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Dear Electra,

I was downsized with a lot of other workers two months ago. I just got a call from my former employer offering to "have me back" as a "contract worker" rather than as an employee. Though my new employer will be an agency, I will be back on the same job, same location, same duties as before.

I'm trying to figure out what this means...working at the same place but no longer as an employee of the company. I understand I will make the same amount of money as before--maybe a bit more. This seems too good to be true. What should I know before I agree?

Am I Going Back to Work?

Great question! To get an answer, Electra asked James Ziegler, aka "Dungaree Dan," author of the Contract Employee's Handbook. The Contract Employee's Handbook website is packed with information on your new status, the dangers and the opportunities. Anyone working as a contract employee or considering this status will find tips, contacts and useful information. Electra says: "Check it out!"

Here's what James/Dan has to say about your letter:

The proper term for your new status is "Contract Employee," or "Leased Employee." As you know, employers routinely hire temps to perform general clerical work, take inventory, or fill in when various office staff are ill or on vacation, so you are probably already familiar with the concept of temporary employment.

What distinguishes the contract employee from other temps is this: Contract employees provide specific, advanced, technical and professional skills. Consequently, contract employees are paid more, usually much more, than regular temps, and they tend to have longer assignments, often lasting several months to a year or more. However, in every other respect contract employees are just like regular temps.

Contract employees are paid by the hour, and are only paid for hours actually on the job. This means no paid sick leave, no paid vacation days, and no paid holidays. With very few exceptions, you can forget about employer-paid health and dental insurance, and employer paid retirement benefits. Other perks and fringe benefits you received as a permanent employee will now be unavailable to you, including corporate and professional training, as well as paid time off for conventions, retreats and trade shows. You will no longer have access to the corporate fitness center, and will probably have to attend company picnics and parties on your own time, i.e., off the clock.

Many contract employees believe incorrectly that they are earning more money now than when they were permanent employees. They take their former annual salary and divide it by 2000 hours to come up with an "equivalent" hourly pay rate. This becomes their target pay rate when seeking contracting assignments. That reasoning, however, is seriously flawed! Here's why:

Most employers figure on a labor load equaling 30 to 40% of an employee's annual salary. The labor load covers all the additional perks, health benefits, and fringe benefits that an employer normally provides at no charge for their employees in addition to the annual salary. Since these benefits are provided tax free to the employee, the actual replacement value of employee benefits may approach 55% of the employee's annual salary.

The client company (in this case your own former employer) takes this into consideration when it budgets for contract labor. If you formerly earned an annual salary of $60,000, the equivalent bill rate for your services is probably in the neighborhood of $60 to $70/hour. A good rule of thumb is this: Divide your annual salary by 1000 to get your hourly bill rate. If you bring the job to your agency, your agency should take no more than 20% of that amount as its fee for processing your payroll. If your agency brings the job to you, you should expect to pay a significantly higher fee averaging 45%, and sometimes exceeding 65%, of the bill rate charged to the client. Independent contractors routinely use this short-cut method to determine their hourly bill rate. As a contract employee you should do the same.

Is the pay rate offered by your agency in line with the above formula? Since your former employer has asked you back, without the intervention of a third party recruiting agency, you should be able to negotiate a pay rate equaling at least 80% of the bill rate. Ask your former employer what the bill rate is. You are entitled to that information. If your agency is taking more than 20%, you should shop around for an agency that will treat you fairly.

There are several appealing advantages to contracting. For example, as a contractor you will be allowed to work with relatively little supervision and corporate ho ha. You will be exposed to many different work environments and technologies as you move from assignment to assignment. Your learning curve will accelerate dramatically. You will work with many different bright and intelligent people who will become part of an ever-expanding professional network for job referrals. As your skill set improves, so will your pay rate. This is especially true if you utilize your network to locate your own assignments, and then present them to your agency as done deals! Conversely, if you allow your agency to always find assignments for you, your overall pay rate will be significantly reduced (often by a factor of two!), and your pay rate will increase more slowly.

As you develop your reputation and referral base, you may want to consider becoming an independent contractor. The operative word here is "independent." Independent contractors share the same lifestyle as contract employees, but with this key difference: Independent contractors are self-employed consultants, which means they have all the benefits and headaches associated with owning a small business. Incidentally, the generic term "contractor" refers to both contract employees and independent contractors. You will find a more complete discussion of independent contracting, and a list of books on the subject, in The Contract Employee's Handbook.

Thank you James! And thank you for your book & site which look at this issue from the worker's perspective.


Page last updated: 9:07 AM on 5/22/09