© 2019 Pamela Rosen

How Contract Employees Work

January 27, 2015

 

I've been a professional contractor, on and off, for about ten years. I didn't know anything about working as a contractor when I took my first contract, and I didn't know anyone else who did, either. I was hired by an recruiter who normally staffed full-time, permanent positions, and I'll admit--I was totally unwaware of how contracting worked.

 

Until the last seven or eight years, contractors were just professional temps who didn't actually take the place of a "permanent" employee on an ongoing basis. Well, now they do. So much so, in fact, that it's estimated that 40 percent of the entire workforce in the United States will be employed on a contractual basis at some point in their careers.

 

So it might be helpful to learn a thing or two about contracting before you accept a contract role. 

 

Contracting can be mutually beneficial for both worker and company, but you have to be aware of a few things. In a contract situation, there are usually three parties involved: an agency, a hiring company, and a contractor. It is possible to contract directly for a company, but that's more of the execption than the rule. 

 

Why should a company hire contractors instead of full-time employees? 

 

It beats the system.

Every company has an allotted number of people they can hire in a given quarter or year, and quite often, that number is "zero." So what do companies do if they have more work than they can handle, but don't have the budget to bring on extra headcount?  They engage with a staffing agency to find workers. The agency takes a portion of each contract worker's hourly wage, and that money is a business expense to a vendor; it doesn't go into the "headcount" bucket. Companies get the help they need, and they haven't hired anyone. The agency did. The contractor is an employee of the agency, so there's no HR overhead, either.

 

It's cheaper than hiring an employee.

Full-time permanent employees take sick days. They go on vacations. They get paid holidays. They even get medical, dental, and even life insurance! If they are laid off, they sometimes get severance packages. The company also has to pay taxes for each employee. Plus, all of that has to be administered by someone in Human Resources.  Hiring an employee is an expensive proposition. Not so with contractors. They pay a single hourly wage to a staffing agency, and the agency takes care of the rest.

 

Business is unpredictable, so flexibility is key.

Let's say a company  has a big project coming up. For example, Company X needs to implement a whole new system for processing orders for the government, and the government's given them six months to get it done or they take their business elsewhere. The company estimates they'll need at least twenty more people to make this implementation happen on time. Do they want to hire twenty people for six months and pay all those taxes? And then pay for their unemployment? No. They hire twenty contractors from an agency, the work gets done without disrupting the full-time employees, and when it's done, the contractors move on.

 

What's in it for contract workers?

 

Get hired more easily

If you've been laid off, you want to get back to work--fast. Today's world pits hundreds of resumes against each other for every job, and the chances of even being noticed are small. Interviews can be long, drawn-out affairs lasting months. Contractors work with recruiters at staffing agencies. A recruiter weeds through the resumes, and presents the hiring company with two or three. By the time your resume reaches a hiring manager's desk, you've already been weeded out, pre-qualified, a rate agreed upon, and you're competing against two or three people--not hundreds. The decision is often made after one or two interviews. 

 

Build a tremendous network and gain vast experience quickly

As a contractor, you may find yourself working for some of the biggest companies in the world, working on high-level, high-profile projects. Your portfolio will swell, and so will your LinkedIn contacts. Having many contracts actually increases your hireability. The more places you've worked, the greater the demand for you must be.  Having a large number of short-term jobs as a full-time employee puts a cloud of doubt around you; the same situation as a contractor makes you look like a hot property. It's not unusual to be hired by the same company two, three, or more times.

 

Be more flexible, earn more money 

Contractors act exactly like employees when they are onsite, but they don't have to deal with MBOs, performance reviews, or corporate politics. They usually get paid considerably more than their full-time employee counterpart, too. The higher pay is to compensate for the lack of paid days off, healthcare benefits, and for the time each year inevitably spent in betwen contracts. It's a lot like having your own business, without the hassles of higher taxes and increased bookkeeping. The agency acts as the contractor's employer of record, and handles all the taxes, checks, and bookkeeping.  With the advent of universal health care in the United States, the biggest barrier to contracting--health insurance--disappears.

 

Let the company pay your agent

With contracting, the money conversation happens first. This is a distinct advantage--contractors don't have to go through lengthy interview processes only to learn the job pays far less than they're willing to take. Agencies earn money by negotiating an hourly wage that the company is going to pay the agency, and then they pay the contractor out of that total. Contractors have room to negotiate the rate assertively without worrying about turning off the the hiring manager. The company isn't involved, and often a contractor's boss has no idea what the contractor is earning. Agencies  usually take 15 to 40 percent of the total negotiated rate. In return, they package you, sell you, and do all the chasing of the hiring manager. After you're hired, they manage your paycheck, any HR issues, and negotiate any issues that may come up between the company and you. 

 

Contracting has a lot of nuances, and we'll discuss them in this blog, but this is essentially how contracting works. Next, we'll talk about what to look for in an agency.

 

 

 

 

 

 

 

 

 

 

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