According to a survey conducted by independent research firm Edelman Berland and commissioned by the Freelancers Union, more than one in three workers – 53 million Americans – is now freelancing. By 2020, more than 40% of the American workforce, or 60 million people, will be freelancers, contractors and temp workers, according to a study done by Intuit in 2013.
Chances are high that you are currently a contractor or have thought about giving up your full-time job to be a contractor. When I left Corporate America in the Spring of 2012, I thought I’d never return. But in November 2013, I received an opportunity to contract for 25 hours a week, and here I am 18 months later still consulting! The X Factor I did not anticipate about building a large personal finance blog is that other companies would be interested in hiring me for my online content knowledge and services.
In this post, I’d like to discuss the differences between a full-time employee and a contractor. Some of you have told me that you never want to be a contractor because you don’t want to be treated poorly; like an outsider. While it’s true that as a contractor, you might not be treated as one of the team, there are plenty of other benefits that make the decision to contract or go full-time surprisingly difficult.
THE DETRIMENTS OF BEING A CONTRACTOR
Before we talk about the positives of contracting, let’s talk about the negatives.
1) You’ve got to make more as a contractor to stay in place. Based on my analysis, you’ve got to make 60% – 100% more as a contractor to replicate the total compensation of a full-time salary. Contractors seldom get any of the important benefits, including: paid time off, health care, tuition reimbursement, ongoing educational training, short-term disability, long-term disability, life insurance, worker’s compensation and sabbatical time.
2) You aren’t treated with the same respect. When you’re a contractor, many people will treat you as a temporary hired gun. You don’t have much authority as a full-time worker. If they think you’re a temporary worker, there’s a tendency for others not to bother trying to get to know you. You might not get the invite to the team lunch, and there’s probably little chance you’ll be able to attend the annual holiday party if you’re truly a temporary contractor. As a contractor, there are a lot of little slights that you would not experience, whether done on purpose or not, if you were a full-time employee.
3) You won’t feel as safe as a full-time employee. Even though there are plenty of examples of long-term contract work, the default setting is for contracting work to be temporary. Given the expectations, you’ve got to always be on your toes to do good work in order to get your contract renewed. At my first contractor job, my Statement of Work got renewed every three months. It was a little unsettling to know that my contracting income might end, even though I didn’t need the money. When I was at my previous job, I seldom felt at risk, except for a couple years during the financial crisis.
4) It’s impossible to climb the corporate ladder. If you have aspirations to get a promotion, you’re never going to get one as a contractor. Only the most committed employees get coveted promotions. Whether by choice or circumstance, being a contractor means you or the company are not willing to fully commit. Furthermore, it’s more likely that you might be up for a pay cut. The more you build out a project, the less the company will need you. For example, part of my duties for one company was to build out a team of writers. After I built out the team, my useful life just decreased by maybe 30%. Someone has to still manage the team, be the editor, drive the creative process, and work the calendar. But all the same, the better a contractor does, the less s/he will be needed.
5) Perhaps less motivation. If you are a super go-getter, like I was the first 10 years of my career, it’s hard to feel the same amount of motivation contracting, unless your ultimate goal is to try and gain full-time employment. My motivation is to learn, help, and get to understand new people and businesses in Silicon Valley. It’s also rare for contractors to get any equity. Equity is what propels full-time employees to really go the extra mile.
THE BENEFITS OF BEING A CONTRACTOR
Now that we’ve got the detriments of being a contractor out of the way, let’s talk about the benefits.
1) A tremendous amount of freedom. Having the freedom to set your own schedule, collaborate with clients of your choosing, and be able to work remotely are the best benefits of being a contractor. When you’re a full-time employee, you’re expected to be in the office and show face time, even though your presence might not be needed. Even if there are other awesome companies that aren’t competitors, you still aren’t allowed to work for any other firm. As a contractor, you’re hired mainly on deliverables. So long as you deliver, it matters less where you are. It’s great to be able to work with a couple different types of companies at once.
2) Potentially less stress. You can’t be a big kahuna as a contractor. There’s no such thing as a contractor CFO, CMO, CEO, or COO. Contracting work focuses more on much more specific duties that can be accomplished with effort and skill. A contractor is not responsible for the overall strategy of a business unit or department. As the CMO of a business, you better fill the top of the funnel or else your job will be at risk. There’re less moving parts for a contractor to manage. Contractors are usually paid for a set number of hours. Once you’ve completed your hours, you have no obligation to work more hours. When I was a full-time employee, I often worked 60-70 hours a week to the benefit of the company. I felt way more stressed as a result.
3) You might be able to make a lot more money. Despite having to make 60%+ more money to replicate a day job total compensation package, you can make a lot more money contracting if you are willing to demonstrate your value proposition, work longer, and work more efficiently. In America, compensation is generally based around a standard 40 hour workweek. But there are 168 hours in a week. If you’re willing to work 60 hours a week, you’ll make 50% more than someone earning the same rate based on a 40-hour workweek. A 40 hour work week is totally arbitrary, and I still don’t understand how there can be people who only work 40 hours a week or less and complain why they can’t get ahead. Nobody successful I know works less than 40 hours a week.
4) The ability to hedge your career and finances. I never knew it was kosher to contract for other companies until one client told me directly I could. Although I’m fortunate to be able to work with clients that I strongly believe will succeed, there may come a time when one client might fail. If you’re a full-time employee, you’re essentially betting your future on the fate of one company. Imagine if that one company was Enron or Lehman Brothers? Yikes! You never fully know how your sector and company will do. Company life cycles are not forever. When I was working at an investment bank, in order to diversify, I invested the large majority of my savings in anything other than financial companies.
5) The ability to work on personal projects not governed by an employer. Many companies require you to disclose all your outside interests in order to make sure there are no conflicts of interest or potential legal hazards. For example, if you’re working at Google, you probably can’t work on creating a competing search engine. Furthermore, all the stuff you come up with at your workplace might be owned by your employer. Arthur Fry, the inventor of the Post-it note, probably would have made a lot more money if he had not been working for 3M. Make sure you do your moonlighting outside of office hours!
HOW TO DETERMINE WHETHER TO CONTRACT OR WORK FULL-TIME
Go the full-time employee route if:
* You’re working for an amazing company you believe in that provides opportunities to grow.
* You enjoy more stability, even though no full-time job is safe anymore.
* You have a lot of dependents and really cherish your company’s benefits.
* You don’t have enough belief and skill to find clients on your own who will pay you a market rate.
* You want to live a more comfortable life, hiding out in a bigger organization which can’t readily pinpoint your deficiencies.
I know plenty of people in middle management who never want to leave because they don’t have to do much work (they just tell other people what to do), have great benefits, get OK pay, and just want to cruise. They are bored out of their minds, but because life is too comfortable, they just sit put.
Go the contracting route if:
* You tremendously value free-time over money.
* You strongly believe in your skills and abilities to provide value to your clients. There is nowhere to hide when you’re a solopreneur.
* You’re more of a risk-taker who thrives on constant new challenges.
* You have an “ace in the hole” that helps make you a great contractor e.g., relationships with powerful people, a company that has already gone where your client wants to go, a website you’ve built on your own.
* You’ve gone as far as you can go in a full-time roll.
* You’re bored out of your mind!
* You’re interested in testing new sectors/companies without fully committing. Too many people join a company they think is great, only to end up regretting their decision and leaving within a couple years.
* You’ve got an entrepreneurial spirit or an actual business that a full-time job would not allow.
* You’ve read, How To Become A Rockstar Freelancer.
FREELANCE YOUR WAY TO FREEDOM
With the creation of Universal Healthcare, fewer people should feel tethered to a job they dislike due to their benefits. Healthcare cost is still outrageously expensive here in the United States if you don’t fall in the income levels that receive a subsidy. But at least everybody can affordably get disaster health insurance. A silver plan for two will cost me $1,400 a month, for example.
There are plenty of opportunities for contractors to earn their way into a full-time role if they are so inclined. Plenty of companies want to hire great contractors full-time in order to lock down a maximum amount of their time. The irony is that a rockstar contractor will probably never want to be locked down because s/he is making way more than a full-time employee, with a lot more freedom. For a three month period when I had three clients, I was making 25% more than my base salary as a Director at an investment bank, for example.
I never thought I’d be a contractor. After building my website into sustainable income generating vehicles, I got a little bored and longed for more inter-human activity again. Contracting is a wonderful experience that has synergistically helped my online business because I’ve been able to thoroughly understand the products I use and promote online.
You don’t have to be afraid of transitioning into a contracting role. If you’ve got a skill-set in high demand, there are plenty of opportunities for you to make a lot more money than in a day job with more freedom to boot. The emergence of the sharing economy has helped popularize contracting into a viable way of life.
Recommendation If You Want To Quit Your Job
If you want to leave a job you no longer enjoy, I recommend you negotiate a severance instead of quit. If you negotiate a severance like I did back in 2012, you not only get a severance check, but potentially subsidized healthcare, deferred compensation, and worker training. Since you got laid off, you’re also eligible for up to 27 weeks of unemployment benefits. Having a financial runway is huge during your transition period.
Conversely, if you quit your job you get nothing. Check out, How To Engineer Your Layoff: Make A Small Fortune By Saying Goodbye, on how to negotiate a severance. I first published the book in 2012 and have since expanded it to 180 pages from 100 pages in the 3rd edition thanks to tremendous reader feedback and successful case studies.
Start your own business/website: If you feel you’re not getting paid what you’re worth and want to boost your income, start your own business online on the side! It used to cost a fortune and a lot of employees to start your business. Now you can start it for next to nothing with a hosting company like Bluehost for under $3/month and they’ll give you a free domain for a year to boot.
Brand yourself online, connect with like-minded people, find new consulting gigs, and potentially make a good amount of income online one day by selling your product or recommending other great products. Not a day goes by where I’m not thankful for starting Financial Samurai in 2009. Here’s my step-by-step guide to for how to start your own website like mine in under 30 minutes.
Updated for 2020 and beyond. After over seven years of doing random freelance work here and there in retirement, I’ve got to say freelancing is the way to go. My website has been a steady lead generator for freelance work if I want it. Sometimes it’s too much, but I’d rather have more than less.