Tuesday, July 01, 2008

The Great Debate: Employee vs. Consultant, Part 3

This is part 3 of my series on the debate between being a W2 Employee vs. a 1099 Contractor as it relates to the technology world.  In my previous posts, I concentrated around the following points:

-          There is too much focus on provided benefits and no easy way to attach a dollar value to them

-          Without a dollar value on benefits, its’ hard to determine your real wage

-          It’s hard to make a good decision on what to do without knowing your real wage

My earlier conclusion is that many people would be better off as contractors instead of employees if they truly looked at the dollar amount of benefits but this summation comes with the following major caveat:  the person should be entrepreneurial in nature and be willing to accept the uncertainty of continued employment.  Working as a W2 employee you have some protections against zealous bosses and other events out of your control that you do not have as a 1099.   Furthermore, many companies have a vested interest in promoting a stable workforce for support purposes and having a staff of consultants who come and go does not help with this goal.    This is a key concern of many hiring managers I’ve talked to – they are concerned they will get a 1099 who will come in, develop some stuff, and bail quickly to go make $10 more an hour on another project.  It’s a valid concern because this has happened a lot in the past, or the consultant walks away without documenting what he/she did leaving the rest of the people in a lurch.  These kind of situations can be rectified by open, honest communication between both the supervising manager and the consultant, but the key point to remember as a consultant is that unhappy clients do not result in additional work. 

Some of the feedback I received from part 1 & 2 revolved around the uncertainty (risk) factor.  Using economic techniques risk can be modeled if you know the probability of each outcome, but there is no real way to know the outcomes in most job situations, so it’s best to plan on billing the client a rate that takes into effect your desired risk premium.  For an example, let’s look at a DBA who can work as W2 for $80,000 or as a 1099 for an hourly wage.  This DBA decides that he needs a risk premium of $50/hr to do the job, putting his hourly rate at $150/hr.  This is a pretty high rate for a DBA so unless there are special skills involved, it’s not likely this DBA will find many clients so the DBA should probably stick to a W2 job.   Another example (quite common) are the consultants who like to work 6-9 months a year with some downtime to travel the world or do whatever.  In this case, the risk premium would be substantially less because the person is hoping to be out of projects for a time.  Someone wanting to work 6-9 months a year is definitely not a candidate for a W2 position.

The biggest and most desired benefit is health insurance.  If I were to put on my economic hat, I could come up with 10 reasons that employers should NOT provide health insurance (and a few reasons they should, mainly adverse selection), but since this is a technology blog, let’s accept that most employers make health insurance the key benefit in their compensation package.  My first W2 job provided ‘free’ health insurance and it was a good plan.   I’ve seen good plans and I’ve seen bad plans, but this is definitely a consideration for anyone who has a family to support.     I’m not going to say a whole lot more about this benefit except look at the plan closely to try and attach a free-market price to it and use this in your job search.     Two plans which have a similar bi-weekly deduction may have drastically different out-of-pocket expenses or doctor networks.   Caveat emptor!

By and large, the biggest benefit I see for companies is the ability to have flexible scheduling. Having a flexible, motivated workforce is key to economic growth.  This is why you will mostly see large development projects staffed with 1099s who have the specialized knowledge to perform the work and leave the after implementation support to the employee base.  The best projects I’ve worked on have done exactly that – design, develop, and build the solution, then train the employees and move on.   These projects are very rewarding and part of the key reason that I enjoy working as a 1099 worker.

In synopsis, working as a W2 employee vs. a 1099 worker can be drastically different depending on your personal values and associated preferred wage.  I like to manage my own career, benefits, and time off versus having to follow a corporate template.  Good luck in whatever YOU decide to do, but I hope this candid discussion has helped inform you of some of the considerations.

1 comment:

Angela said...

Re: Your comments on contractors being an unstable workforce. It is unfortunate that some contractors give the rest of us a bad name by not giving projec ts their all, failing to leave sufficient documentation behind to allow for staff to build upon your work, and bailing to work for a higher wage. While I understand the necessity for us as independent consultants to maximize our earnings, I would hope that we would at least give the company we're currently woring for the opportunity to match the hourly rate. I loved the fact that you pointed out that leaving clients in a lurch or with unfinished work will certainly not result in more clients. We work in a specialized industry, and your reputation can spread quickly so it's important for it to be a good one. It's never a good idea to burn bridges. On the health insurance concerns, there are companies out there that combine all the benefits of working for a corporation with the ability to run your own business by acting as an umbrella corporation for consultants. MBO Partners, http://www.mbopartners.com is one; you do your own thing, they bill your clients and give you a single W-2 at the end of the year - and you get access to group health insurance. It's win-win.