Contractor Employees Handbook

Copyri ght 1998- 2000 James R. Zi egl er. Al l Ri ght s Reserved.
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www. CEHandbook. com
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By James R. Ziegler, Ph.D.
Published by
P.A.C.E.
Professional Association of Contract Employees
http://www.pacepros.com
The Contract Employees Handbook is online at
http://www.cehandbook.com
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Chapt er 1: An Overvi ew of Techni cal and Prof essi onal Contract i ng
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The Worlds Oldest Profession?
Call em freelancers, free agents, independent contractors,
sole proprietors, or just plain self-employed. They go back
as far as the oldest profession, and just as that line of work
is historically corrupted by greedy and unscrupulous
middlemen, so are the professions of technical contractors
corrupted by greedy and unscrupulous temp agencies,
recruiting firms, staffing firms, and other so-called
consultants in the bodies-for-hire business.
But a pimp by any name is still an unsavory character who
is out to skim as much as possible off the top while keeping
the clientele happy and the workers under control.
Temping is as old as work for hire. In fact, the familiar,
permanent, full-time employment model may be little more
than a flash in the corporate pan. That model, characterized
by permanent, full-time employment where the employer
provides a secure career path, job training, and access to
health insurance and a pension, has been with us for
scarcely a century. Before that it was every man for himself,
and any woman without a man was in a world of hurt.
Fortunately, today the historically ancient model of
contingent work offers great potential for men and women
alike, and may offer one of the best avenues that women
and minorities have for rising above the proverbial glass
ceiling.
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A New Paradigm.
The traditional model of permanent employment is being
rapidly replaced by a new paradigm of contingent
employment.
This new paradigm has taken on a strategic role in both
small and large companies alike, from your average cash-
strapped start-up to such industry giants as Microsoft
where fully one-third of all workers are technical and
professional temps.
And Microsoft is not unique in this regard. This is how
James Meadows, VP for Human Resources at AT&T put it in
1996:
People need to look at themselves as self-
employed, as vendors who come to this company
to sell their skills. In AT&T, we have to promote
the concept of the whole work force being
contingent [i.e., on short-term contract, no
promises] though most of our contingent workers
are inside our walls. 'Jobs' are being replaced by
'projects' and 'fields of work', giving rise to a
society that is increasingly 'jobless but not
workless'. Quoted in the NY Times, 2/13/96.
So, it looks like the historically ancient model of
contingent employment is gaining new respect, and the
world's oldest profession is attracting some high-powered
advocates.
Nevertheless, contractors will always be vulnerable to
unscrupulous and indifferent agencies, and it looks like the
agency system is here to stay. But, to the extent that contract
workers understand how the system works, and understand
how to make the system work for contractors, contracting,
when compared with permanent employment, will provide
better opportunities for professional advancement, greater
financial rewards, and ultimately that ever-elusive thing we
call job security.
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Two Kinds Of Workers.
The IRS recognizes two categories of individual workers.
s Independent Contractor
s Employee
Independent contractors may be sole proprietorships,
partnerships, limited liability companies, or corporations.
Most technical and professional consultants are either sole
proprietorships or one-person corporations. These are the
two business forms that we usually associate with
individuals who operate as independent contractors.
There is some disagreement about the precise definition of
an independent contractor. Some authors restrict the term to
individuals working as an independent business. Others
include all businesses ranging in size from a one-person
operation to the largest mega-corporation.
Sole Proprietorships
Sole Proprietor is the default tax status of every person
with a social security number. As long as individuals
conduct their business as a sole proprietorship, they need
not register with any government agency. In common with
all businesses, sole proprietors may have to take out a local
business license and file a fictitious name statement, but
aside from that, becoming an independent contractor is so
simple it is virtually automatic.
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Sole proprietors may use their Social Security number as
their federal tax identification number, and they complete
IRS Form 1040 just like any other individual taxpayer. But
there are also some important tax consequences of sole
proprietorship that distinguish sole proprietors from
regular employees.
s Sole proprietors pay both the employers and the
employees share of federal payroll taxes reported on
IRS Schedule SE. Ordinarily, the employer pays half of
the FICA taxes and the employee pays the other half,
but in a sole proprietorship the individual is both the
employer and the employee, and thus pays both
halves. This is the so-called Self Employment Tax.
FICA Social Security. 6.2% + 6.2% = 12.4% of all
gross earnings up to the annual wage cap ($76,200
in 2000).
FICA Medicare. 1.45% + 1.45% = 2.9% of gross
earnings with no upper limit.
Sole Proprietorship
Tax ID# = SS#
SS# SS# SS#
The Business and the
Business Owner are
the same entity.
Hence Self-employed
Employees are optional.
Fi gure 1-1: Sol e propri etorshi p busi ness form.
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s Sole proprietors deduct legitimate business expenses
on Schedule C. This means that sole proprietors get
more tax breaks than employees, and they are able to
spend more of their earnings tax-free.
s Sole proprietors pay quarterly estimated State and
Federal income taxes on Form 1040ES.
s Sole proprietors may take advantage of special
retirement plans designed especially for self-employed
individuals that permit tax-deferred retirement contri-
butions up to the federal maximum of $30,000 per year.
On balance these tax consequences are very favorable for
sole proprietors and, except for the additional tax benefits
of incorporation, it is generally more advantageous to be a
self-employed sole proprietor than a regular employee.
Partnerships
A partnership is like a shared sole proprietorship.
Although a partnership may have employees, the partners,
themselves, are not, for employment tax purposes,
employees. Partners are owners.
In many ways a business partnership is like a marriage in
which each partner is fully responsible legally and finan-
cially for the business dealings of the other partner or
partners. When one partner goes bad, gets lazy, or makes
poor business decisions, a partnership can be your worst
nightmare. My advice regarding business partnerships:
Never enter into one. (I withhold any further comments on
the similarity of matrimonial partnerships and business
partnerships.)
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Limited Liability Companies
If a partnership is like a marriage, then a limited liability
company is like a marriage with a prenuptial agreement.
SS#-----------SS#-----------SS#
Partnership
Tax ID# = FEIN
SS# SS# SS#
Partners are owners.
They are not employees.
Fi gure 1- 2: Part nershi p busi ness f orm.
Limited Liability Company
Tax ID# = FEIN
SS# SS# SS#
Owners (limited liability
partners) are called
members. They are not
employees.
The Business and its
Members are separate
entities.
SS# SS# SS#
Fi gure 1- 3: Li mi t ed l i abi l i t y company busi ness form.
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The limited liability form affords most of the protection of
the corporate form, but with simpler reporting require-
ments and generally lower fees. For this reason limited
liability companies are gaining popularity, and in some
states a single individual can form one.
Corporations
An independent contractor doing business in the
corporate form has certain additional advantages over a
sole proprietorship. The chief advantage arises because
incorporation creates a separate entity that is legally
distinct from its sole shareholder who is also the corpo-
rations employee. This separation allows the owner to hide
behind a corporate veil such that the owner's personal
assets may be protected from creditors of the corporation
and from lawsuits. However, if legal requirements of the
corporate form are not rigorously adhered to it is frequently
possible for lawyers and the IRS to pierce the corporate veil
and attack the owner directly.
Corporation
Tax ID# = FEIN
SS# SS# SS#
The Business and the
Business Owner(s) are
completely separate
entities.
All corporations have at
least one employee.
Corporate officers are
employees with the
same status as other
employed workers.
Fi gure 1- 4: Corporati on busi ness f orm.
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Corporations have three functional groups: Directors,
Officers, and Shareholders. Directors (members of the
Board) direct the overall business. Officers (President, Vice-
president, Secretary, Treasurer) run the day-to-day business
operation. Shareholders are the owners and investors. In a
one-person corporation one individual directs and runs the
business, and also owns all the corporations shares. The
sole shareholder is also the corporations sole employee.
Corporations have the legal status of a person for
purposes of taxation, contracts, tort liability, and law suits.
Most corporations are closely held, meaning they have a
limited number of shareholders, and their shares are not
traded on a public exchange such as the New York Stock
Exchange or NASDAQ. Closely held corporations are
generally exempt from filing with the Securities and
Exchange Commission (SEC), and from publishing audited
financials and annual reports.
Corporations come in two primary varieties, C-corpo-
ration and S-corporation:
s The C-corporation is the default form of corporation. It
is best suited to larger corporations. Income to a C-
corporation is taxed twice, first at the corporate level,
and second when dividends are paid to the owners.
s The S-corporation is a special form in which income is
not taxed at all at the corporate level. Instead, income
passes to the shareholders where it is taxed as
individual income. One-person corporations usually
adopt the S-corporation form. In many respects an S-
corporation has the look and feel of a sole propri-
etorship, but with the added protection of a corporate
veil. The S-corporation form is restricted to corpora-
tions with fewer than 75 shareholders. There are also
limits on how much an S-corporation can earn before it
must convert to the C-corporation form.
s Other forms:
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Professional Service Corporation. This form is
reserved for doctors, veterinarians, attorneys,
engineers, accountants, architects, and certain other
professionals. Taxed at a flat 35%, a professional
service corporation is generally advantageous
when corporate net income is greater than $150,000.
Nonprofit corporation
Religious corporation
Technically, the owner of a one-person corporation is not
an independent contractor. He or she is an employee of the
corporation that is itself the independent contractor.
All newly formed corporations must obtain a new federal
employer identification number (FEIN). This number distin-
guishes the corporation as an entity separate from its owner
or owners. The corporation files its taxes using IRS form
1120 or 1120S, and it identifies itself by its FEIN. Corporate
directors, officers, and other corporate employees file their
taxes using the standard IRS form 1040, and identify
themselves using their Social Security number.
Shareholders, that is investors/owners, are not employees
of the corporation unless they also happen to be a director
or officer of the corporation.
Because all corporations have at least one employee, each
corporation must also obtain an employer account number
in each state where it has employees - even if it has only one
employee, the sole shareholder.
On the plus side, corporations offer significant tax advan-
tages and greater legal protection for business debts and
lawsuits for the owners and officers. Also, incorporation
may make it easier to attract clients, whose decision makers
are more likely to view you as a bona fide business. On the
minus side, corporations have more complex reporting and
bookkeeping requirements, not to mention higher fees.
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Summing It Up
Table 1.1 gives a summary comparison of the features and
benefits of various types of business entities including Sole
Proprietorship, General Partnership, Limited Liability
Company, C-corporation, and S-corporation. The table is
adapted from the Entity Comparison Table in the Parcorp
Services web site at http://www.parcorpsvcs.com/.
Tabl e 1-1: Compari son of busi ness ent i t i es.
Sol e
Propri et or
General
Part nershi p
Li mi t ed
Li abi l i t y
Company
C-
corporat i on
S-
corporat i on
Li abi l i t y
Prot ecti on
None.
Owner /
pr opr i et or
has unl i mi t ed
l i abi l i t y.
None.
Par t ner s
have
unl i mi t ed
l i abi l i t y.
Yes.
Owner s /
member s are
gener al l y not
per sonal l y
l i abl e f or t he
debt s of t he
busi ness.
Yes.
Owner s /
shar ehol der s
ar e not
per sonal l y
l i abl e f or t he
debt s of t he
cor porat i on.
Yes.
Owner s /
shar ehol der s
ar e not
per sonal l y
l i abl e f or t he
debt s of t he
cor porat i on.
Management Owner /
pr opr i et or i s
r esponsi bl e.
Gener al l y
par t ner s ar e
equal l y
r esponsi bl e.
Owner s /
member s can
manage or
el ect t o have
desi gnat ed
manager s.
A boar d of
di r ect or s
el ect ed by
t he
shar ehol der s
manages t he
cor porat i on.
A boar d of
di r ect or s
el ect ed by
t he
shar ehol der s
manages t he
cor porat i on.
Format i on
and
Operat i on
Def aul t
st at us of
ever y
Amer i can.
Legal
r equi r ement s
ar e f ew.
Legal
requi r ement s
ar e l ess
f or mal t han
f or
cor porat i ons.
Must
mai nt ai n
cor porat e
f or mal i t i es
such as a
boar d of
di r ect or s,
shar ehol der
meet i ngs,
resol ut i ons,
and annual
report i ng.
Must
mai nt ai n
cor porat e
f or mal i t i es
such as a
boar d of
di r ect or s,
shar ehol der
meet i ngs,
resol ut i ons,
and annual
report i ng.
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What Is a 1099?
Client companies must file a Form 1099-MISC with the IRS
if they pay a sole proprietor more than $600 in a calendar
year. IRS Form 1099-MISC reports gross earnings only. It
does not report payroll taxes and withholding taxes because
client companies do not collect and pay taxes for
independent contractors, including sole proprietors.
Durat i on Li f e of sol e
pr opr i et or.
Di ssol ved by
deat h of
par t ner.
Gener al l y
l i mi t ed t o a
f i xed amount
of t i me,
however,
mor e st at es
now al l ow
per pet ual
exi st ence.
Per pet ual Per pet ual
Taxat i on Not a
separ at e
t axabl e
ent i t y. Sol e
pr opr i et or
pays al l
t axes.
Par t ner s pay
t ax on t hei r
shar e of t he
i ncome and
can deduct
l osses
agai nst ot her
sour ces of
i ncome.
Gener al l y
t her e i s no
t ax at t he
LLC l evel .
I ncome / l oss
i s passed
t hr ough t o
member s of
t he LLC
accor di ng t o
t he
Oper at i ng
Agr eement .
LLC s can
el ect t o be
t axed as a C-
cor porat i on.
Cor por at i on
must pay t ax
on al l i ncome
and i s
subj ect t o
cer t ai n
rest r i ct i ons
on r et ai ned
ear ni ngs.
Shar ehol der s
t hen pay
i ncome t ax
on t he
i ncome
di st r i but ed t o
t hem
resul t i ng i n
doubl e
t axat i on.
No t ax at
cor porat e
l evel . I ncome
/ l oss i s
passed
t hr ough t o
t he
shar ehol der s
accor di ng t o
t hei r
per cent age
of
owner shi p.
Transfer of
Ownershi p
No No Gener al l y
yes, subj ect
t o appr oval
f r om ot her
member s.
Yes.
Gener al l y
t her e are no
rest r i ct i ons
on t r ansf ers.
Yes. Subj ect
t o consent
and
rest r i ct i ons
on
Shar ehol der s
.
Tabl e 1-1: Compari son of busi ness ent i t i es.
Sol e
Propri et or
General
Part nershi p
Li mi t ed
Li abi l i t y
Company
C-
corporat i on
S-
corporat i on
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Independent contractors operating as sole proprietors are
often referred to as 1099s, and contracts with independent
contractors are referred to as 1099 contracts. A more
accurate term is business-to-business contract because a
sole proprietor is very much an independent business in
every respect.
Partnerships, limited liability companies, and corpora-
tions are also independent contractors, but client companies
do not have to report payments to these businesses on IRS
Form 1099-MISC, or on any other form for that matter. Form
1099-MISC is only used to report payments to sole propri-
etorships. It is technically incorrect to refer to a contract
with a partnership, limited liability company, or a corpo-
ration as a 1099 contract.
The term corp-to-corp contract should be used only for
contracts between two corporations, although you will
often hear the term used incorrectly as a catch-all for any
independent contractor agreement.
Independent contractors complete IRS Form W-9 to
declare that they are exempt from withholding taxes. The
client keeps the completed form as evidence that the
contractor is a vendor and not an employee of the client.
Client companies must withhold and pay to the IRS 31% of
payments made to any independent contractor for which
they do not have a W-9 on file.
What Is a W-2?
At the end of the year every employer submits an IRS
Form W-2 to the IRS for every worker they employed
during the year. Employers send additional copies to their
employees who attach the W-2 forms to their local, state
and federal tax returns.
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The W-2 form reports gross wages paid to the employee,
and in this regard it is similar to IRS Form 1099-MISC.
Additionally, the W-2 form also reports federal, state, and
local taxes withheld from the employees paycheck.
The W-2 form distinguishes a bona fide employee from an
independent contractor. Employees receive a W-2 at the end
of the year; independent contractors do not.
Employees
So, you might ask, If independent contractor is the
default tax status of every taxpayer, why do the vast
majority of companies shy away from hiring independent
contractors? Why, instead, do they prefer to hire agency
temps for technical and professional assignments? What is
so bad about 1099 tax status, and what is so good about
being an employee? And, what the heck is an employee
anyway?
Actually, employees are a relatively recent phenomenon,
having arrived in their present form in only the last century
or so. If recent trends are any indication, future generations
may view regular employment as a historical flash in the
pan.
Merriam-Webster's online dictionary, http://www.m-
w.com, dates the word employee back to only 1822, and
defines an employee as
One employed by another usually for wages or
salary and in a position below the executive
level.
But even independent contractors receive wages, and
officers of corporations are employees, so how an
individual is paid and their job title are not in and of
themselves reliable discriminators.
A more realistic definition of employee might be this:
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A worker employed for wages or salary by
another entity that is required to pay certain
government mandated payroll taxes out of pocket
and also collect and pay additional government
mandated payroll taxes plus withholding taxes
from the worker's wages.
In practice, however, there is an enormous gray area
where the determination of employment status is anyone's
guess.
s The Internal Revenue Service Code 3121(d) defines an
employee according to:
How the worker is treated.
Usual common law factors.
Statutory rules.
s Every state and federal department has a separate set
of criteria.
s The courts are notoriously unpredictable.
The pivotal issue appears to be who collects and pays the
taxes. Another name for employer might as well be tax
collector because collecting and paying taxes on your
behalf is what makes someone who pays you an employer
and not a client. In fact, one can argue that employers are
tax collectors first, and businesses second in the eyes of
most government agencies.
It is easier and far more reliable to collect payroll taxes
and income tax withholdings from fewer, larger, experi-
enced employers than from a much greater number of
independent contractors. Most independent contractors are
one-person operations that spend their productive time
selling their services. They are not particularly adept at
bookkeeping and calculating taxes. For this reason it is
probably fair to say:
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If the IRS and other government agencies had their
way, every worker in the United States would be
someone else s employee.
Here is another factor that favors employees over
independent contractors. Government agencies, including the
Internal Revenue Service (IRS), U.S. Department of Labor (DOL),
Immigration and Naturalization Service (INS), State Departments
of Employment, Workers Compensation Departments, State Labor
Departments, the U. S. Equal Employment Opportunity
Commission (EEOC), and the Occupational Safety and Health
Administration (OSHA) make it their business to make sure that
all workers are properly registered for public entitlements and that
they are protected by rules and regulations governing the
workplace. These regulations apply to regular employees. They do
not, for the most part, apply to independent contractors.
Consequently, several government agencies have estab-
lished guidelines, or common law factors, that establish
criteria for determining whether individual workers are
fully compliant independent contractors or de facto
employees of the client company. The common law factors
universally address the issue of control.
Employers control the work of employees. They do not
control the work of independent contractors. When the IRS
conducts an audit of employee status, the auditors look for
evidence of control. The IRS training manual published in
1996 puts it this way:
Following the common law standard, the
employment tax regulations provide that an
employer-employee relationship exists when the
business for which the services are performed has
the right to direct and control the worker who
performs the services. This control refers not only
to the result to be accomplished by the work, but
also the means and details by which that result is
accomplished. In other words, a worker is subject
to the will and control of the business not only as
to what work shall be done but also how it shall
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be done. It is not necessary that the business
actually direct or control the manner in which the
services are performed; it is sufficient if the
business has the right to do so. Independent
Contractor or Employee? IRS Training Course 3320-
102(10-96), pg. 2-3.
You can download the entire 160 page-training manual at
the IRS web site: http://ftp.fedworld.gov/pub/irs-utl/
emporind.pdf.
In a 1987 Revenue Ruling [87-41, 1987-1 CB 296], the IRS
devised a list of twenty common law factors to help
companies and IRS agents determine the tax status of
individual workers. The 1996 IRS training manual trimmed
that list to eleven factors organized in three areas of control.
s Behavioral control: The right to direct or control how
the work is done.
s Financial control: The right to direct or control how
the business aspects of the worker's activities are
conducted.
s Relationship of the parties: How the parties perceive
their relationship.
The courts also invoke common law to distinguish between
independent contractors and employees. The book, The IRS,
Independent Contractors and You!, 1993, http://www.worker-
status.com/, by tax attorney James R. Urquhart III, lists 51 common
law factors that have figured in court cases and appeals. Never-
theless, the courts are not limited to any given list of factors, but
rely on the totality of the evidence before them. The result is a
system that is arbitrary at best, if not utterly capricious.
We can best summarize the issue of control in one simple
dictum:
Companies must treat their independent contractors
like the outside vendors that they are, and do whatever
they can to avoid the appearance that any independent
contractor is really their own employee.
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The burden of proof is on each company, the employer, to
show unequivocally that an independent contractor is not
their regular employee. It is not enough that both the
contractor and the client agree on independent contractor
status. If the worker looks like an employee, walks like an
employee, and quacks like an employee, the IRS will try to
reclassify the worker as an employee. Independent
contractors, and employees of independent contractors,
must look, walk, and quack like independent contractors,
and avoid any appearance that they are really employees of
their client.
In other words, a company that hires an independent
contractor is considered guilty until proven innocent. The
overwhelming bias of the IRS is to classify all workers as
employees until the company can prove otherwise. Even if
the company ultimately wins in tax court, the negative
financial consequences of the IRS attempting to reclassify
an independent contractor can be enormous. If the company
loses an audit because the independent contractor is
found to be a regular employee of the client, the IRS can go
after thousands of dollars in back taxes and penalties - up
to and exceeding 41% of the money already paid to each
reclassified independent contractor.
The IRS is much more aggressive toward employers than
toward reclassified independent contractors because, quite
frankly, employers represent a higher potential return to the
IRS. At best, the most that the IRS will collect from a reclas-
sified contractor is the tax on disallowed business expenses.
Contractors Can Trigger an IRS Audit.
It's easy to put all the blame for reclassification in the lap
of the IRS and other government agencies, but self-
employed independent contractors can themselves pose a
significant risk to their client companies.
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Contractors can precipitate an IRS audit when they decide
it is in their best interest to be an employee rather than an
independent contractor. What makes this so dicey is the
inherently hostile alliance of a self-righteous worker with
an aggressive government agency. This might happen, for
example, when an out-of-work contractor decides to file an
unemployment claim against a former client. Independent
contractors can pay unemployment insurance on
themselves, but virtually none do. If the State Department
of Employment decides that an out-of-work contractor
really was an employee of the client all along, it will alert
the IRS to collect back taxes from the client for Federal
unemployment insurance, and this will trigger a wider
audit involving Federal and State withholding taxes as well.
Another risk arises when a contractor is injured on the job
and files a workers comp claim or state disability claim
against a client company. Carpal tunnel syndrome and back
problems are common ailments in technical and profes-
sional work environments. Workers comp covers
employees. It rarely covers independent contractors. In
some states, as in California for example, individuals who
are also independent contractors can take out state
disability insurance on themselves, but, again, virtually
none do.
There is also the risk that a contractor might damage a
client companys property or the property of others, or
injure an employee or visitor to the client company while on
the job. Many independent contractors do not carry general
liability insurance, so the liability could easily pass to the
client.
All of these factors place enormous pressure on companies
to avoid using independent contractors if there is any
question about their compliance with government guide-
lines.
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1-20
Certainly there are circumstances that clearly indicate that
a worker is an independent contractor, and there are
circumstances that clearly indicate that a worker is a
regular employee. But there is no bright line that distin-
guishes one from the other. Instead there is a vast gray area
of ambiguity where no company dare venture because the
risk is just too great.
The solutions:
s Companies must make very sure that their contract
workers comply fully with the IRS common law factors
for independent contractors,
Or
s Make sure that their contract workers are someone
elses employees.
Employers of Record.
And this brings us to the subject of third-party employers
of record. A third-party employer of record employs
contract workers who actually work for another company.
They do so largely as a convenience to the client company
in order to mitigate the risk of reclassification.
Employers of record are really just scaled-up temp
agencies. Most operate as contractor recruiting firms that
match contractors with client companies. A few operate as
payroll firms or pass-through agencies that employ
contractors only after they have already landed an
Clearly an
Independent
Contractor
Clearly a
Regular
Employee
Vast
Gray
Area
Fi gure 1- 5: A vast gray area of ambi gui ty l i es bet ween
i ndependent contractors and empl oyees.
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1-21
assignment on their own. Umbrella services are similar to
pass-through agencies, and they also offer better benefits
and tax advantages.
Employers of record give contractors the W-2 tax status
most appreciated by government agencies. They pay all
payroll taxes plus state and federal withholding, and
because they also provide general liability insurance,
unemployment insurance, and workers compensation they
virtually eliminate most of the risks that may trigger an IRS
audit.
Because contract employees are bona-fide employees of
their employer of record, the client company can treat them,
for the most part, like their own regular employees. The
company can control both the result to be accomplished by
the contractors work, and also the means and details by
which that result is accomplished. In other words,
companies dont have to pussyfoot around agency
employees. They can treat them like everyone else on the
workforce.
The foregoing, however, does not mean that client
companies have free reign to treat contract workers with
less dignity and respect than their own employees. This is
made clear in EEOC Notice Number 915.002, 12/03/97,
Enforcement Guidance: Application of EEO Laws to Contingent
Workers Placed by Temporary Employment Agencies and Other
Staffing Firms, http://www.eeoc.gov/docs/conting.html:
Staffing firm workers are generally covered
under the anti-discrimination statutes. This is
because they typically qualify as employees of
the staffing firm, the client to whom they are
assigned, or both. Thus, staffing firms and the
clients to whom they assign workers may not
discriminate against the workers on the basis of
race, color, religion, sex, national origin, age, or
disability.
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1-22
The EEOC enforcement guidance makes clear that the
client must treat a staffing firm worker assigned to it in a
non-discriminatory manner. The document also explains
that staffing firms and their clients are responsible for
ensuring that the staffing firm workers are paid wages on a
non-discriminatory basis. Finally, the guidance describes
how remedies are allocated between a staffing firm and its
client when the EEOC finds that both have engaged in
unlawful discrimination.
Contract employees may also be considered employees of
the client for the purpose of insuring workplace safety. In a
series of compliance letters the Occupational Safety and
Health Administration (OSHA) of the US Department of
Labor has held that whether or not exposed persons are
employees of an employer depends on several factors, the
most important of which is who controls the manner in which
the employees perform their assigned work. The question of
who pays these employees may not be the determining
factor. Visit http://www.osha-slc.gov/OshDoc/
toc_interps.html, and enter the keywords <contract
employees> and <temporary workers>.
The compliance letters also state that when deciding who
should record work related injuries and illnesses of contract
workers the primary factor to be considered is who super-
vises these workers on a day-to-day basis.
Thus, the onus of responsibility for workplace safety falls
squarely on the client company, especially when it is the
clients own personnel who direct the contract employees
work activities.
Ironically, temporary help services are normally exempt
from OSHA recordkeeping requirements. OSHA classifies
the staffing industry as a low-hazard industry, and temp
agencies are not required to record injuries and illnesses on
the OSHA Log.
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1-23
Here is another caveat for the users of contract employees.
Companies must never use contract employees as a
substitute for their own regular employees, especially on
contracts lasting more than one year. Long-term assign-
ments beg the question of whether the client company is
simply using contract employees to avoid the cost of
government mandated entitlements and company benefits.
If the courts find this is the case they may invoke the
principle of coemployment.
Coemployment means that the worker is deemed the
employee of the agency for purposes of, say, wages, and the
employee of the client for purposes of certain employee
benefits. For example, in the class-action case, Vizcaino v.
Microsoft, the courts have repeatedly ruled that, for the
purpose of benefits, Microsoft is the common-law
employer of long-term contractors. The issue of
permatemps is discussed in detail at the web site for the
Washington Alliance of Technology Workers, http://
www.washtech.org/.
The Rise Of Client-centered Temp Agencies.
Notice that the entire argument for third-party employers
of record is based on the needs of the client company and
not on the needs of the individual worker. This focus on the
client has led to the disastrous situation we have today in
which contractors are viewed universally as second class
citizens, more akin to migrant workers than to highly
skilled professionals.
I believe that contract employees are treated so poorly
because of two historical influences that are utterly contrary
to the well being of contract employees:
s The influence of permanent placement recruiting
firms.
s The influence of low-paying clerical and seasonal temp
agencies.
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1-24
Permanent Placement Recruiting Firms.
Permanent Placement Recruiting firms are undeniably
client centered, working on either a retainer or contingent
basis for the companies that engage their services. They
conduct active searches for mid to high level professionals,
managers and executives, and when they successfully fill a
job order their clients usually pay the recruiting firm
between 25% to 30% of the first years salary.
A successful candidate becomes a regular employee of the
client company, and the recruiting firm has no ongoing
responsibility beyond, possibly, a 90-day replacement
guarantee.
Permanent placement recruiting is real hard work. And a
good recruiter can expect to place only one candidate per
month. An exceptional recruiter will place two or three
candidates. Recruiters usually keep about one-third of the
fee, while the remainder goes to the house to cover
overhead and owners profit.
In the mid 1980s, when executive recruiting firms first
began to expand into contracting, they naturally continued
to view the companies as their real customers. By also
employing the contractor they satisfied the clients need for
a third-party employer of record, but they also satisfied an
important marketing need of their own. By employing the
contractor they maintained an ongoing relationship with
the client. This gave the recruiting firms continuous access
to the client for both their permanent placement and
contractor recruiting businesses.
Additionally, by combining both permanent placement
and contract recruiting, the recruiting firms could add
temp-to-perm (also called contract-to-hire) contracts to
their marketing arsenal. Now companies could try out a
potential new hire without actually having to hire the
individual.
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1-25
These firms tended to apply the same 30% fee structure to
their contractor placements that they also applied to their
permanent placements. To that they added about 10% or so
to cover the employers share of payroll taxes, bringing the
overall margin to 40% of the billing rate. In some cases they
felt justified in taking 50% of the billing rate or more owing
to the added administrative overhead involved in
payrolling a contract employee.
Scaled-up Temp Agencies.
The full-service contract employment agency, or
contractor recruiting firm, is an outgrowth of the familiar
temporary employment agency. Companies hire clerical and
seasonal temps to perform routine office chores, take
inventory, do seasonal work, and fill in when various office
staff are ill or on vacation. Before the rise of contract
employment temps were exclusively low-paid, hourly
workers filling part-time jobs that seldom lasted more than
a few days or weeks. Temp work was what you did to tide
you over while you looked for that next real job. Temping
was not your career.
True consultants, on the other hand, operate as
independent businesses, and they work on very different
types of temporary assignments. These career professionals
are solution providers who offer their clients project-
oriented expertise in the areas of marketing, management,
research, technology implementation, and other specialized
disciplines.
In the early eighties there began a trend toward
downsizing that accelerated the demand for highly paid,
career contractors. But unlike their project-oriented
colleagues, the true consultants, these new contractors were
increasingly called upon to perform routine, generic tasks
previously carried out by salaried employees.
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1-26
The climate for independent contractors -- both
consultants and generic taskmasters -- changed radically in
1986 when Congress repealed safe harbor for technical
contractors working through third-party consulting firms.
The Revenue Act of 1978 had earlier established that
employers could appeal reclassification by the IRS if the
employers industry had consistently treated certain classes
of workers as independent contractors. But section 1706 of
the Tax Reform Act of 1986 changed that by amending the
Revenue Act of 1978 so that employers could no longer seek
relief through safe harbor for the following job classifica-
tions:
s Engineer
s Designer
s Drafter
s Computer programmer
s Systems analyst
s Other similarly skilled worker engaged in a similar
line of work
Almost overnight, thousands of independent contractors
found it necessary to convert from 1099 status to W-2 status,
as client companies grew increasingly fearful of IRS audits
that might reclassify independent contractors as employees
of the client.
A mass hysteria gripped employers, as the IRS begin to
reclassify technical contractors working through third-party
agencies. The IRS became more aggressive, and employers
began to discriminate against all independent contractors,
even true consultants and one-person corporations.
Employers needed a fallback strategy, and they found it in
traditional temp agencies.
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1-27
Because client companies were already familiar with the
traditional temp agency model, it was only reasonable to
adapt that model to technical and professional contractors.
The move was good for clients, and a boon to temp
agencies, but it was a disaster for independent contractors.
Applying a scaled-up version of the temp agency model to
independent contractors disenfranchised them from their
own independence. Contractors lost their tax write-offs,
they lost their participation in the contract negotiation
process, they lost control over the rates they charged for
their services, and as a final indignity they were reduced to
the status of captive employee.
Consider also the matter of unconscionably high fees
charged by certain unscrupulous contract employment
agencies. Ordinary temp agencies bill out their regular
temps at only $15 to $25 per hour on assignments that last
at most only a few days or weeks. Because marketing
expenses and administrative overhead have to be recouped
over a relatively short period, regular temp agencies have
to take a large cut of the billing rate just to cover expenses
and make a reasonable profit.
But contractors are not regular temps. They are highly
paid career professionals who frequently accept assign-
ments lasting months, even years. Scaling up typical temp
agency margins creates massive windfalls for contract
employment agencies. Agencies make more money per
placement owing to much higher billing rates, and they
collect those high margins over a period of months, if not
years, long after recouping their initial marketing costs.
Scaled up temp agencies earn an additional windfall when
highly paid contractors on long assignments exceed the
annual wage caps for Federal unemployment taxes ($7000),
State unemployment taxes (wage cap varies by state), and
Social Security taxes ($80,400 in the year 2001). Once the
wage caps for these taxes are exceeded, the employers
f : t : : | t : | t aj | : j : : ' t It : t : : t
1-28
share of payroll taxes drops by approximately 10% of gross
wages, and the agency gets a big raise. Temp agencies love
highly compensated contractors on long assignments.
Self-employed, independent contractors can look forward
to significant savings in the employers share of payroll
taxes during the third and fourth quarters of each year, but
scaled up temp agencies invariably keep the savings for
themselves.
Another way the temp agency model fails contractors is in
the relationship of the parties. Low-paid temp workers
readily accept the notion that temp agencies do them a
favor by giving them work. Regular temps are grateful that
they have any work at all, and this gratefulness engenders a
paternalistic attitude in agency staffers. In short, regular
temps are treated like children. Such a subordinate role is
inappropriate for highly trained career professionals,
including contract employees. Is there any wonder why
contractor recruiting firms are so condescending and
patronizing towards contractors?
Recruiting firms admonish both their contract employees
and their client companies from discussing billing rates on
the grounds that such information is proprietary. But thats
just so much baloney. A hallmark characteristic of profes-
sional service providers is full disclosure of services and
fees. When professional service providers withhold infor-
mation about service fees they stifle the very competition
that keeps quality high and costs low.
This is the real reason why recruiting firms maintain a
code of silence about agency rates and fees. Agencies
don't want client companies to know about the obscenely
high margins they earn and the ridiculously low wages they
pay to contract employees. And agencies especially don't
want client companies to know that they are paying the
agencies far too much for their contract workers.
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1-29
When companies and contractors both know the agency
margin they can both shop for the best possible deal.
Competition will increase contractors pay rates while
simultaneously lowering what companies must pay for
those contractors. Unfortunately, many client companies
help agencies hide the billing rate from contract employees,
and in doing so they unwittingly contribute to unneces-
sarily high contract labor costs.
Whos The Customer, Anyway?
Traditional recruiting firms view the client company as
their primary customer because of the dual influences of
permanent placement recruiting firms, and low-paying
clerical temp agencies.
There is another reason why recruiting firms view the end
user as their customer. They point to the fact that they, and
not the contractor, own the contract with the end user,
and they point to the fact that the client company pays
money to the recruiting firm and not to the contractor.
Why do the recruiting firms own the contract? It's because
they are the employer of record, a relationship that is
required by the end users to protect themselves against IRS
reclassification. It is not because the agency is a true
consulting firm. It is not because the recruiting firm is
managing a project for the end user. It is not because the
recruiting firm is actually supervising the contract
employees. Recruiting firms own the contract because the
IRS and other government agencies want someone to collect
the taxes, and the end user doesn't want that job.
With respect to payment, there is no question that the end
user pays the employer of record. But, why do they pay the
employer of record? It is not because the employer of record
is doing the work. It is because the employer of record is
charged with collecting and paying taxes on behalf of the
f : t : : | t : | t aj | : j : : ' t It : t : : t
1-30
contractor. In other words, the employer of record is
collecting money on behalf of the contractor, for work
performed by the contractor.
If the end user would allow it, many career contractors
would prefer to qualify as IRS compliant independent
contractors and pay their own taxes, or do so through a
payroll service like ADP or Paychex, and enjoy the tax
advantages of self-employment.
Who owns the contract and who receives payment are
bogus reasons for viewing the client company as the
recruiting firms primary customer. And they are equally
bogus reasons for treating the contractor as a second-class
citizen - as little more than a high tech migrant worker.
The recruiting firm is the employer of record only as a
convenience to the client company, and for no other reason.
The primary functional relationship is always between the
contractor and the client company.
Remember the final scene in the animated movie A Bug s
Life when Flick, the heroic ant, finally confronts the evil
grasshoppers. As he rallies the support of the assembled
colony he exclaims, Ants don't serve grasshoppers. Grass-
hoppers need us! Indeed, if contractors could find a way to
bypass predatory recruiting firms, the recruiting firms
would go broke. Contractors don't need recruiting firms.
Recruiting firms need contractors. That is why the recruiting
firm's real customer is the contractor and not the client
company. As Flick the ant proclaims in A Bug s Life, Nature
has a certain order. The ants pick the food. The ants keep the
food.
Hai ku for Contract Professi onal s
Greedy Recruiter,
Independent Contractor:
Grasshopper and Ant.
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1-31
The Job Matching Function And The Employer Of
Record Function.
The recruiting firms get away with hiding the billing rate
because they control both the job matching function and the
employer of record function. Recruiting firms negotiate the
billing rate and other contract terms, they invoice the end
user, they collect the revenues, and they pay the contractor
what they feel like paying. At no time does the contractor,
who is actually performing the work, participate in this
Client
Company
Contractor
Customer is
The Client
Outside Recruiting
Firms
Temp Agencies & other
Staffing Agencies
In-house Staffing
Management Firms
Captive Gatekeepers
& Screeners
Prof. Employment
Orgs. (PEOs)
Staff Leasing
C
l
i
e
n
t

S
e
e
k
s

C
o
n
t
r
a
c
t
o
r
C
o
n
t
r
a
c
t
o
r

S
e
e
k
s

C
l
i
e
n
t
Customer is
The Contractor
Employers of Record
Pass-through Agencies
& Umbrella Services
(e.g., P.A.C.E.)
Stand-alone Marketing
Services
Marketing Agents
(Talent Agents)
Fi gure 1- 6: Whos the customer?
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1-32
process. Because the recruiting firms keep contractors out of
the loop contractors are kept ignorant of the very infor-
mation they need in order to succeed in their chosen career.
Recruiting firms tie the job matching function to the
employer of record function. They will locate a new
assignment for you, but in order to take the assignment you
must become their employee. Even if you retain your status
as an independent contractor, the recruiting firm still holds
you captive by refusing to disclose the billing rate, and they
will keep you from signing a direct contract with the end
user. In most industries tying is an illegal restraint of trade -
an anti-competitive practice. For some reason it is still
tolerated in the technical and professional contracting
industry.
If contractors could split the entirely separate functions of
job matching and employer of record, they would once and
for all have open access to the billing rate, and they would
finally know what the agencies are charging for their
services. At last, contractors could make reasoned decisions
based on the quality of service and on price. They could
choose to work with an agency based on value delivered
rather than on who controls the information.
Ethical business people and professional service providers
practice full disclosure. Scamsters, shysters and con artists
do not. Thats why we call them scamsters, shysters and con
artists.
Many contractors derisively call outside recruiters
pimps, but that is not entirely fair. Even prostitutes know
the billing rate.
Job Matching As a Separate Function.
Mark Maguire works for the St. Louis Cardinals, but his
sports agent works for Mark Maguire. If Mark ever thought
that his agent worked for the Cardinals he would fire him in
a minute. Why? Because taking money from the Cardinals
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1-33
would be a basic conflict of interest. Mark Maguires agent
helped Mark negotiate a deal with the Cardinals, and he
probably takes 10% of Maguires salary, and 10% of the
money Maguire earns from having his picture on boxes of
Wheaties.
Tom Clancys books are produced by his publisher. His
literary agent sets up the book deals and promotional
events. The agent probably takes 10% of the royalties. If
Clancy thought his agent was cutting sweetheart side deals
with the publisher he would fire him faster than you can
say Hunt for Red October.
Tom Cruise (remember Jerry Maguire?) has a talent agent
who negotiates movie deals. He probably takes 10% of what
Cruise earns. If Tom Cruise thought that his agent repre-
sented the movie production companies, Tom Cruise would
dump him in a Hollywood minute.
Sports agents, literary agents, movie agents, and other
ten-per centers all work exclusively for the talented profes-
sionals they represent. Why? Because the talented profes-
sionals want it that way. They won't permit a conflict of
interest. Why then should contract professionals allow a
conflict of interest? It goes back to the dual influences of
permanent placement recruiting firms and clerical temp
agencies. But, those shopworn models are inappropriate for
a new paradigm of technical and professional career
contractors. Contract professionals need their own
marketing agents who view the contractor as their exclusive
customer.
Stand-alone Job Matching.
Marketing agents do stand-alone job matching. They
introduce their customer to prospective end users. Once a
match is made, the marketing agent backs out of the loop.
The contractor is then free to negotiate a direct contract
with the end user, or alternatively to employ the services of
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1-34
a separate, third-party employer of record. Marketing
agents might charge a flat rate, but like other talent agents
they will probably charge about ten percent of the billing
rate.
Stand-alone job matching is something that even full
service temp agencies might offer as one of several
unbundled services provided on an a la carte basis.
Marketing agents dont own the contract, and they do not
handle the contractors money. This separation allows the
contractor to participate fully in contract negotiations and
in setting the billing rate.
Marketing agents are sorely needed to support self-reliant
independent contractors, and to complement stand-alone
employer of record services like P.A.C.E., http://
www.pacepros.com, and other umbrella services and pass-
through agencies.
Marketing agents will appear only when contractors
create market demand by refusing to work with traditional
recruiters, and by working exclusively with brokers that
offer stand-alone job matching.
Fortunately there are virtually no barriers to entry for
marketing agents. Anyone can set up interviews with client
companies and hiring authorities. All they need is a phone
and a Rolodex.
Marketing agents dont invoice the end user, they dont
collect from the end user, they dont have to process payroll,
they arent responsible for paying taxes on behalf of the
contractor, and they arent responsible for guaranteeing the
contractor's performance. In fact, they dont do any of the
tedious back office tasks of an employer of record. All they
do is set up interviews and then collect their ongoing fee
from either the contractor or the contractor's employer of
record. What could be simpler?
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1-35
One would think that the really smart recruiters might see
the value in this risk-free set-up and start working for
contractors as marketing agents. That would be a very good
thing for contractors.
Online Job Matching.
The Internet is overrun with job boards and resume banks
that charge recruiting firms to post jobs and to search their
database for resumes submitted by contractors and out-of-
work employees. These agency-sponsored web sites have
been the mainstay of the recruiting business for the past
decade. They are the grease that lubricates the giant engine
that has propelled this runaway train of contract
employment.
At long last, we are beginning to see the emergence of web
sites that cater primarily to client companies in direct
competition with predatory recruiting firms.
To the extent that contractors embrace client-sponsored
job matching services, the competitive marketplace will
force recruiting firms to rethink their obscenely high
margins.
Hopefully, client-sponsored job matching services will
drive predatory recruiters out of the contracting business in
the same way that other online services have reduced the
ranks of high-priced stockbrokers and travel agents.
Complementing these online matching services will be
marketing agents who work exclusively for the technical
and professional contractor. They will offer stand-alone job
matching as a fee-based, personalized alternative to free
online job searches. They wont be free, but they will charge
much less than the obscenely high margins levied by
predatory recruiting firms.
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1-36
Employer Of Record As a Separate Function.
True consultants market their own consulting services.
Many contract taskmasters are equally adept at marketing
themselves. Why, then, should they pay for the marketing
overhead of a full-service agency just because their client
wants them to have W-2 tax status?
Fortunately, they dont have to use a full-service
recruiting firm as their employer of record. They can use a
pass-through agency or an umbrella service.
s Pass-through agencies:
Pass-through agencies employ the contractor only
after the contractor has first landed an assignment.
Pass-through agencies have no commissioned
recruiters and no marketing overhead so they can
easily operate on a gross margin of 20% or less
(although some may charge as much as 25% of the
billing rate).
In other words, a contractor that uses a pass-
through agency should receive at least 80% of the
billing rate.
In all other respects a pass-through agency is
similar to a traditional temp agency.
s Umbrella services:
Umbrella services are similar to pass-through
agencies, except that umbrella services use sophis-
ticated accounting procedures to set up each
contractor as an independent business unit within a
larger corporation.
Umbrella services charge no more than 5% of the
billing rate plus the actual cost of the employer's
payroll taxes to confer W-2 tax status to their
contract employees.
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1-37
The actual gross margin of an umbrella service is
only about 15%, and it gets significantly less over
time as year-to-date gross wages exceed the
unemployment insurance and Social Security wage
caps.
Contractors who work through an umbrella service
realize significantly higher net earnings and
superior benefits when compared with traditional
agency temps.
Umbrella services offer very aggressive tax-deferred
retirement plans with pre-tax contributions as high
as 25% of gross wages - up to $30,000 per year.
Umbrella services reimburse their contract
employees for work-related expenses with tax-
exempt dollars just like a self-employed
independent contractor.
The Professional Association of Contract
Employees, a.k.a. P.A.C.E., has a web site that
explains this innovative concept in detail, http://
www.pacepros.com/.
Because pass-through agencies and umbrella services
charge a fixed percentage of the billing rate they are
explicitly full disclosure, and competition operates freely to
keep the quality of service high and the cost low. Moreover,
there is never any question for whom the agency works. The
agency works for the contractor.
Isn't the customer the person who requests the service, and
isn't the customer the person who pays the bill? Splitting the
job matching and employer of record functions makes it
clear that the contractor is the agency's real customer
because splitting the two functions makes it clear that
ultimately the contractor is the one who pays the bill.
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1-38
Why the Competitive Marketplace Will Eventually
Replace Temp Agencies With a Better Model.
We have seen that the contractor recruiting industry is
completely upside down when it comes to ethical and
professional standards of conduct. The industry operates
with a built-in conflict of interest that pits recruiting firms
against the contractors who are their real customers. Unlike
all other professional talent agents, indeed all other profes-
sional service providers, contract employment recruiters are
the only professionals that hide their rate structure. The
contractor recruiting industry is the only industry that
operates under the premise that their real customer is
always wrong.
Fortunately, environmental forces are rapidly converging
that can put this industry right side up. Thats the good
news. The bad news is that the convergence of environ-
mental forces is not enough. Contractors themselves must
create the market demand that will reform this industry.
Contractors must first break the enfeebling shackles of their
former masters, and reclaim control over their own careers.
What are the converging environmental forces that will
help bring down the predatory recruiting firms? Here are
the main ones as I see it:
s Corporate HR departments are getting more
aggressive.
s Career pages on corporate web sites are getting more
sophisticated.
s The rise of hourly-paid contract recruiters.
s Contractors are getting smarter and more assertive.
s Online forums and discussion groups.
s Agency-supported job-posting sites are discovering
the client.
s The rise of free agent portals.
s Readily available online rate and salary information.
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s A new breed of contractor-friendly recruiting firms
and employers of record.
Corporate HR Departments Are Getting More Aggressive.
At least 50% of personnel search activity by corporations
will soon be handled internally without the need for
external recruiters according to a report by Thomas Weisel
Partners, a well-respected investment bank with numerous
ecommerce investments. You can read the Executive
Summary of the Thomas Weisel Partners White Paper, titled
eCruiting: From Job Boards to Meta Markets, at http://
www.tweisel.com/client/index.html.
Some have suggested that within the next 2-3 years
corporate online recruiting (and possibly another business
cycle downturn) will permanently eliminate over one-third
of all external recruiters.
In-house corporate recruiters are in direct competition
with outside recruiting firms, and they are doing what it
takes to identify potential talent. Here is an example of
what I mean. At a recent workshop for corporate recruiters
a technical guru in the HR department of a major software
company revealed that their corporate servers identify the
IP address of every visitor to the companys web site. If the
IP address belongs to a competitor the web site displays a
special career page designed to recruit that competitors
employees. Pretty clever, eh?
Companies are also hiring consulting firms to teach their
HR staffs how to use sophisticated software to mine the
Internet for job candidates. Of particular interest are passive
candidates. Passive candidates are employees who for one
reason or another are not actively looking for work. They
may have posted a resume on the Internet, or their company
has posted their name and e-mail address on a corporate
web site. Chances are, if your name, job title, and e-mail
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address appear anywhere on the Web you have been added
to the candidate database of one or more potential
employers.
You may have noticed that some companies advertise
career opportunities on national television. But, enterprise
application software giant PeopleSoft wins the prize for
most aggressive job-related advertising. The HR
department (not PeopleSoft, mind you, but the HR
department itself!) at one time sponsored a major tennis
competition at which the HR department advertised jobs at
PeopleSoft on national television. Currently, PeopleSoft, the
company, is sponsoring the career of PGA golfer Gary
Nicklaus, up-and-coming son of golf legend Jack Nicklaus.
PeopleSoft understands that its prospective employees and
software customers play upscale sports.
Career pages on corporate web sites are getting more
sophisticated.
The PeopleSoft web site, http://www.peoplesoft.com/,
illustrates how corporations are becoming ever more
sophisticated at marketing their career opportunities
directly to job candidates and consultants.
The Careers link takes you to the PeopleSoft employment
section where you can search jobs by job category, job title,
and location. Borrowing a trick from e-commerce web sites,
PeopleSoft lets you fill an electronic briefcase with up to
five jobs and then submit your application online. Another
page lists upcoming job fairs, recruiting events, and parties.
The Events page recently proclaimed: We throw a hell of a
party. We just had a kick-out-the-jams, swing-till-dawn
recruitment event at the Metreon in San Francisco with
Lavay Smith & Her Red Hot Skillet Lickers. If you're inter-
ested in getting the scoop on our next event, give us your e-
mail address and we'll keep you posted.
The Benefits page promotes flex time, casual dress, and
free PeopleSnacks three times a week. The company
provides a free shuttle service, money to pay for public
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transportation passes, and a guaranteed ride home if you
have to leave early or work late. The PeopleStore sells
cool, high quality PeopleSoft merchandise: baseball caps,
golf balls, key chains, boxer shorts, and much more. New
parents receive a PeopleBaby package, complete with a
PeopleBaby T-shirt, a Growing Child magazine
subscription, and a card from Dave. (Dave's the hip boss of
PeopleSoft.) The Benefits page invites new employees to
have Lunch with Dave. (Yes, lunch with Dave is an
official company benefit.)
A page on Corporate Culture emphasizes the Fun Factor
and the contribution of individuals. A dedicated College
page pitches PeopleSoft to college grads, and promotes paid
co-op internships.
Job candidates and consultants visiting the PeopleSoft
Career Opportunities page can even link to a Recruiters
page that lists the names, e-mail addresses, and areas of
specialization of approximately forty in-house PeopleRe-
cruiters.
As the PeopleSoft Career Opportunities pages so
abundantly illustrate, companies are becoming increasingly
sophisticated in their approach to recruiting talented
professionals. I suspect that we will see the day soon when
contract professionals are contacted directly by aggressive,
in-house corporate recruiters as often, if not more often,
than by outside recruiting firms. This will be a good thing
and a welcome development.
The Rise of Hourly-Paid Contract Recruiters.
Contract recruiting is growing by leaps and bounds.
Companies are learning that it is almost always cheaper to
hire a contract recruiter by the hour than to go through an
outside agency. Because of this, it is quite likely that when a
contractor calls the HR department of a potential client that
the person who answers the phone will be a fellow
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contractor. Contractors share a common bond, and that can
only bode well for contractors looking for a new
assignment.
Contractors Are Getting Smarter and More Assertive.
At long last the contracting industry is maturing and
growing wiser, and there are more old pros who know the
ropes. Savvy contractors know how to deal with outside
recruiters, and they also know how to avoid them
altogether.
Experienced contractors are more likely to have a
powerful professional network of former colleagues,
coworkers, and client contacts. They know that a well
maintained professional network generates a full pipeline
of high-paying and challenging assignments. That is why
experienced contractors devote special attention to the care
and feeding of their professional network.
Savvy contractors are comfortable picking up the phone
and calling client companies directly to set up interviews.
They are unwilling to turn over this important function to
an outside recruiter who will take 20% to 30%, or more, off
the top for simply making a few phone calls. Savvy
contractors appreciate the value of money and time, and
they spend both wisely.
Online Forums and Discussion Groups.
Newsgroups, specialized e-mail lists and discussion
groups have been around for years, but they are not readily
available to everyone, and they can be rather cliquish. One
online forum, however, stands out as the single most
popular source of real-time information for independent
contractors and contract employees. It is Janet Ruhl's
Computer Consultant's Message Board, http://
www.realrates.com/bbs/.
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Janet Ruhls Message Board has educated more contractors
than any other online resource, including The Contract
Employees Handbook. The Message Board is a place where
contractors can communicate with other contractors, or just
lurk on the sidelines soaking in the wisdom of experienced
pros. Janet Ruhls web site also hosts a job matching
database of contractors and projects, as well as the webs
most extensive and reliable database of rates and salaries.
Janet Ruhls Message Board is a major force awakening
contract employees to the abusive practices carried out by
predatory recruiting firms. To the extent that knowledge is
power, Janet Ruhls Message Board gives contractors the
power to take control of their careers, and deal effectively
with agencies and clients alike.
Other online forums pale in comparison to Janet Ruhls
Message Board, but they are nevertheless worth checking
out:
s Contract Employment Weekly, http://
www.ceweekly.com/
s Contract Employment Daily, http://
www.cedaily.com/
s RoadWhore, http://www.roadwhore.com/
s CPUniverse Forum, http://www.cpuniverse.com/
forum/
Agency-Supported Job Posting Sites Are Discovering
The Client.
The first online job boards for technical and professional
contractors were supported almost exclusively by outside
recruiting firms. For example, job-matching sites like
DICE.com charge recruiting firms several hundred dollars a
month to post job specifications in a searchable database.
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In theory, online job postings are supposed to be for real
jobs at real companies, but more often than not the online
postings are simply bulletin board ads for the agencies that
post them -- nothing more than shiny bait on a recruiter s
hook.
When you visit an online job board you have two options:
1. You can search the board for interesting jobs and then contact
whoever posted the job, or
2. You can post your skills and contact information online and
wait for someone to call you.
Either way, you run a much higher chance of connecting
with outside recruiting firms than connecting directly with
prospective clients. The reason is simple. Recruiting firms
pay big bucks to post jobs online and purchase resumes
from the job boards. Most recruiters depend on the job
boards for their livelihood, and they compete head to head
with hundreds of other recruiters who have paid for the
same information. Is it any wonder they should be so
aggressive at tracking you down?
Agencies that subscribe to these services (and there are
over 1000 of them that subscribe to DICE.com) receive an e-
mail attachment listing several hundred resumes submitted
during the previous 24 hours. Agencies can also search the
resume database online.
Hundreds of agency researchers (called sourcers) and
rookie recruiters sort through the list of resumes in order to
build an inventory of qualified candidates that they can sell
to client companies at margins as high as 50% of the billing
rate.
Prior to July 1, 1999, DICE prohibited client companies
from posting jobs, and for good reason. Full-time jobs and
contract assignments posted directly by client companies
would compete with the same jobs posted by agency
subscribers, thus driving down the agencies' inflated
margins.
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Following the purchase of DICE by EarthWeb for $35
million in the summer of 1999 the ban on job postings by
client companies was lifted. This move heralded the
realization that client companies represent a greater
potential source of income than third-party recruiting firms.
In a cruel irony, DICE recognized that the very same
recruiting firms that had made DICE so successful were
now entirely expendable. Recruiting firms had become
addicted to the sites online job posting service to the extent
that their very existence depended on the leads they
received by subscribing to DICE. With a lock on agency
subscriptions, DICE had little to loose by opening its online
service to client companies.
There are dozens and dozens of agency-supported job-
posting sites that operate just like DICE, and all of them
must address the issues raised by posting agency jobs and
client jobs on the same job board.
Here is a tip that will reduce your grief and increase your
earnings. When registering your availability online type the
following message prominently at the top of your resume
and in the text box where you enter additional information:
COMPANIES ONLY.
ABSOLUTELY NO OUTSIDE RECRUITERS.
My Employer of Record for W-2 Tax Status is
P.A.C.E., Professional Association of
Contract Employees.
This message should dissuade most outside recruiters
from bothering you with their pitiful sales pitches. It also
conveys that you have W-2 tax status, making you more
attractive to IRS-wary companies. Use this message every
time you post your resume online.
[Authors note: I listed P.A.C.E. in this example because I
personally like P.A.C.E., not only because P.A.C.E. is my
own organization, but because P.A.C.E. is the only umbrella
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service I know of that doesnt actively market its services
to outside recruiting firms. There is no reason why you
could not list a different umbrella service or pass-through
agency as your employer of record.]
A New Breed of Job-matching Service.
For as many agency-supported job sites as there are on the
Internet there are far fewer sites that match technical and
professional contractors directly with client companies. Two
of the originals are Independent Contractor Exchange (ICE),
http://www.icenationwide.com/, and Software
Contractors' Guild, http://www.scguild.com/. In the mid
1990s these companies pioneered the idea of charging a
small subscription fee to client companies and contractors
to post job orders and contractor profiles online. Neither
service takes a cut of the billing rate, and neither accepts job
orders from recruiting firms.
More and more job posting services are now following the
leads set by Independent Contractor Exchange and Software
Contractors Guild.
Contractors who use these services may contract directly
with client companies (providing they comply with the
IRSs common law factors) or they can choose their own
employer of record. More elaborate portal sites offer a
wide selection of services and resources designed to help
independent contractors and self-reliant contract employees
locate assignments and manage all aspects of their careers.
on their own without having to use predatory recruiting
firms. Some of the most popular free agent portals are:
s http://www.ework.com/
s http://www.skillsvillage.com/
s http://www.guru.com/
s http://www.iniku.com/
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The sales pitches of these free agent portals stress that
they will connect you directly with client companies, but a
word of caution is in order. There is no guarantee that your
information will go exclusively to client companies. Any
company can pay a fee and post jobs, including predatory
recruiting firms.
You can expose the outside recruiting firms by asking
every recruiter that calls this question:
May I, or my own employer of record, contract
directly with the client or its in-house agent?
If the answer is No, then you are talking to an outside
recruiting firm and not to a direct representative of the
client company. The whole idea of registering with a free
agent portal is to connect directly with potential clients,
thereby avoiding predatory recruiting firms.
Free agent portals hold the promise of displacing
predatory recruiting firms in the same way that online
services in other industries are displacing high-priced
stockbrokers and travel agents. By some accounts, online
recruiting will displace up to one-third of all external
recruiters within three to five years, and that would be a
very good thing.
A caveat regardi ng free agent portal s
Many agency-supported job-matching sites look like free
agent portals, but in reality they are wolves in sheep's
clothing. Beware of job-matching sites that promise to
connect you directly with client companies, but then feed
(or sell!) your contact information to predatory recruiting
firms. Be especially wary of companies that also purport to
offer an umbrella service in conjunction with their agency-
sponsored job-matching service. You stand to take a big hit
financially by accepting assignments through the recruiting
firms that subscribe to a job-matching service. Also, in a
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classic example of bait and switch, you may be prevented
from using the umbrella service altogether as a condition of
accepting a contract assignment through a recruiting firm.
If you do use an online job-matching service make sure
that it will never feed your information to third-party
recruiting firms. If you get calls from the dark side, tell
them to take a hike, and avoid using the offending online
job-matching service in the future.
Remember, you can maximize the chances that client
companies, and not recruiting firms, will call you by typing
the following message prominently at the top of your
resume and in the text box where you enter additional
information:
COMPANIES ONLY.
NO OUTSIDE RECRUITERS.
Contract Employees.
Readily Available Online Rate and Salary Information.
Predatory recruiting firms wont tell you what they are
billing the client company for your services, but that
doesnt mean that you cant find out what your services are
worth on the open market. Rate surveys and salary surveys
are readily available on the Internet. For this reason, it is
becoming increasingly difficult for predatory recruiting
firms to lowball the rates they are willing to pay you. You
must, however, beware of rate surveys that are sponsored
by agency advertising, or worse yet, that report low rates
submitted by predatory agencies.
Want to know what your skills are worth? Go to any major
search engine and enter the keywords <rate survey> and
<salary survey>. Then prepare to be overwhelmed with
information you can use to put a price on your skills.
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Absolutely the best survey site, in my opinion, is at Janet
Ruhls Realrates.com, http://www.realrates.com/. Janet
Ruhls Real Rate Survey and Real Salary Survey report rate
and salary data submitted by high tech workers themselves.
This is the most comprehensive survey site on the Internet,
bar none.
You might ask, How can salary information help me if I
charge by the hour? Employ the divide-by-one-thousand
rule of thumb. Simply divide by one thousand the salary for
a regular employee who does the same type of work as you.
The result is the minimum hourly billing rate for a
contractor doing the same job.
Armed with solid information about what your skills are
worth to client companies you will be able to recognize
when a slick recruiting firm (or cheap client!) tries to push
you into accepting a lowball rate. You can parlay the infor-
mation in rate and salary surveys into tens of thousands of
dollars in additional earnings each year.
A new breed of contractor-friendly job-matching services
and employers of record.
A new breeze is blowing, and it carries the promise of a
new breed of recruiting firms and employers of record.
Agencies are finally getting it - technical and professional
contractors want to work with agencies that treat
contractors like valued customers, not as inventory.
The two primary services (job matching and employer of
record) that were once bundled into a single offering by
predatory recruiting firms are being unbundled and offered
as separate services by more progressive agencies whose
mission is to serve the community of technical and profes-
sional contractors.
J ob Matchi ng
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Not all contractors will be comfortable doing what it takes
to land projects and assignments on their own. Some will
require an ally, someone with professional integrity,
someone who represents the best interests of the contractor.
Writers have literary agents, professional athletes have
sports agents, and actors have talent agents. We will soon
see the rise of marketing agents for technical and profes-
sional contractors.
Marketing agents will not employ contractors, and they
will not sign a contract with the contractors client. All they
will do is locate projects and set up interviews. The
contractor is then free to sign directly with the client or
work through a separate employer of record. Stand-alone
marketing agents have no responsibility for invoicing,
collections, payroll, benefits administration, or tax
collecting. What could be easier?
Talent agents in other fields charge no more than 10% of
the billing rate to keep their talented professionals in work.
One would hope that marketing agents for technical and
professional contractors will charge about the same.
Marketing agents who can keep twenty or thirty contractors
on the job will do very well financially, and they will earn
honestly every penny they make.
Personal marketing agents are extremely rare, but I expect
that market forces will soon create them in large numbers.
The increased popularity of pass-though agencies and
umbrella services has laid the groundwork for the
emergence of personal marketing agents.
At long last, service oriented individuals can contact
contractors on the web and offer personal job matching
services for just 10% of the billing rate. Will stand-alone
marketing agents enter the job-matching arena? Will savvy
contractors use their job-matching services? The emergence
of inexpensive personal marketing agents, combined with
the rising popularity of free agent portals, will drive yet
another wooden stake into the vampire heart of the blood-
sucking contractor recruiting firms.
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Empl oyers of Record
The reward for locating an assignment on your own is that
you can shop for an employer of record that treats you like
a real customer. The best employers of record are pass-
through agencies and umbrella services.
Pass-through agencies are like regular temp agencies in
every respect, except that they omit the job-matching
function. Consequently, they take less off the top than a
recruiting firm, their fixed margin being usually between
20% and 25% of the billing rate.
Although some recruiting firms also offer stand-alone
employer of record service, contractors who locate their
own assignments should avoid using recruiting firms as
their employer of record. Do not loose sight of the fact that
recruiting firms represent the client. Not only do recruiting
firms charge more than pass-through agencies, but their
loyalty is in the wrong place.
Umbrella services are by far the best form of employer of
record. They offer more and better services than pass-
through agencies, and they also charge less. Self-reliant
contractors will always come out ahead by using a true
umbrella service as their employer of record.
Umbrella services offer technical and professional
contractors a real ally to help them break the bonds of
predatory recruiting firms and once again regain full
control over all aspects of their contracting careers.
What Can Contractors Do?
How can contractors take advantage of these changes in
their environment to wrestle control away from the
recruiting firms? Here are some specific action items.
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Act like an independent business.
Repeat after me:
I am not an employee of the client. I will not act
like an employee of the client. I wont even think
like one. I am an independent business.
Now, dont you feel better.
Whether you are an IRS-compliant independent contractor
or a contract employee working through an employer of
record, you must conduct yourself as an independent
business, that is, as an outside vendor. You are not an
employee of the client and you must avoid any appearance
that you are.
Identifying with employees of the client only leads to
grief for both you and the client. I have heard contractors
complain because they were not invited to the company
picnic, or they were passed over when the company handed
out tee-shirts and coffee mugs to its regular employees.
I have also seen instances where contractors filed
unemployment claims and workers compensation claims
against their clients.
This kind of stinkin thinkinsaps you of your personal
power and limits your professional growth. As a self-
reliant, independent business you are free to move in any
direction you want, learn whatever excites you, progress at
your own speed, set your own billing rates, and not take
guff from anyone. Self-reliance builds character.
Businesses often outsource key business functions to
outside specialists. They use outside vendors to balance the
books and prepare their tax returns. They outsource their
marketing function to PR firms and advertising agencies,
and they use printing services and direct mail processing
companies.
As an independent business you can outsource the
marketing function to dozens of online job-matching
services or to a marketing broker. You can also outsource
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the employer of record function to a pass-through agency or
umbrella service. Always keep in mind, that you are
outsourcing these functions to professional service
providers, and never, never, forget that you are the boss and
the agencies that provide these functions are working for
you.
Now, repeat after me:
I am an independent business. I am the boss. Job
matching services and my employer of record
work for me. I am the customer, and the customer
is always right.
This is your mantra. Say it often. Say it when you are
feeling weak and insecure. Say it before the altar of the evil
recruiting firm. Say it when doubt comes calling in the
middle of the night, and say it over and over and over until
all doubt is removed.
If you must use a recruiting firm Take control.
Read the Contract Worker s Bill of Rights, and hold the
agencies accountable for the guidelines and principles in
that document. You can read the Contract Worker s Bill of
Rights in Appendix B of this Handbook and at http://
www.cehandbook.com/cehandbook/cwbor.html.
Contractor recruiting firms are dinosaurs. They are unnec-
essary, irrelevant, and they are headed for extinction. But
dont think that makes them harmless. More fearsome than
Tyrannosaurus rex, many contractor recruiting firms would
like nothing better than to take a gigantic bite out of what
the client pays for your consulting services.
Stay out of their way. Avoid them like the plague (a
plague of T. rexes?). You dont need them, you dont want
them, and they generally do more harm than good.
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Nevertheless, circumstances may result in you getting a
client through the job matching services of an outside
recruiting firm. So, how do you sit down to dinner with a T.
rex and not end up becoming the main course?
First of all take control of the relationship. You call the
shots. Make it absolutely clear that they are working for
you. Dont let them pressure you into a subordinate
position.
I nsi st on knowi ng the bi l l i ng rate
If the recruiting firm will not tell you the billing rate then
they cannot be trusted to manage your relationship with the
client. You need a partner that represents you. When the
recruiting firm refuses to tell you the billing rate it means
that they dont respect you. It also means that their primary
loyalty is to the client, and this conflict of interest will work
to your disadvantage every time.
I call disclosing the billing rate the acid test because it is
the best indication I know of that you are dealing with an
honest, trustworthy, professional service provider.
Whenever you make initial contact with a recruiting firm
say the following:
I am looking for a firm to market me to end
users. I am only sending my resume to firms that
disclose the billing rate. Do you tell your contract
employees what you are billing the client for their
consulting services?
Stand firm on this issue. You will know within seconds of
asking this question if you can trust the firm. If the recruiter
hedges or gets defensive drop that recruiter like a hot
potato. Any firm that refuses to tell you the billing rate is
reserving the right to rip you off.
How else will outside recruiters get the message that
hiding the billing rate is wrong unless you convey to them
in no uncertain terms that hiding the billing rate is a deal
breaker? If outside recruiters see first hand that hiding the
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1-55
billing rate is costing them commissions then the compet-
itive marketplace will select more reasonable recruiters.
Asking for the billing rate creates market demand for honest
recruiters, and it builds respect for the contractor as a
valued customer as opposed to a marketable piece of
inventory.
Protect the i ntegri ty of your resume
Dont let anyone modify or distribute your resume
without your knowledge, review, and express permission.
This is more than a privacy issue. A hyped-up or inappro-
priately modified resume can create unrealistic expectations
of what you can do for the client, thereby damaging your
reputation and hurting your ability to obtain gainful work.
Unauthorized distribution of your resume can result in
multiple submissions to the same client, causing you to be
removed from consideration for a qualified assignment.
Insist that you are told beforehand precisely where your
resume is being sent so that you can keep track of who sees
it and when.
To protect the integrity of your resume, place this notice
prominently at the top of your resume:
This document is expressly NOT in the
public domain and remains the sole
property of the copyright owner.
Distribution or modification of this
document without the knowledge,
review, and express permission of the
copyright owner is strictly
prohibited.
Resume of [Your Full Name]. Copyright
2000 [Your Full Name]. All rights
reserved.
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Copyright protection is not diminished because your
resume is posted to an electronic database, personal web
page or other public venue. All published copies of your
resume should contain the above message.
Protect your references
Never, never, give reference information to a recruiting
firm. If a recruiter asks for your references tell the recruiter
that once an interview has been scheduled you will hand
deliver (or e-mail) a confidential list of references to the
client.
Recruiting firms are notorious for abusing the confidenti-
ality of references by doing any and all of the following:
s Market other candidates to references.
s Solicit job orders from references.
s Solicit from references the names of co-workers,
colleagues, and contractors.
s Solicit business leads from references.
s Attempt to recruit references.
s Transfer or copy reference information to a location
outside the contractors own file.
s Make reference information available to others not
specifically engaged in placing the contractor with a
specific client.
Your references speak for your reputation, and your
reputation is your most important credential. Guard your
references with your life.
Distributing your reference information to zealous
recruiters can alienate your references and seriously
damage your reputation and your ability to locate work.
Protect your freedom to work.
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Read the employment agreement carefully, and strike out
or modify abusive language. Non-compete periods should not
last longer than six months. They are only valid in those cases
where the agency introduced you to the client, and only then for the
specific department and physical location where the assignment is
carried out. Do not sign away the right to work for your own client.
Use a marketing agent instead of a recruiting firm.
When you authorize a recruiting firm to help you locate a
contract assignment a sales person picks up the phone and
starts calling client companies. There is nothing very
complicated about that, but it would be nice if the person
making the marketing calls on your behalf had more than a
passing understanding of what you do and how well you do
it.
The truth be told, anyone can call clients on your behalf to
set up interviews, and they will do just as well as the
average recruiter. In the current job market finding qualified
contractors is the hard part; selling them to client companies
is a cakewalk.
Lets say that you are working so hard that you have little
spare time to market your own consulting services. What
you need is a marketing agent.
Your marketing agent can be anyone who is able to talk
intelligently about what you do, and who also has the time
to call potential clients during the day. Ive heard of
contractors using their mother, their spouse, another
contractor, even their teenaged children to help them set up
interviews.
Do you know a retired person who might appreciate the
extra income they could earn by setting up interviews for
you? They would only have to make calls once every few
months or so as each contract winds to a close.
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How would you pay your marketing agent? Talent agents,
sports agents and literary agents generally take 10% of
gross receipts for setting up deals for the talented profes-
sionals they represent. Do you know someone who would
appreciate a 5% or 10% royalty on your billings in return for
making a few calls and setting up a successful interview?
I get lots of feedback from contractors regarding how they
market their services. As you would expect, very few
contractors are comfortable cold calling client companies.
Additionally, few contractors know someone else, other
than a professional recruiter, who would make the calls for
them.
This is undoubtedly why the vast majority of contractors
agree to work through overpriced contractor recruiting
firms.
Given the high rates charged by contractor recruiting
firms, it is hardly surprising that many contractors would
rather pay a fellow contractor or another knowledgeable
person between 5% and 10% of the billing rate in order to
interview directly with client companies.
Fortunately, there are more than a few contractors who are
willing to call client companies on behalf of their fellow
contractors. These contractors represent a sizable untapped
reservoir of marketing brokers among the legions of
contract workers.
Here is an example of what I mean. One of P.A.C.E.s
division managers, Sabrina, actually likes calling
prospective clients. She is a natural networker, and she
regularly keeps in touch with former co-workers and
clients. For Sabrina, setting up interviews and snagging
new contracts is a piece of cake.
When Sabrina joined P.A.C.E. I explained that she could
earn a rebate equal to 1% of her billing rate for every
contractor that she successfully referred to P.A.C.E. The
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idea of offsetting the P.A.C.E. service fee with multiple
rebates naturally appealed to her, and she explained that
she had lots of contractor friends she wanted to refer.
Recognizing her talent for team building, I also suggested
that she refer fellow contractors to her client companies in
return for a percentage of the billing rate. Within a week
Sabrina had referred three contractors to P.A.C.E. and also
got them contract assignments at her client company.
Sabrina charges each contractor 10% of the billing rate for
marketing them to client companies. She makes sure that
the contractors add 10% to their billing rate in order to
cover the finders fee. Contractors may pay a little more than
if they had marketed themselves, but they pay a whole lot
less to Sabrina than they would have paid to a predatory
recruiting firm.
Sabrina has taken the first steps to becoming a stand-alone
marketing broker. Imagine the boost to her contracting
income if Sabrina could keep 10 or more contractors
actively billing at any given time.
As a contractor you can contribute to the rise of marketing
brokers by insisting on working only with recruiting firms
that offer a stand-alone marketing service. When you speak
with a recruiter say this:
I am looking for a marketing agent who will set
up interviews for me with end users. I am willing
to pay no more than 10% of the ongoing billing
rate for a successful interview. I will either
negotiate a direct contract with the end user or, if
necessary, I will use a separate employer of
record. Are you willing to market me for no more
than 10% of the billing rate?
The recruiter can take it or leave it. By adopting this
attitude you put yourself in control. You establish that you
are the customer. An assertive attitude builds respect for you
as a self-reliant contractor, and it creates market demand for
stand-alone marketing services.
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You may have to kiss a lot of frogs before you find your
prince. But thats the bad news. The good news is that you
will learn who you dont want to do business with. And,
better yet, when you do find an agency that works for you,
you will have found a marketing broker that can keep you
working with little or no downtime between assignments.
Bottom line: If you absolutely must use someone else to
market your contract services to potential clients a stand-
alone marketing broker is the way to go.
Market your own contract services.
Regi ster onl i ne.
The pros market their own contract services, and now
thanks to the Internet so can you.
The easiest (or laziest) way to market yourself is to
register online with the various job boards. Its the path of
least resistance. It is also the path to predatory recruiting
firms.
A few pages earlier I described how you can freeze out the
recruiters and preferentially attract client companies when
registering online. I will repeat what I said earlier because it
is so important.
When registering your availability online type the
following message prominently at the top of your resume
and in the text box where you enter additional information:
COMPANIES ONLY.
NO OUTSIDE RECRUITERS.
Contract Employees.
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This message should dissuade most outside recruiters
from bothering you with their pitiful sales pitches. It also
conveys that you have W-2 tax status, making you more
attractive to IRS-wary companies.
Using this message, you can register on dozens of job
boards (a recent survey identified over 30,000 online job
boards!) and get the kind of responses you want, namely,
direct calls from client companies themselves.
If you think you might be talking to an outside recruiter
you can smoke them out with a few simple questions:
s Questi on: Do you work for a recruiting firm or do
you work for the client where I will be working?
Bad answer: I work for a recruiting firm.
Good answer: I work for the client.
s Questi on: Can I negotiate the billing rate directly
with the client?
Bad answer: "No."
Good answer: Yes, the billing rate is entirely up to
you and the hiring authority for the client.
s Questi on: Do you take a commission out of the billing
rate if I accept an assignment with your help?
Bad answer: Yes, I earn a commission out of the
billing rate.
Good answer: No, I do not earn a commission. You
receive the entire billing rate.
s Questi on: Can I or my employer of record sign an
independent contractor agreement directly with the
client?
Bad answer: No, my company will sign a contract
with the client.
Good Answer: Yes, either you or your own employer
of record will sign an independent contractor
agreement directly with the client.
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Good answers indicate that you are speaking with an
employee or other direct representative of the client, such
as an hourly-paid contractor just like yourself who works as
a recruiter for the clients HR department. This is good. You
want to hear good answers.
Bad answers indicate that you are speaking with an
outside recruiter who makes his or her living by taking as
big a bite as possible out of your billing rate. Dont be too
harsh with recruiters who respond to your online resume.
Obviously, they cant read. Either that or they dont respect
your wishes, and you definitely do not want to work with a
person like that. Blow a whistle into the phone and hang up
-- or politely explain that you only work with literate
people who respect your wishes, and hang up.
Mi ne corporate web si tes.
Corporate web sites contain a wealth of information about
departments, projects, and key personnel. And we have
already seen that many also have sophisticated career pages
where you can browse available jobs and submit your
resume for consideration. Dont pass up the opportunity to
learn as much as possible about a prospective client before
you go in for the job interview.
Contact cl i ent compani es di rectl y.
Client companies want to hear from you. HR departments
dont like outside recruiters any more than the rest of us,
and for good reason. Recruiting firms inflate the cost of hire
for contingent labor. Want to hear the HR worlds sweetest
music? Its this.
Hi, my name is Joseph Java Jockey. Im
marketing my own services as a contract
programmer. I have W-2 tax status through my
employer of record, P.A.C.E., and I can start
tomorrow.
Go after adverti sed, permanent posi ti ons.
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Dont be afraid to inquire about permanent positions. Use
the old temp-to-perm ploy to earn contract rates while
trying out a permanent position.
I have previously discussed the divide-by-1000 rule of
thumb as a simple way to convert annual salaries into
hourly billing rates. By adeptly applying the divide-by-1000
rule of thumb you can actually apply for permanent
positions, yet be hired as a highly-paid contractor. A report
published by Information Week in the first half of 2000
estimated that there were approximately 1.6 million unfilled
high tech jobs being offered by non-governmental, for-
profit companies with more than 50 employees. It was
expected that half of the full-time positions would never be
filled.
Many companies still have a bias for permanent
employees. As a contractor your challenge is to give these
companies a reason to view you as a candidate for their
unfilled permanent positions.
Here is the drill. Apply directly for an advertised
permanent job, or just cold call HR out of the blue to see if
they need someone with your skill set. Suppose HR tells
you they only want to hire a permanent employee. Ask
them what is the salary range. Now, suppose that the HR
representative tells you that the salary range is $75,000 to
$85,000 depending on experience. Voila! You now know that
the equivalent hourly billing rate for that position is $85 per
hour.
Explain that you have been working as a contractor, but
that you are available immediately as an interim solution,
and that you might even consider a temp-to-perm position.
Explain that temp-to-perm would give you and the
company a chance to check each other out with little or no
risk. And, best of all, you are available immediately. You
will want to stress that because of your broad experience as
a contractor you can hit the boards running. Let the
company know that you are the bromide that will ease their
pain.
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This approach lets the company evaluate you as a
potential full-time employee, which is just what they are
looking for, yet allows you to earn top dollar as a technical
or professional contractor.
You flew in the window and landed right in their lap, and
if they know whats good for them they'll jump at the
opportunity to hire you. You may not be the perfect fit they
were looking for, but what the heck. You are only a
contractor, there is little or no risk, and your hourly billing
rate is close to the fully loaded labor cost, so hiring you as a
contractor is a break-even situation all the way around.
Of course, just because you are working temp to perm
doesnt mean that you have to convert to full time
employment, but if you do convert you are already poised
for the top of the salary range. The company is not likely to
replace you with a permanent employee because you will
have become a known quantity, and replacing you with an
unknown would be risky at best.
Ask your fri endl y l i brari an.
Yes, I agree, using the library is a bit archaic, what with all
those musty books and such. And yet, the library is a
wonderful source of invaluable information. Best of all,
libraries have librarians and docents. These are the nice
people who dedicate their lives to helping you find the
information you need. And the information you need is a
listing of local companies organized by size, location and
industry. You need this information so that you can contact
the companies directly to market your contract services.
Ask at the information desk where you can find the directories that
list companies by industry type and geographic location. Most
directories have headings for the main phone number, address and
number of employees. Take the directory and a handful of coins to
the nearest copier, and copy the relevant pages for your search.
Job seekers in California are blessed with three especially compre-
hensive directories:
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s Commerce And Industry Directory
s Richs Business Directories
s Duns Regional Business Directory
Duns directories are also available for every major metropolitan
region in the United States. All three directories provide separate
listings of companies by name, by product/service, by city, and by
size. They provide phone, fax and 800 numbers, local addresses,
number of employees, and in some cases e-mail and web site
addresses.
Your librarian will also cheerfully direct you to additional lists
compiled by local business journals and other sources.
Bui l d and nurture a powerful , professi onal network.
Its not how many people you know or how much you
know, but how many people you know who know how
much you know. Know what I mean?
This is the essence of building a powerful professional
network. Build and nurture a powerful, professional
network, and you will never be out of work, even in slow
times.
We will visit this subject in detail in a later chapter, so for
the time being I will simply give a bulleted list of key
points.
s Develop a close professional relationship with one or
more mentors.
s Be a mentor. Create a network of coworkers who are
indebted to you for your good advice and expertise.
s Be nice. Nice people help other nice people. I know, it
sounds trite, but nice people do finish first. Arrogant,
rude, overly shy, insensitive, indecisive, negative,
surly, nasty, or mean-spirited people are much less
likely to receive job leads from coworkers and fellow
contractors.
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1-66
s Trade business cards and contact information with
everyone you meet.
s Prepare a simple, plain-English, 30-second description
of what you do and why it is important, so clear and
free of jargon that even your grandmother could
understand what you do. Tell it to everyone you meet.
s Collect home phone numbers and personal e-mail
addresses from co-workers and client supervisors.
Remember, people change jobs frequently nowadays.
s Maintain a list of professional contacts in your
computer and call regularly to touch base and
exchange information. A call when you are in need
will be much more welcome if you regularly called
when things were going well.
s Contact members of your powerful professional
network at least every other month, and keep them
abreast of your availability and new skills.
s Share job leads and industry news with your contacts.
What goes around comes around.
There is a common thread that runs through these points,
and it is this:
Keep in touch with the people who can help you land
contract assignments.
I ts up to you.
There are lots of ways to land a contract assignment, and
some of them are better than others. The list below ranks
the ways from best to worst. Ironically, most contractors use
the worst way to land an assignment. Very few use the best
way even though the difference in annual income between
the best and the worst ways can be tens of thousands of
dollars.
For example, given a billing rate of $100 per hour, and
accounting for the employers share of payroll taxes, the
difference in gross wage between the two extremes can be
f : t : : | t : | t aj | : j : : ' t It : t : : t
1-67
$20 to $35 per hour. Even if you bill only 1600 hours a year,
the difference can be $32,000 to $56,000, all of which goes
into the pockets of your recruiting firm unless you market
your contract services directly to client companies. It
sounds like a no-brainer to me. What do you think?
Best way to l and an assi gnment (Ful l control )
s Market your contract services directly to client
companies.
s Employ a stand-alone marketing broker to set up inter-
views between you and potential clients.
s Use a recruiting firm that will let you or your
employer of record sign directly with the client.
s Use a recruiting firm that signs directly with the client
but also discloses the billing rate.
s Use a typical recruiting firm that controls the entire
process.
Worst way to l and an assi gnment (No control )
Use a separate employer of record.
If you qualify as an IRS-compliant independent
contractor, and you are comfortable doing your own
bookkeeping and taxes, and your clients are comfortable
working with independent contractors, then you probably
dont need or want an employer of record. If you dont need
or want an employer of record then my advice to you is
dont use one.
On the other hand, if you gotta have one, use a stand-
alone employer of record that works on your behalf exclu-
sively, such as a pass-through agency or umbrella service.
Establish a relationship with a stand-alone employer of
record before you land your assignment. That way you will
be prepared when the client tries to steer you toward an
expensive recruiting firm, or if a predatory recruiting firm
tries to lock you into their own W-2 agreement.
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Tell any clients, recruiting firms, and marketing agents
that you already have an employer of record. Explain that
you will only work with them on a corp-to-corp basis
through your own employer of record.
When you have a stand-alone employer of record in your
hip pocket you can leverage their expertise in dealing with
clients and agencies. It is so much more productive and
satisfying to come from a position of power than to kowtow
to the demands of an outside recruiting firm.
Negotiate a billing rate based on current market rates.
Negotiate your own billing rate. Dont let the client or a
recruiting firm (god forbid!) dictate what you are paid. Let
the free market determine what your skills are worth. In
general, your skills are worth what a recruiting firm would
bill the client, and not what a recruiting firm might be
willing to pay you.
A good place to find contractor's rates is Janet Ruhl's Real
Rates web site at http://www.realrates.com/. Janet posts
both hourly rates and annual salaries submitted by actual
workers. These rates, I believe, are more reliable than the
rates submitted to agency-sponsored job boards by
recruiting firms. Recruiting firms have a vested interest in
reporting only the low rates they pay contractors as
opposed to reporting the higher rates they bill client
companies.
Reliable rate surveys on the web are rare, but surveys of
annual salaries are quite common, presumably because
reporting annual salaries is a less sensitive issue than
reporting hourly contract rates.
You will be overwhelmed by the number of salary surveys
on the web. Just go to http://www.altavista.com/ or http:/
/www.google.com/ or any of the other search engines and
enter the keywords <salary survey>. You could also enter
<rate survey>. In response to a recent search of the
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keywords <salary survey> Alta Vista returned 54K web
pages that mention salary survey, and Google returned 34K
pages.
Narrow down the search by inserting additional keywords
such as <IT> <technical> <computer> <software>
<electrical engineer> etc.
Apply the divide-by-1000 rule of thumb to convert annual
salaries into equivalent hourly billing rates. This is the
method used by many recruiting firms and experienced
contractors to set their billing rates. They ask the client
what is the salary range for a permanent employee doing
the same type of work. Then they divide the upper figure in
the range by 1000 and quote that as the billing rate. For
example, if the salary range is $80,000 to $100,000 then the
equivalent hourly billing rate is $100 per hour. This system
works because the fully loaded labor cost, pro-rata by the
hour, is just about 1/1000th of an annual salary.
Recruiting firms will tell you what your skills are worth if
you know how to decode the pay rates they quote to new
recruits. I have found that recruiting firms initially shoot
for a margin of 50% and then negotiate back to their
minimum affordable margin of 30% to 35%. Use this infor-
mation to decode the pay rates qoted by recruiting firms.
Here is what I mean. Say that a recruiting firms calls you
in response to your online registration on Dice.com. Ask the
recruiter what she would pay for your skills. If she quotes a
W-2 pay rate of $50 per hour you can interpret that to mean
that she expects to bill you out at $100 per hour. You can
probably negotiate the pay rate up to $65 or $70 per hour,
but that is still a far cry from a billing rate of $100 per hour.
I am not at all suggesting that you actually accept a
contract position through a recruiting firm, only that you
use the pay rates quoted by recruiting firms to determine
what your skills are actually worth. Then use this infor-
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mation to market yourself directly to client companies and
invoice at the full billing rate, either directly or through an
umbrella service like P.A.C.E., http://www.pacepros.com.
What This Means For The Future Of Contracting.
s Agencies and client companies will view technical and
professional contractors, whether 1099, corp., or W-2,
as independent businesses and outside vendors. They
will no longer treat technical and professional
contractors like high-tech migrant workers.
s Technical and professional contractors will view job-
matching services and employers of record as profes-
sional service providers who work for the contractor. In
turn, these professional service providers will view
contractors as their only true customers.
s The contracting industry will move from a client
centric orientation to a contractor centric orientation.
s Contractors, not agencies, and not clients, will drive
the contracting industry.
s All contractors regardless of tax filing status will know
their billing rates, and therefore what their services are
worth on the open market.
s All contractors will participate fully in the contract
negotiation process.
s Technical and professional contractors will have better
health benefits, better retirement plans, and more job
security than most permanent employees.
s Contractors will once again control their own careers.

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