanks, Gail. I mean “Duh” a job is a job, even if the Bureau of Labor Statistics doesn’t count it. I use my contractor graphic artist about one third of her time. She has two other clients like me. Voila, a an employee isn’t created, but a job is. Enough of those jobs and our economy starts floating a lot more boats. As far as regulations and taxes go: If there were none of either, wouldn’t we still hire contractors rather than employees if it were cheaper–and remained that great economic invention a “variable expense”?

  12. I think it’s a simple case of money – contractors, for the most part, are cheaper, and the majority of small businesses won’t have enough work to make it worthwhile taking on a full-time/part-time employee for a singular job role.

  13. Great post! I can attest to the fact that so many entrepreneurs and small/medium businesses are now hiring virtual support as our company has seen a 300% increase in the past 7 months! Many of our new clients are novice to the idea and we help them in their process of hiring virtual admin support, customer support, designers, etc…

  14. I find that if we need more help on a daily basis, hiring an outside contractor can be more costly than just hiring a new employee. Plus the employee can be trained the way I want them to be trained. Also, if you hire an outside contractor, isn’t that a job? I mean the contractor has to hire someone AND make a profit or he wouldn’t be in business long.

  15. Several years after this article was published and we’re still seeing a huge trend towards hiring people like Virtual Assistant online and shunning the traditional route!