What Are The Benefits of Contracting?
What are the benefits of contracting vs permanent employment? Guest writer Steven Baker explains the advantages and disadvantages of being a temp.
March 8th, 2011, a guest article by Steven Baker
What Are The Benefits of Contracting? |
"You can earn HOW MUCH?!"
This is one of the first thoughts I had when I first discovered contracting.
I work as a self-employed Software Testing contractor in Sydney, Australia. In this article, I am going to run through the concept of temping and try to answer
the question: what is the big deal about being a contractor?
What is Contracting?
First of all, you are probably wondering what I mean by contracting, or going contracting. It's a
little bit different to working normally in a job, where you are hired as a permanent
employee on an on-going basis. Some industries call it temping.
As far as showing up, doing your
work, and going home there really isn't any difference either way. The real differences come down to
the paperwork behind the scenes and your appetite for risk... and money!
So here are the five major differences between contracting and regular permanent employment.
#1 - Job Flexibility
When you are a permanent employee, you usually don't have an end date to your employment. The
majority of the workforce is hired on a permanent basis. You just get hired, enjoy regular working
hours, a regular salary, and depending on the company you work for, a range of company benefits.
Then one day you retire. Changing jobs is totally optional, and, though many people don't these days, if you want to you can stay in the
same job for your entire working life (assuming you don't get made redundant).
Many people opt for permanent jobs. Now I am not saying there is anything wrong with that - some people are very happy doing it - but the fact you are reading this website tells me you may be
looking for another way.
With contracting, you will more than likely have a fixed end date when you will finish working in
that job. You will most likely enjoy the same or similar working hours as the other employees. For example: I am currently working on a 12-month contract and I have to work 40 hours per week. The
permanent employees at the company have to work 37.5 hours per week. Other than that there is
no difference to day-to-day goings on.
So the difference here is you move around different companies a bit
more. That is a great benefit - you can get far more work experience, meet a lot more people (and
make more connections) and if you want to take a few weeks (or months) off between contracts, you
can! Temping is, in my eyes, a much better way to go about doing the same job.
#2 - Money
One of the main reasons people decide to go contracting is for the money.
Contractors get paid a lot more than permanent employees. Take one recent example I saw:
a manager who is a permanent employee gets paid an AU $85,000 salary. His subordinate, effectively
his second-in-charge, gets paid AU $650 per day as a contractor, or AU $169,000 annualized. He is earning almost exactly double what his boss is earning!
The difference is staggering, and as you might have seen by my opening statement, was my deciding
factor for ending a life as a permanent employee and becoming a contractor. Those are real figures
from the software testing industry, and ones I hope to soon see on my own payslip!
It may not be such large sums in your industry so please don't get your hopes up too high. However,
you can probably earn more than what you earn now, by taking this step.
Here are a few reasons why a temp can charge more than regular staff:
- In-demand skills - the contractor knows that their skills are in demand and this ensures they get the going market rate.
- Dispensability - the contractor takes a higher risk than the permanent employee by being
more dispensable (see below).
- No benefits - the daily rate includes all of the contractor's benefits, whereas permanent
employees receive this on top of their salary.
- Experience - there is a snowball effect where the more contract jobs you work on, the more
experience you will have and therefore the more money you can command.
- Confidence and vision - having faith in yourself to take the plunge and become
a self-employed contractor shows you are confident in your own abilities. Confident
people are more likely to get what they want compared to people who are not confident.
I was told by an experienced contractor that my first contract was probably going to be a "dud"
contract - where I wouldn't get paid very well simply because it was my first one. So I was happy with 12
months in order to get into it. At the end of the contract I can either renew with the same company,
and ask for more money if the market rate is better, or I can move to another company who is
paying better, without any hard feelings.
If you can increase your rate at every new contract, you can
give yourself continuous pay rises - and how many permanent roles can offer that?! This in turn can lead to
greater rewards as time goes on.
#3 - Job Security
Job security is very important to most people. But as we've seen with the recession, the idea that any of us have any real job security is a myth.
Nevertheless, a permanent employee feels like a safe employee. And in some regards, relative to contractors, they are.
As a temp, there is the risk that your contract will be terminated at any time. This is a benefit
that the hiring company has over contractors, as the work may dry up and they need to dispense of
the excess staff.
Take this example: a company has 3 regular permanent staff and get a new client. The project is
going to be big and they need 10 people to do all the work. They know there is a chance the plug
could be pulled, so they don't really want to hire 7 new permanent people, and then be forced
to pay out 7 redundancy packages down the line, should that happen. So they decide to pay a bit
more for 7 contractors instead, knowing they can get rid of them at any time, without all the costly redundancy packages. And hey, they'll just pass that extra cost of the higher rate onto the client.
The lower job security is one reason why temps get paid more. They are temporary - but they get a greater return for taking on this perceived risk. Yet in a market where your skills are in demand, the risk of going without work for an extended
period is low and you can really make a lot of money.
It's up to you how "safe" you need to feel. If you were contracting and put away some of your money
for a rainy day you can make your own security. A contractor I used to work with used to bank his
earnings and pay himself a modest salary to live off. Between contracts he also gave himself two
months paid holiday in Cyprus - how's that for a rainy day!
#4 - Employee Benefits
Companies who want to create a nice package for their employees often go out and find some great
benefits to include alongside the salaries they pay. We've all heard of benefits like private medical
cover, company car, pension payments, or discounts on certain company or partner products.
But what if you don't want to or even can't use some of these benefits? Many of them are one-size-fits-all in their intention, and a lot of the time you don't fit their image of the employee they're
buying for.
In my previous job, I used to receive a list of all the benefits purchased for me over the prior tax
year. Working there for 4 years, I can say that I barely used any of them, and never used the more
expensive ones. Employees get these for free, but don't think about the fact that the company has
to pay for these. I wish they had given me the cash instead!
As a contractor, you have to deal with the fact that you will probably not be eligible for any of these
benefits from the company you work for. Some people like the security of their benefits. Other
people like me, prefer the cash instead, so I can at least go and buy my own private medical cover,
and pass when it comes to child care vouchers.
The other side to this coin is all the other basics like sick pay and holiday pay. A temp's rate will
have these things built in, but it doesn't change the fact that if you want a holiday then you won't
get paid during this time. But with a bit of budgeting you can still come out better off. This is another reason that contractors earn more than their permanent peers.
#5 - Administration
When you are a permanent employee, you sign your contract and never really think about any of the
necessary administrative work. All your tax and workplace
insurances all get taken care of for you and you just need to collect your payslip and enjoy your
net salary.
Depending on how you set yourself up as a contractor, you may be able to still enjoy these benefits.
My recruitment firm takes care of all of this for me, so I don't need to worry - and I'm sure they take
a nice slice out of my daily rate for the privilege!
Some contractors want to be fully independent and run themselves like a proper business. This
means they send invoices to the client to get paid. They receive the gross payments and have to
charge things like GST/VAT on top, and ensure they account for tax and other business running
costs like doing tax returns. Some even go so far as to register a company for themselves to operate
through instead of running as a sole trader. Because you are invoicing the company, this carries all
the regular problems of following up on payments, and potentially not being paid on a regular basis.
Training is also another cost that you may not consider as a permanent employee. It is imperative
that a contractor maintains their skills and this can include going on regular training courses.
The cost of courses are not going to be covered by anyone but yourself. But if you let yourself
lapse, you might see others getting jobs ahead of you. So this is a great incentive to upskill yourself and
learn new and exciting things, which can be hard to motivate yourself into doing if you get trapped
in a rut as a permanent employee.
Since you have to do all of these things yourself, this is yet another reason why contractors get paid
more - to cover these costs and time.
Contracting vs Permanent Employment
I've outlined the major differences and there are clearly several pros and cons to being a contractor vs a permanent employee. So which is better?
You already know what I think about the subject: temping is a far better way to make
money than being permanent. Here's a quick rundown of all the advantages and disadvantages of contracting.
Advantages:
- More money
- Greater flexibility
- Better chance of getting wider experience
- Better chance of moving up "the ladder"
- More control of your career, life and finances
- Greater incentive to upskill yourself
- Being paid what you're worth!
Disadvantages:
- No/less company benefits
- Less job security
- Possibility of not finding work
- Not being paid on time
- Organizing tax and insurances
Conclusion
That's a summary of how I operate as a contractor. Obviously this kind of career will not suit everyone - but if you feel the extra considerations are worth it, you may just be able to make a lot more money and enjoy greater life experiences too. I know that I am
earning three times as much as I was in my previous role - and I have since learnt that am still getting
paid less than I should be! The income potential is vastly different as a temp.
It isn't just suited to the IT industry where I work either. You can also find opportunities in the trades and
less skilled industries, training, management, writing and creative industries. You have only to take a
look at what is out there to find the opportunities. And if you never look, you'll never know.
Steven Baker |
About The Author
The Benefits of Contracting is a guest article by Steven Baker, a self-employed software tester working mainly in the retail banking sector. Steven made the switch to self-employment after coveting the dream life and has never looked back. He is an avid open networker on Linked In, and is happy for any curious readers to contact him via his Linked In profile.
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