Contract / Consulting Jobs Explained … Available in Three Different Flavors

In today’s ultra-challenging job market, there are many opportunities out there for so-called “contract” or “consulting” jobs. Historically in the staffing business, it’s a well known pattern that when the economy is down, companies tend to rely more on contract resources to get work done rather than hiring permanent employees. When the economy is up, the reverse is true and permanent jobs tend to outweigh contract opportunities. It’s a very cyclical and predictable shift in how companies approach hiring.

I think it’s safe to say that most job-seekers — especially those who recently lost their permanent positions as a result of the economic downturn over the last few years — are hoping to find another full-time, permanent job. They might be reluctant to accept a contract position for fear of being unavailable if a permanent position suddenly presents itself elsewhere. On the other hand, working is better than not working, right? And very often a person will start out as a contract employee and end up being hired by that same company on a permanent basis because they performed so well. Still other job-seekers actually prefer the world of contracting, and only pursue those sorts of temporary positions. Such professional contract/consultants usually have a very specialized skill-set that is in high demand, and can actually make more money contracting than they could as a permanent employee. Those contract/consultants also often move around a lot, accepting contract positions in different locations for varying lengths of time. In other cases, there are many senior-level semi-retired professionals who no longer wish to return to the grind of a permanent position, but are still interested in remaining active in their field by taking on interim contract assignments.

By the way … for those who are collecting unemployment compensation, it’s worth noting here that accepting any type of employment, contract or otherwise, will certainly affect one’s eligibility to continue collecting unemployment benefits. If the amount you earn on a weekly basis is less than your unemployment benefit amount, then your benefits will likely be reduced to reflect the difference. If you earn more than your benefit amount, then your unemployment payments will stop while you are working. If that happens, and then the contract assignment ends (through no fault of your own) then theoretically you can simply resume your unemployment benefit payments, which should be extended past where they might have ended before … you should still get the full amount you were originally allocated. However, in such a case you will most likely have to re-apply to get your benefits re-instated. And here’s my disclaimer — there is no guarantee that your re-application will be approved. For better information about his issue, I would advise you to contact your local Unemployment Office and discuss the particulars of your situation with a representative there. Here’s a website with links to unemployment information in all 50 U.S. states: “Unemployment Information.”

Among many job-seekers, there is a lot of confusion about contract jobs. I’ve gotten many questions about contract positions that indicate how confusing it can be: What exactly is a contract job? How is that different from a “consulting” job? What’s the difference between a “1099” and a “W-2” contract job? Is a contract the same as a “part-time” job? Is “full-time” the same as a “permanent” job? Can a contract job be “full-time?” Can a “permanent” job be “part-time?” Who invented Liquid Soap, and why? (OK, I just threw in that last one to see if you were paying attention.)

SO, let’s start with some basic definitions:

GLOSSARY:
Contract Job: A temporary position with a company. Usually, but not always, has NO benefits included (unless they are available through a 3rd party staffing firm.)
Consulting Job: A fancier name for a contract job. Could be a higher, more senior-level position.
Temp Job: Yet another name for a contract job – usually referring to lower-level administrative positions (secretaries, data entry, bookkeepers, etc.)
Permanent Job: The traditional employee situation with a company. Usually (but not always) includes benefits.
Full-Time Job: 40 hours per week. (“Full-Time” could refer to either a contract or a permanent job.)
Part-Time Job: Less than 40 hours per week. (“Part-Time” could refer to either a contract or a permanent job.)
1099 vs. W-2: A “1099” employee is a self-employed “independent contractor.” Independent contractors bill their clients for their time – usually by using a purchase order – based either on an hourly rate or a flat fee for services rendered. Either way, no deductions are withheld from their payments, and they are responsible for paying all their own taxes (using IRS Form 1099 … hence the name.) On the other hand, a W-2 employee gets paychecks from the company they are employed by, based on the hours they work, at an agreed upon hourly rate. Those paychecks will already have all the standard deductions taken out for them by their employer (federal, state and local taxes, social security, medicare, etc.) Also, 1099 contractors must pay self-employment tax, while W-2 employees do not. In addition, independent contractors are often required by their clients to carry their own liability and other types of insurance.
At-Will Employee: In the United States¹, most “permanent employees” in today’s work world are hired “at will” – a legal term which means that they can quit anytime for any reason (or no reason at all) without giving advanced notice. Of course, the reverse is also true: they can be fired at any time for any reason (or no reason at all) without advanced notice. This really blows the old concept of “job security” eh?! It also tends to blur the line between a contract and so-called “permanent” job.

For the most part, contract jobs are either directly with a client company that has the need, or through a 3rd-party staffing firm that engages with the client company and provides consultants to them as needed. In such a case, the contractor usually becomes an employee of the staffing firm for the duration of the contract assignment. That firm then pays the person an hourly rate for the work they do at their client’s company, and then bills their client for that person’s time — after, of course, adding a significant markup. (Everyone’s got to make a living, right?)

The Pros and Cons of Contract Jobs:
When presented with the prospect of a contract job, it’s fairly easy for job-seekers to evaluate the overall pros and cons of such a position. Of course, each situation is different — but the following things are mostly true for all contract jobs.

Pros:
1) Income. Money coming in is always good, right? Bills get paid!
2) It looks good on a résumé. Contract jobs – even short-term ones – look way better on a résumé than a gap in employment … especially if it’s work within your industry niche.
3) It keeps you current and up-to-date in your field.
4) A contract job gets your foot in the door of a company that could potentially hire you on a permanent basis.

Cons:
1) By definition, it’s a temporary position. When the contract ends (and they almost always do at some point) you will most likely be unemployed again. Future unemployment benefits could possibly be affected.
2) Generally, contract jobs do not include benefits (health insurance, retirement plans, etc.) unless they are available through a 3rd party staffing firm.
3) Contract employees often feel like outsiders at their companies. They don’t have the same feeling of “ownership” of their work that permanent employees usually have, nor do they enjoy the same feeling of camaraderie with their co-workers that permanent employees usually feel.

The 3 Different Flavors of Contract Jobs:
Whether a contractor is a 1099 or a W-2, working directly for a client or through a staffing firm, full-time or part-time … contract assignments generally fall into 3 categories or “flavors.” This is something that often confuses job-seekers (and recruiters!) when they hear about a contracting opportunity. I’ve even heard from some job-seekers that the recruiters they spoke with don’t seem entirely sure which flavor of contract opportunity they are working on. Clarifying which of these 3 flavors someone is looking at is critical in evaluating such an opportunity, and deciding if it’s worth pursing.

1) Limited Duration Contract:
This is when the contract has a pre-defined beginning and end date. The duration could be any length … from a few days to a few weeks or months. I’ve even seen contracts last up to a year or more. The main thing that defines this type of contract is that there is no plan whatsoever to bring the person on board as a permanent employee. It’s either not in the company’s budget, or for whatever reason the company does not want to add headcount to their permanent payroll. When the contract ends, the job is over.

2) Contract with the Intention to Hire:
In this scenario, the company already has an approved “req” (requisition) from their HR department to hire a new permanent employee. However, they want to start the person out as a contractor first – mostly to see how they perform and how they fit in with the company and the personnel. It’s the classic “Try-Buy” situation. They don’t want to pull the trigger and hire someone until they are absolutely sure they have the right person for the job. If it doesn’t work out, it’s a lot less complicated for the company to simply end the contract than it would be to terminate a permanent employee.

3) Contract with the Possibility to Hire:
Here, the person starts out as a limited duration contractor, just like number 1. However, in this case, the company has made it known that they are at least open to the possibility of converting the contractor into a permanent employee. The rub is that they do not actually have an approved “req” (requisition) from their HR department allowing them to hire a new person. This can be the most frustrating situation of all. This scenario suggests that if the person does a great job and proves to be a valuable asset to the company, their boss could then request permission to hire the person. But, there is certainly no guarantee that such a request would be approved … and no actual promise of permanent employment no matter how well the person performs. The decision of whether or not to hire the contractor is often dependent on factors totally out of that person’s control.

Those last two flavors are often confused with each other, and many times are both referred to by recruiters as “Contract-to-Hire” or “Temp-to-Perm” opportunities. However, as I’ve just explained, they are quite different from each other in a very fundamental way. It’s up to each job-seeker to dig in and ask the right questions when evaluating these opportunities. The most obvious question should be: “Does the company already have an approved req to go ahead and hire someone on a permanent basis if this contract works out?” If the recruiter can’t answer that question clearly, tell them to go back to their client and find out! I’m certainly not saying that you should turn down any of the 3 flavors of contract jobs defined here. However, knowing what you are getting into, and managing your own expectations is key.

¹ As many astute readers have pointed out, employment laws, the “at-will” status and requirements for giving notice may vary outside of the United States.