What is the underlying difference between contractors and employees and how can they be kept distinctive in the gig economy?

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The difference can be thought of as analogous to a buy vs. lease decision with assets. Hiring employees is a long-term investment in a person, requiring financial commitment and dedication to professional growth. Engaging contractors is a short-term investment in a needed skill or capacity gap, with no commitment beyond the time needed.Contractors are the right solution for the organization if you have short-term needs, and if you don't need to close capability or skill gaps among internal talent. Further, contractors will typically have smaller overhead costs, such as benefits, bonuses, or infrastructure (e.g., laptops). However, contractors have no obligation to stay beyond the life of their contract, and they also have no investment in business outcomes (unless their contract stipulates specific outcomes or service levels). In labor-constrained markets, contractors will come at a high cost and increase their fees upon each contract renewal.Employees are the right solution for the organization if you have long-term needs, and you are closing capability or skill gaps in the organization. Overhead costs are higher, but there is higher intrinsic value to the firm overall. On the other hand, employees' skills tend to stagnate over time if they lose motivation or become complacent in their roles. Further, firms must invest in and commit to career growth and development, in order to maximize the value of an employee to an organization.From a gig economy perspective, “gig employees” generally are like contractors in that they fill temporary needs of the organization. The difference is in how the needs of an organization are defined, which can be in a few ways, including:Skills (e.g., a Java developer)A particular project (e.g., a Java developer for this CRM implementation)A particular task (e.g., a Java developer to build this application function)Gig employees are the last type (a particular task). Their contracts are generally tied to outcomes like service providers (e.g., the Java function must meet requirements a, b and c), where contract employees are often “body shopped” into an organization to fill resource gaps, but not outcomes. Visually, one way to think of the differences is: