Thursday, June 12, 2008

The Great Debate - Employee vs. Consulting

Thought I would share an interesting dilemma I found myself dealing with the past couple of weeks.  This is the consultant dilemma of whether to stay on as a consultant (or 1099 employee for commonality) vs. going directly and working with someone as a W2 employee.

First, there are numerous benefits to being a W2 employee.  The true benefits are the ability to receive workman’s compensation in event of unemployment or injury, and the protection of having to deal with corporate HR departments if there is a personnel issue.  Other ancillary benefits are generally medical insurance, vacation and sick time, and a retirement plan.    The drawbacks of being a W2 employee are that it’s more difficult to move on to other projects quickly and generally some amount of pay is given up to provide the above benefits. 

There are also benefits to being a 1099 employee.  The major benefit is freedom.  This freedom is being able to pack up and leave at a moments’ notice – which truthfully isn’t used that much if one wants to maintain satisfied clients.  There are also other benefits like being able to manage your own career vs. following a corporate career path and receive much more flexibility with scheduling.  The drawbacks are that you are responsible for providing all benefits and there is no nanny organization wanting to take care of you – i.e. companies do not have a vested interest in the well being of consultants as they do their own employees.

All that said, I’ve been studying and practicing economics long enough to know that there is a certain opportunity cost associated with being an employee.  I did a little research into the origin of medical insurance being provided by corporations and it generally was a benefit provided after WW2 to attract the best employees in a brutally competitive market.  Another offshoot was the good ‘ol pension plan which has almost universally disappeared from corporate offerings.   Vacation and sick time provisions were also introduced around this time and now we have a model for the current workplace.

Is this model broken?  I’m inclined to believe yes.  Here’s the economic argument for it: Job seekers blindly look at salary and benefits to determine their offered compensation package.  One thing is that it is very difficult to rank different packages side by side: if company A is offering a salary of $90,000 + $200 a month for health insurance + 2 weeks vacation + 2 weeks sick time per year, is that better than company B which is offering $93,000 +_ $300 a month for health insurance + 3 weeks vacation + 2 weeks sick time per year.  Out of the door B looks better because of the salary difference ($3000-$1200 health care diff = $1800).  However, what if company A would roll over vacation and pay out upon departure but B does not?  Now the equation is different.   Job seekers also don’t know that company A gives 4% raises per year while B gives 2%. 

Everyone who has insurance knows full well that the costs have risen substantially in the past 10 years.  A good portion of those costs can be attributed to the prevalence of insurance that subsidizes unnecessary procedures.  An invention to fix this, the HSA account and high-deductible plan is designed to put more consumers in charge of their own insurance on the assumption that someone paying cash will do only necessary, value-oriented procedures.  This has been proven time and time again that in a cash society the consumer is a winner.


Being a 1099 worker is not for the faint of heart – it’s easy to see steady, well paying work cancelled at the drop of a hat.  A couple years ago I worked with a number of contractors who were brought in for a project, moved from out of state, and cut after 2 days on site due to cancellation of the project.  The benefit is generally contractors are paid an hourly wage that includes the premiums of acceptance of this kind of risk and the loss of benefits.  Someone who is smart can take good advantage of this situation to provide themselves with a higher level of salary and benefits at a much lower cost than what could be provided by a corporation.


Notwithstanding the obvious corporate goal of promoting employee stability and retention, I believe most people would be better off as 1099 employees.  This would allow the following:

1.       People are judged by their output and not padding the clock by showing up on Sunday to clean desk for 4 hours

2.       You don’t get paid to socialize around the water cooler discussing last-night’s episode of Survivor (Reduction in office politics)

3.       You are able to best manage your finances and benefits which in turns reduces the cost of providing insurance to all

4.       Employers are best able to keep around high performers and lose those employees who do not perform

One major hurdle to this is recent changes from the government that more narrowly defines the W2/1099 world to keep employers from having contractors that are de-facto employees. 

Obviously this is going to be a controversial post, but stay tuned for part 2……



1 comment:

There are some who call me... Tim said...

"companies do not have a vested interest in the well being of consultants as they do their own employees"

Oh, that was a funny one!

I now work for a company where the owner cares quite a bit for his employees, but prior to that I worked for a Giant Entity that didn't give a rat's ass about the employees.

Sure, there were benefits (we were an affiliate of the Giant Entity, so our benefits were s**t compared to the real Giant Entity), but to have the center manager stand in front of his employees at a service recognition breakfast and say "I expect half of you to not be here next year" shows more than crappy benefits...

Your statement carried much more weight 20-40 years ago... now it is simply wistful nostalgia.

(Great article, though.)