web analytics

By some estimates, around half the professionals working in information technology industry are contractors. Other knowledge industries also use huge numbers of non-payroll workers.

Many public relations positions are now contract-based, freelance journalists and graphic designers are everywhere and in many cases, even marketing, HR, legal and accounting positions are moving outside of the corporate core.

In theory, pushing workers out of the core is more efficient. On the surface, the idea is that companies can save money by moving highly specific and infrequently required skills outside the core business and then buy them back on an as needs basis. To some extent, this is tied up with the move towards outsourcing.

Out the door then back on freelance contracts

It’s not unusual for a company to make a worker redundant with a sizable payout then rehire the same person on a contract to do the same job with higher pay. From an economic point of view, this gets sillier if that worker is contracted through an agency or third-party who then adds their commission to the costs.

In some extreme cases, the employee who originally worked a 60-hour week for a salary that officially brought 40 hours of their time is now paid for the full 60 hours. In other words, this practice can end up costing a company twice as much to buy the same productivity.

We’ve all heard stories of these things happening. Two things explain these seemingly mad practices. First, there’s a simple accounting trick. By moving labour costs from one side of the ledger to another, companies can often make themselves look more profitable. At the same time, companies can cut the liabilities associated with employees – which improves the bottom line.

Corporate macho

Then there’s the macho, investment-driven thing. For a long time in the 80s and 90s investors and market analysts viewed cutting a company’s headcount as a proxy for business or managerial efficiency. As managers trim staff numbers, share prices rise. To some extent this still holds. We won’t bother to analyse whether trimming staff numbers this way is a wise long-term move.

In recent years there’s been a faint indication that the trend towards contracting is declining as companies move to lock-up skilled workers by bringing them in-house. In other words, companies are pressuring certain type of contract to return to the corporate fold. This has come about partly because companies often find themselves unable to hire specialist skills as when they need them – the waiting list for certain skills can be long.

There are also fears about confidentiality and exclusivity. It’s not that consultants tell tales out of school or that they cheat, it’s more that, you can hardly employ someone on a top-secret project for six months and then have them walk down the road and do the same job for a competitor. Stopping them isn’t practical and can be counter-productive.

Restrictive contracts

For example, in my line of work as a writer, I’m often presented with restrictive contracts. Some prospective employers make unreasonable demands – for example, they might ask for full indemnification against any legal costs that may arise out of my writing. Others might require over-restrictive copyright clauses or stipulate that I can’t write for their rivals within a set timeframe – often one year.

In practice I refuse to sign any kind of restrictive contract – I simply can’t afford to have someone who is paying me for a $2000 job to stop me earning $100,000 elsewhere. Nor am I daft enough to indemnify someone for vast sums over a job worth a few grand. In fact, the insurance premium I’d have to pay is often greater than my earnings. Remember the knowledge worker credo – there is enough good, well-paid work, out there for you to bypass all the rubbish.

From the employer point of view, only desperate contractors will enter over restrictive contracts – not the kind you’d want to hire. Another reason employers are snapping up experts is that by doing so, they can deny their services to their rivals and steal a march.