Contract vs. Direct Employment- back to resources

A direct employee is one who is hired to work full time by a company who expects a long term relationship. The employee is generally paid a salary plus benefits.

There are 2 types of contracting positions. It’s sometimes hard to differentiate between the two.  Generally companies refer to one as a Contractor and the other as a Consultant but these terms seem to get blurred in discussion. For the most part, when we use the term contractor, we’re referring to an independent consultant as described below.

In one case (Consultant), you become an employee of a company and receive some benefits like medical and vacation. The hourly rate isn't usually as high as a contractor’s pay because the employee receives benefits. While not as high as in contracting, there is still some risk to being a full time Consultant in that the company generally places the employee on site at a client’s location. If their client decides to terminate the contract for some reason, there is a good chance that the Consultant’s employment will also be terminated unless the employer has another client.

The other, Contractor or Independent Consultant, receives no benefits but makes a much higher hourly rate, like $ 50-100+ hr, depending on location. The contract itself usually has a set time (eg 6 months or 1 year or for the length of one project) but understand that companies sometimes hire contractors to give them the flexibility to release them should their employment or contract situation change. ONLY THE RATE IS GUARANTEED FOR THAT TERM, NOT THE EMPLOYMENT! You get paid for taking that risk and even if a contact is for a set time period, the company can terminate your contract at any time.

Advantages and disadvantages
SALARY: Whether to take a job as a contractor or a direct employee has a lot to do with an individual's personal goals regarding their next job, their long range career and family issues. The biggest benefit to contracting is $$. You make more money! But the rate is reduced when you factor in things like paying for benefits like medical coverage, life insurance, and pension; paying relocation expenses; taxes; and saving to cover long periods of unemployment. So one thing to consider is that the amount you net may not be as great as it appears on the surface. If you check with an accountant though, you might choose to set up a business entity and deduct appropriate expense from your income.

EXPERIENCE: One advantage of contracting is that by working in various positions, the work is less mundane than if an engineer worked on the same project for 2 years or more. Also, by working at different companies, engineers gain diverse experience, across project/product life cycles and in different industries, that makes them more marketable. That can be true but the opposite could result. At times, companies hire contractors to finish out a project or do the work (documentation, testing etc) that others prefer not to do so their experience might be limited. Also, a contractor who has changed projects often over a short period of time may not have developed the depth of experience required by employers in a competitive job market.

JOB SATISFACTION: While not easily measured this is something that each engineer should consider when deciding on whether to contract or not.  Do you get a great deal of job satisfaction by being an expert or a trusted employee?  Do you value being thought of as loyal to the company? Or, do you prefer to move around, do many different jobs and get satisfaction in rapidly learning new things, working in different industries and with different people?

STABILITY: During times of growth, contractors may be in high demand if companies are struggling to maintain a workforce adequate to meet growing demand. In times of economic downturn or when a project is lost, contractors are oftentimes at greater risk and are the first to be released, as employers attempt to avoid employee layoffs and the cost of those layoffs. Job stability is important to some employees and the perception is that direct employees have more stability than contract employees. The truth is that companies hire direct employees for the long haul and are generally committed to keeping them on board. However, contractors with depth of solid experience, well managed finances and a willingness to go wherever the next job takes them will likely do very well for themselves in their career.

LOCATION:  This is an important consideration in the decision to become a contract employee or not. If location is important to you and your family and you are not living in a densely populated area, the likelihood is that you will have to move for your next job.  A direct employee, with no anticipated layoffs, may be able to stay indefinitely in that location. As a contract employee, you’ll either have to move to the next job location or set up a temporary residence at the new job returning to your permanent residence on weekends. This is not only costly, but can be disruptive to family life and add stress to a marriage. If, however, you live in a highly populated metro area like DC, Boston or the San Francisco Bay area, you’ll likely be able to maintain your employment without moving whether you’re a direct or contract employee.

FUTURE OPTIONS:  It’s very difficult to determine whether being a full time direct employee or a contractor will likely increase your future employment options. While contract employees may gain a lot of diverse experience, a full time employee may become a subject expert in their company that might make them more valuable and marketable in the future.  Also, an employee who really would like a long term direct position should realize that it’s easier to do that if they’ve had a stable work background, employed with one or two employers, as opposed to 10 or 15 employers over the same period.

RECORD KEEPING: While this should be a minor consideration, it’s worth noting because some people are just really lackadaisical when it comes to keeping good records. That shortfall could be a disaster for that person because a contractor still has to keep track of finances, withhold and pay all of his or her applicable taxes. Federal income tax, social security tax, federal unemployment insurance tax, plus state and local tax liabilities where applicable all have to be tracked and paid by the contractor. Also, a contractor needs to put away money for retirement. The failure to responsibly save money to pay taxes can leave consultants in a financial crisis when tax day nears or without a nest egg for retirement.
 
Here is one last word from the advice corner.  While several factors come into play, the decision on whether to be a direct employee or a contractor comes down to the individual’s personal goals and their risk threshold. The one caution is this. Contracting is a totally distinct career path. It’s not for everyone. Once an engineer becomes a contractor, it's difficult to go back to being a full time, direct employee. The longer someone has been a contractor, the harder it is to become a permanent employee.