Tuesday, June 17, 2008

Employee vs. Consulting, Part 2

Let me begin by clarifying that W2 workers are employees and 1099 workers are contractors. 1099 workers are not employees for anyone as defined by the IRS, so I want to make that very clear in my previous post where I was too liberal in my use of the word employee.

My earlier synopsis was that most people would be better off working as 1099 contractors. There are numerous reasons, but the first is to make transparent the cost of benefits. The true cost of seeing the doctor when you sneeze twice in the morning is much higher than your $20 co-pay. Cash consumers also have a lot of leverage because they eliminate the middleman insurance company. Vacation time is very hard to value – some people don’t use it all and worse yet, some companies don’t allow their employees to use accumulated vacation time. For those economists out there, there is a labor/leisure scenario that goes like this: “As a 1099 I make $800 a day when I’m in the office, and if I want to take a day off work to go fishing I need to get at least $800 value out of my fishing, else I should work”. It’s pretty easy to put a valuation on leisure activities when you know your wage, but as a W2 employee it’s more like: “I get 2-weeks off a year so I’m going to be fishing at least 2 weeks this year and hopefully 10 more days when I’m supposed to home sick in bed.” It’s pretty clear to see that scenario 1 is more efficient for both parties as to the valuation of time and money.

There are also some rules that companies must abide by with 1099 workers that are not true for W2. For starters, 1099 workers set their own schedule. They are also given project milestones but not direction. They are sometimes provided with office equipment. W2 employees are told when they can/can’t work, are given training, direction, and specific instructions, and are provided everything they need to complete the job. The reason for these rules is that 1099 workers do not collect workers compensation insurance. One of my friends had a 1099 worker who didn’t pay his personal taxes and came back and claimed he should have been a W2 employee. My buddy was not impressed and it’s sad that some people reap the benefits and expect others to pay the piper. As a 1099, I prefer to use my own laptop during client visits because I have all the software I need to document and develop and I always have unfettered email and internet access via my Sprint card. At some client sites it’s difficult to carry on a phone conversation because of privacy issues and email is a confidential and quick substitute.

I also know people who have done the contract-to-hire routine. This routine is generally touted as a way for both the employer and employee to get to know each other before committing to a long term (W2) relationship. Unfortunately, I think it’s more biased to the employer. The employer can decide whether or not to extend an offer just as the worker can choose whether or not to accept it. But the worker is given a hard deadline of a time to convert or leave, and this is generally at the whim of the budget of the hiring manager. I’ve known friends who wanted to roll W2 but were waiting 8 months to start the project they were K-to-permed for, and didn’t feel comfortable rolling until the project started. That situation turned out to be a lose/lose for both parties because the company didn’t get a good worker and the worker lost a good long term relationship because the contracted ‘dating’ period wasn’t long enough to provide any benefits.

This post is becoming long enough for a part 3, so I will post more about this in a couple weeks when I get some time. Next I’ll explore the difficulty of finding 1099 work vs. W2 work, and where that trend is heading in the future. Stay tuned and happy data warehousing.


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Anonymous said...


Some intriguing thoughts and I am looking forward to Part 3 for a conclusion. I am currently a 1099 employee and have been for about 8 months. I can honestly say that I would prefer to be this way as the flexibility to work is unparalleled. To explain, as a 1099 employee you are looked to as someone to provide solutions, an answer, a completed project, etc. You are not just someone to fill a spot and do whatever is thrown at you (at least not most of the time). The great difficulty as you mention is that work is sometimes harder to find. Most employers seem to be focused on having a having a body fill a spot long term rather than hiring someone to handle things on a project basis. The main reason I believe this to be is that most companies do not have a firm handle on the work that needs to be completed in 6 months, 1 year or farther. They are still very driven by what is going on in a day-to-day environment. Somewhat sad.

Anyway, thanks for the post.


Calito Casessero said...

I think you need to take a more theoretical perspective at the economy before posting such presumptious statements. The IT consulting market is becoming overly saturated with companies like Lockheed, Deloite and Unysis shipping their work to India, Brazil or China. I started all my job as Contract to Hire with some companies havin the right to hire before the 6 month is up. They usually try to hire before the end of the contract. Alot of companies are faced with budget cuts. So you know who's the first to go. CONSULTANTS. They're the most expendible. At this time its a safe bet to become a full time employee. I took a pay cut when I became a FTE. 5k pay cut but I got life insurance, discounted health insurance, 20 vacation days,paid holidays, 5 pto days and the ability to telecommute when needed. So do you think I made the wrong decision?

Wes D said...

Thanks for the comments.

Calito, it sounds like you made a great decision based on your personal circumstances. You are correct that consultants are generally the first to be cut when budgets get tight, but for those of us consultants we just have to work harder to show clients the value. Beware of the trap into believe that W2 jobs are permanant....while you will qualify for unemployment and possibly severance, there is nothing keeping companies from cutting both W2 and consultants at the same time. I've seen it happen both the way you describe it as well as the way I do.