"The contractor costs $120/hr. A full-time employee would be $80,000/yr. That's only $38/hr — obviously hiring is cheaper."
This logic is wrong — and it leads to bad hiring decisions in both directions.
The contractor rate and the salary are not comparable numbers. One is the total cost. The other is a fraction of the total cost. Getting this decision right requires putting both options on the same basis.
The Real Cost of an Employee
The $80,000 salary is the starting point. Here's everything else:
| Cost Component | Typical Range |
|---|---|
| Base salary | $80,000 |
| Superannuation (11.5%) | $9,200 |
| Payroll tax (varies by state, ~5%) | $4,000 |
| Annual leave (4 weeks) | $6,150 |
| Sick leave (10 days) | $3,075 |
| Workers compensation insurance | $800–$2,000 |
| Recruitment cost (amortised) | $3,000–$8,000 |
| Onboarding and training | $2,000–$5,000 |
| Equipment (laptop, phone, software) | $2,500–$5,000 |
| Office space per person | $5,000–$15,000 |
| HR administration overhead | $1,500–$3,000 |
| Management time | $3,000–$8,000 |
| Total fully-loaded annual cost | $120,000–$149,000 |
A $80,000 employee costs $104,000–$148,000 per year when you include everything. The commonly used rule of thumb is 1.4× salary for a fully-loaded cost — in this case, $112,000.
At 1,760 productive hours per year (accounting for leave and public holidays), that's an effective rate of $64/hr — not $38/hr.
The Real Cost of a Contractor or Agency
The contractor's $120/hr rate looks expensive. But what does it actually include?
A contractor at $120/hr working 1,760 hours costs $211,200/yr. But they bring their own equipment, pay their own super, and you have no leave liability, no payroll tax, and no recruitment cost.
For an agency arrangement, add a margin (typically 20–30%) on top of the worker's effective rate.
The comparison is closer than the headline numbers suggest — and the right answer depends heavily on the specific role.
When to Hire
Hiring a permanent employee makes more sense when:
- The work is ongoing and predictable. If you need someone doing this work 40 hours a week for 3+ years, the economics usually favour employment.
- Deep institutional knowledge matters. Some roles require deep understanding of your business, systems, and relationships that takes years to develop. Contractors churn; employees can accumulate this.
- You need management authority. Contractors work to a brief. Employees can be directed, managed, and developed in ways contractors legally cannot.
- The role involves sensitive IP or data. Employment relationships have clearer IP ownership and confidentiality obligations.
- Culture and team cohesion matter. Building a high-performing team is harder with high contractor turnover.
When to Outsource or Contract
Contracting or outsourcing makes more sense when:
- The work is project-based or variable. Peaks and troughs in workload favour flexible resourcing over permanent headcount.
- You need specialist skills for a defined period. A 6-month data migration project doesn't justify a permanent data engineer hire.
- Speed matters. Hiring takes 2–3 months. A contractor can start next week.
- You're testing a new function. Before committing to permanent headcount, a contractor lets you validate whether the function is needed long-term.
- The market moves fast. In technology especially, skills needed today may be automated or redundant in 3 years.
The "contractor is expensive" objection is usually based on comparing hourly rates to salary — not comparing total costs. Run the numbers properly before dismissing the contractor option.
The Hybrid Approach
Many businesses get this wrong by treating it as binary. The most effective resourcing models combine both:
- Permanent core team for ongoing, relationship-intensive, IP-sensitive work
- Contractor surge capacity for peaks, projects, and specialist skills
- Agency/outsourced functions for non-core activities (accounting, payroll, IT support)
The goal is a resourcing model where your permanent headcount cost is covered by your baseline workload, and contractors absorb the variable component.
A 3-Year TCO Comparison
For a marketing role — comparing a permanent hire vs a retained agency arrangement:
| Permanent Employee (3yr) | Agency Retainer (3yr) | |
|---|---|---|
| Annual cost | $112,000 | $96,000 |
| Recruitment (one-off) | $12,000 | $0 |
| Equipment and setup | $6,000 | $0 |
| Training | $4,500 | $0 |
| Management overhead | $9,000 | $3,000 |
| 3-Year Total | $355,500 | $291,000 |
In this example the agency is cheaper over 3 years — but delivers less control, less institutional knowledge, and less flexibility to direct the work. Whether that trade-off is worth $64,500 depends on the specific role and business context.
Sham contracting is a real legal risk in Australia. If a contractor works exclusively for you, follows your direction, and uses your equipment, the ATO and Fair Work may deem them an employee — regardless of the contract wording. Get proper advice if your contractor arrangement looks like employment.
Making the Decision
Run the numbers for your specific situation. The inputs that matter most:
- Fully-loaded employee cost (1.35–1.85× salary depending on role and state)
- Contractor or agency total cost (rate × expected hours + any management overhead)
- Time horizon (short-term favours contractors; long-term often favours employees)
- Recruitment and onboarding cost (often underestimated at $10,000–$30,000 for specialist roles)
- Productivity ramp time (new employees take 3–6 months to reach full output)
TrueOutflow has a hiring and HR vertical that models this comparison with your actual numbers — including the often-missed recruitment and ramp costs.