Contract Employee's Newsletter
Helping Contract Professionals Manage Their Careers

October 01, 2001

Edited by James R. Ziegler

A Companion to:
The Contract Employee's Handbook
www.cehandbook.com

Sponsored by:
P.A.C.E. - Professional Association for Contract Employment
www.pacepros.com

 


About The Contract Employee's Newsletter

The Contract Employee's Newsletter is a free e-mail publication for technical and professional contractors containing news, commentary, tips, links to useful resources, nuggets of wisdom submitted by readers, and anything else that seems appropriate at the time. The CENewsletter is distributed bimonthly or whenever issues warrant. The subscriber list is confidential and will not be disclosed outside this organization.


In This Issue

Read recent issues of The Contract Employee's Newsletter.


Suggest A Topic For The Newsletter

Ideas Anyone?
I invite you to submit your ideas for newsletter topics. Chances are, if a certain topic interests you as a Contract Professional it will interest the majority of our readers.

Guest Appearances
Would you like to contribute a short piece to the Contract Employee's Newsletter? Maybe a marketing tactic that works for you, or a true story of agency madness? I'll cite your name, your e-mail address, and a link to your website. I can't pay you, but I'll make sure that everyone who reads the Contract Employee's Newsletter knows who you are and what you do. It can't hurt, and, who knows, it just might help your consulting career. Contributions should be of general interest to all Contract Professionals.

Mail your suggestions to suggestion@pacepros.com.

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Marketing Tips

You Are A Vendor, So Market Yourself Like One

This marketing tip will vastly increase your chances of getting through to the appropriate decision maker. It requires some simple cold calling, but this is not a sales call. It is more like an informational interview. Here is how it works.

Call companies that may require your skills and expertise. When you reach the operator say the following:

"Hello, my name is [your name]. My company is a vendor of technical consulting services to companies in your industry. My division specializes in [two or three word description]. Who should I contact regarding your company's requirements in this area?"

If the operator suggests HR, say something off the cuff like:

"Oh, you probably thought I was a headhunter or a job-seeker. Actually, my company is a vendor of technical consulting services. Who should I address our marketing materials to? Is there a specific project manager or director in charge of [two or three word description] that I should address this to?"

The operator may send you to the Purchasing Department. Great. Ask the purchasing agent how you can qualify your company as a vendor for [two or three word description], and ask who you should speak with about upcoming projects in your company's area of expertise.

Note that you never indicate that you personally are the one and only provider of this service. You are not wearing your "out-of-work employee" hat. In fact, you already threw it away. You are wearing your "company representative" hat.

By taking this approach you present yourself as a vendor as opposed to an out-of-work employee. Your search is now targeted to those specific individuals who need the services provided by your company.

If anyone asks what company you are with simply give the name of your employer of record. For example, P.A.C.E. Division Managers say "My company is P.A.C.E." If you are an independent contractor give the name of your sole proprietorship or one-person corporation, or give the name of your company's DBA.

This approach is not a ruse. The default business status of every American citizen is sole proprietor, and you are a one-person business whether you realize it or not.

P.A.C.E. Division Managers have reported good success with this approach.

Let me know how this approach works for you. I would also like to hear about successful variations on this theme. I'll publish them in an upcoming issue.

Mail your suggestions to suggestion@pacepros.com.

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Ask Dungaree Dan

Recruiter Threatened By His Own Agency's Noncompete Clause

Q: Dear Dan -- I am a VP of a temporary help company for medical personnel in California. I have a noncompete & restrictive covenant clause in my contract. I desperately want to go out on my own. I've been with this company 15 years. Can you advise me on my options. I heard that noncompete clauses in California do not hold up in court. What direction can I go. By the way, I love all of your valuable information. Thanks. -- Signed: Bound But Determined

A: Dear Bound But Determined -- I am tempted to expand upon the principal of what goes around comes around. Or wax poetic on the idea that the taste of one's own medicine is by far the most bitter. Oh, the irony of it all. A VP of a recruiting firm is asking me of all people for advice on how to beat an agency noncompete clause. Geesh.

You say you are an agency VP, and have been with the company for 15 years. Undoubtedly, you have given lots of attention to enforcing noncompete clauses. Should I be surprised that in 15 years you have not learned how to avoid getting burned by one yourself?

Oh well, I'll cut you some slack this time. After all, you did say you love all of my valuable information. I'll pretend you want to come over from the dark side to become a P.A.C.E. Certified Marketing Agent, who works exclusively for talented Contract Professionals, and who has zero conflict of interest with the Contract Professionals you represent.

In return for my help I want you to vow that you will never use overly broad and intimidating contract language in your new recruiting practice, and that you will freely and openly disclose the agency billing rate to your temporary employees and independent contractors.

Caveat: I am reasonably certain that the following information is a fair discussion of noncompete clauses as they might apply to your situation. However, I am NOT authorized to give legal advice. Therefore, before you do anything rash I recommend that you take a copy of your employment agreement to an employment law attorney for review and proper legal advice.

Companies use different types of contract language in an attempt to keep their employees from going to work for the competition. The contract clauses fall into three categories:

  1. Nondisclosure
  2. Nonsolicitation
  3. Noncompetition

Nondisclosure clauses protect the employer from a former employee disclosing proprietary and confidential information to a competitor. Examples are "trade secrets", customer lists, internal reports and documentation, computer code, design specifications, and the like.

Nonsolicitation clauses protect the employer from a former employee actively recruiting existing employees and clients of the employer for the employee's new company.

Both nondisclosure and nonsolicitation clauses offer reasonable protections against unfair competition. Employees should have no difficulty abiding by such provisions so long as the language is not overly broad and the employee behaves ethically.

Noncompetition clauses are troublesome because they prohibit an employee from working for the competition or for a client or vendor of the competition within an arbitrary radius and time limit. Such clauses are frequently seen in the employment agreements of professionals such as beauticians, accountants, attorneys, and physicians, where one individual may have a dedicated clientele.

For example, it is common in most states, with the notable exception of California, for medical practices to require that member physicians agree not to work within 100 or 200 miles of the original practice for a duration of one or two years. This is because physicians generally have a dedicated clientele, which the practice has developed at great expense. These patients would undoubtedly follow a physician to a new practice resulting in significant loss of income to the original practice.

Temp agencies are notorious in their use of intimidating and overly broad "covenants not to compete". Aggressive covenants not to compete are routinely included in vendor agreements with subcontracting agencies and independent contractors, and in the employment agreements of staff employees, temporary employees, recruiters, and executive personnel.

Properly worded, narrowly defined nondisclosure and nonsolicitation clauses are perfectly legal in all states. Noncompetition clauses, if not abusive and overly broad, are enforceable in virtually every state except California and New Hampshire. The prohibition against blanket noncompetition clauses for agency temps was discussed in the September 15, 2001 issue of The Contract Employee's Newsletter.

In California, by statute, noncompetition agreements are void as a restraint of trade, so if you have signed a blanket noncompete clause with a California employer you are generally free to change employers at will. Blanket noncompete clauses are not enforced by California courts or by the California Department of Industrial Relations.

See: California Business and Professions Code:

"16600. Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

In the last issue of of The Contract Employee's Newsletter I cited a decision in Federal District Court:

CASE: Robert Half International v. Gregory J. Stenz
COURT: Federal District Court, Eastern District
SUMMARY: Applying Delaware law, as specified in the contract between the parties, Court found that former employer of staffing manager for Accountemps office could not enforce clause in employment agreement which prohibited former employee from working for competing staffing firm, but could enforce clause prohibiting solicitation of former employer's clients or employees.

Specifically, the order reads:

  • the Defendant IS enjoined from directly or indirectly soliciting any of the Plaintiff's clients or candidates for whom the Plaintiff has performed services in the course of its business within the twelve months preceding March 24, 2000;

  • the Defendant IS enjoined from soliciting, inducing, or attempting to induce any other of the Plaintiff's employees to leave the Plaintiff and become connected with the Defendant at any other executive recruiting firm, employment agency or temporary personnel services business;

  • the Defendant IS enjoined from disclosing, furnishing, or making accessible to any person, firm, corporation, or other entity, or making use of, any confidential information obtained while he or she was in the employ of the Plaintiff including information obtained through the client and candidate databases of the Plaintiff; and

  • the Defendant IS NOT enjoined from owning, managing, operating, controlling, being employed by, participating in or being connected in any manner with the ownership, management, operation or control of any competing executive recruiting firm, employment agency or temporary personnel service business.

So, you can feel free to open your own agency provided that you start from scratch, and you do not take with you any trade secrets or proprietary information, and you do not attempt to solicit clients or employees of your former agency.

In a recent and particularly insidious development the U.S. Court of Appeals, 7th Circuit, (1995, Pepsico Inc. v. Redmond) validated something called the Inevitable Disclosure Doctrine (IDD). The IDD gives an employer the right to prevent a former employee from working for a competitor if the employee had access to the company's trade secrets and if their misappropriation and disclosure to the competition is deemed to be inevitable.

Agency contracts often contain language that attempts to define as trade secrets the names of your client contacts. Don't be surprised if your agency tries to use the IDD to keep you from working for a competing agency on the basis that you have learned agency trade secrets that could help your new agency compete against your former agency. The IDD has been upheld by courts in California where you plan to set up shop.

I doubt seriously if an agency could successfully enjoin a contract employee from jumping to a competing agency on the basis of "trade secrets" and "proprietary information" since contract employees scarcely have access to anything but the name of their current client. However, a recruiter has access to virtually all of an agency's higher level proprietary information, including client lists, client contact information, internal policies and procedures, and good will developed at the agency's expense.

OK, I did my part. Now, what about your vow that you will never use overly broad and intimidating contract language in your new recruiting practice, and that you will freely and openly disclose the agency billing rate to your temporary employees and independent contractors? -- Signed: Dungaree Dan

Questions for Dungaree Dan
Send your questions about contract employment to Ask Dungaree Dan. We will try to answer all of your questions, and we will publish the most interesting ones in The Contract Employee's Newsletter.

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Survival Tactics

Identifying The Greed In Agency Subcontracts

The following is excerpted from an article called Inefficiency and Greed.

Consider this scenario. You ask a third-party recruiting firm to introduce you to prospective clients. You interview with one or more companies, you select a client, and the agency quotes a W-2 wage as the amount they will pay you.

You would like to sign directly with the client as an independent contractor but the agency explains in no uncertain terms that because the agency found the contract assignment they “own” the contract.

Agencies seek control of the contract because they perceive themselves as working for the client, and because they perceive you as their direct competitor (which, of course, you are).

Either you must work as the agency’s employee or you must work as the agency’s subcontractor. But in either case it is the agency that will sign a contract with the client.

As a subcontractor you have two options:

  • Sign a subcontractor agreement with the agency as an independent contractor.

  • Select an employer of record that will sign a subcontractor agreement with the agency as an independent contractor.

You may not need an employer of record if you qualify as a “1099-compliant” independent contractor. 1099-compliant means that you satisfy the common law factors that define an independent contractor relationship. In other words, you are able to satisfy the powers that be that there is little chance that the IRS or another government agency might reclassify you as an employee of the client.

Of course, you may not qualify as a 1099-compliant independent contractor, or the agency may have a blanket fear of reclassification, or you simply don’t want the hassle of running your own consulting business. In these cases you will have to become the employee of a third-party employer of record.

If you convert to independent contractor status the agency will save on payroll taxes, payroll processing costs, insurance costs, and the cost of money for payrolling you before they receive payment from the client. Instead, these costs will be passed on to you or your employer of record.

How much will the agency save because they are now paying you or your employer of record as an independent contractor?

If the agency does not pass the entire savings on in their pay rate they will realize a significant windfall, and you will end up earning significantly less than if you had agreed to be the agency’s employee.

Assume for the sake of argument that the agency had originally offered you a W-2 wage of $100 per hour. What must the agency pay to you as an independent contractor so that both the agency and you break even on the deal?

Below is a brief discussion of the payroll-related costs that no longer apply when the agency contracts with an independent contractor.

  • Employer’s share of payroll taxes – 12.45% of Gross Wage
    Companies pay out-of-pocket for payroll taxes on employee’s gross wage. They do not pay taxes on what they pay to independent contractors. Payroll taxes include:

    • Workers Compensation – 0.5%
      Rates vary by region, industry, and experience level, but they average about 0.5% of GW for white collar professions.

    • FICA Social Security – 6.2%
      Employer pays 6.2% of GW out of pocket (and employee pays 6.2% of GW out of payroll). In 2001 the wage cap for FICA SS, above which neither employer nor employee pays, is $80,400.

    • FICA Medicare – 1.45%
      Employer pays 1.45% of GW out of pocket (and employee pays 1.45% of GW out of payroll). There is no wage cap for FICA Medicare.

    • FUTA Federal Unemployment Insurance– 0.8%
      The wage cap for FUTA is $7000.

    • State Unemployment Insurance – 3.5%
      Rates vary among states and with the company’s experience level. The UI wage cap also varies among states. Owing to their high number of UI claims temp agencies and contractor recruiting firms have relatively high UI rates.

  • Additional costs associated with payrolling an employee – 2.35% of Gross Wage
    Agencies incur additional costs associated with computing, processing, and paying regular payrolls that they do not incur when paying independent contractors.

    • Cost of processing payroll – 0.5%
      This item includes the cost of a payroll service such as ADP, plus associated administrative labor costs to compute and process payroll.

    • Cost for General liability and errors & omissions insurance – 0.15%
      Agencies pay for GL and E&O insurance to cover their own employees. They do not provide these insurance coverages for independent contractors. Independent contractors must pay for their own insurance coverage.

    • Cost of benefits administration – 0.55%
      This item includes the setup and maintenance costs for retirement plan and health insurance, plus associated administrative labor costs.

    • Cost to pay wages in advance of client’s payment – Minimum of 1.00%
      Temp agencies and recruiting firms must pay their contract employees on regular paydays. The cost of money to advance payroll on regular paydays is about 1% of wages, assuming an average float of 30 days. Small firms that cannot qualify for a sufficiently high line of credit must sell their receivables to a factoring company. Factoring companies charge between 3% and 7% depending on volume.

    • Bad debt – 0.15%
      The cost of bad debt can vary widely depending on the state of the economy and on how well the agency qualifies its clients. Agencies must pay their hourly-paid temporary employees regardless of whether the client ever pays the agency. On the other hand, agencies pay their subcontractors only if and when the client pays the agency. When you operate as an independent contractor your agency passes on the risk of bad debt to you or to your employer of record.

Naturally, the overhead costs associated with payrolling agency employees will vary from agency to agency. However, these figures show that on average an agency will save about 15% of gross wage when it converts from an employer-employee relationship to a client-vendor relationship.

If you change your status from W-2 employee to independent contractor your agency should increase your wage by at least 15%. Anything less and the agency makes a windfall profit on the difference . . . at your expense.

Most agencies will adjust up their W-2 pay rate by 5% or 10% at the most. Don’t let them get away with it. Use this analysis to negotiate an independent contractor pay rate that is at least 15% higher than the agency’s previously quoted W-2 rate.

The table below shows some equivalent independent contractor pay rates based on a payroll overhead cost of 15%.

Table: W-2 Wage and Equivalent IC Pay Rate

Agency’s Offer
of W-2 Wage
Equivalent
IC Pay Rate
$35.00 per hour $40.25 per hour
$50.00 per hour $57.50 per hour
$75.00 per hour $86.25 per hour
$100.00 per hour $115.00 per hour


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Resources

Online Glossaries and Dictionaries

Use these online resources to decipher employment and staffing industry terminology.

Everybody's Legal Dictionary
Alphabetical lists of legal terms with a search function on the Nolo.com website. Of interest to Contract Professionals are specialized lists for Small Business, Employment Law, and Independent Contractors.

The Staffing Industry Glossary of Terms
This glossary of staffing industry terms is a set of “working definitions” for staffing industry professionals. Although it is not a definitive list, it is useful nonetheless in deciphering staffing industry lingo.

A recent search on Google.com using the keywords <glossary or glossaries> returned over 50,000 listings. Narrow your search to identify specialized glossaries by entering qualifying keywords, e.g. <insurance glossary>, <retirement glossary>, <financial glossary>, <legal glossary>, <legal dictionary>, etc.

Locate additional reference resources under the heading “General Reference” in Appendix A: Resources for Contract Workers in The Contract Employee's Handbook.

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Contract Employee's Glossary

Terminology For Contract Professionals
This issue focuses on terms beginning with the letter A.

Accountable plan
An accountable expense reimbursement plan is a written policy of the employer governing the reimbursement of work-related expenses. To be accountable the reimbursement policy must include all three of the following rules.

  • Expenses must have a business connection – that is, you must have paid or incurred reimbursable expenses while performing services as an employee of your employer.

  • You must adequately account to your employer for these expenses within a reasonable period of time.

  • You must return any excess reimbursement or allowance within a reasonable period of time.

Expense reimbursements under an accountable plan are not part of your income. They are paid with tax-free dollars, and they don't appear on your Form W-2.

Umbrella services, such as the one provided by P.A.C.E., have accountable plans that are specifically designed to reimburse Contract Professionals using tax-exempt dollars for all of their work-related expenses. Ordinary employers of record such as recruiting firms and temp agencies cannot do this.

Most contract employees incur significant expenses related to operating their home office, keeping their skills up to date, and marketing their services. A well crafted accountable plan lets your employer of record offset these costs with tax-free reimbursements, potentially saving you several thousand dollars a year.

All too often, Contract Professionals must convert to W-2 employment status in order to satisfy the requirements of their IRS-wary clients. In doing so, however, they give up the ability to write off most of their out-of-pocket, business-related expenses. An accountable plan lets W-2 employees "write off" their out-of-pocket expenses just like a self-employed independent contractor.

Age Discrimination in Employment Act (ADEA)
ADEA is a federal law that prohibits arbitrary discrimination against workers over the age of 40 in any employment decision, especially firing. Companies must treat agency temps the same as their own employees with respect to the provisions of ADEA.

Agency
A firm that functions as an agent or that employs agents. Frequently used in place of the term contract employment agency. Examples are recruiting firms, staffing firms, pass-through agencies, and umbrella services.

Agency of record
Agency of record refers to an agency that has a direct contract with a client to provide the technical or professional services of a specified individual, in which that individual is operating as an independent contractor. The term is used in the same context as the term employer of record, in which case the agency provides the technical or professional services of a contract employee.

Agent
An agent is an individual who facilitates a business relationship in return for a fee. Examples are insurance agent, marketing agent, talent agent, sports agent, and literary agent. Sometimes agents are referred to as brokers.

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P.A.C.E. News

Free General Liability and Errors & Omissions (E&O) Insurance

Contract Professionals with inadequate or no liability insurance coverage pose a significant risk to their clients. There is the risk that a contractor might damage a client's property or the property of others, or injure someone while on the job. Or, a contractor may damage the client's business through willful negligence or incompetence. Many Contract Professionals do not carry liability insurance, so the liability easily could pass to the client.

General Liability Insurance protects both the contractor and the client from damage to persons or property.

Errors & Omissions (E&O) Insurance (also known as Professional Liability Insurance) protects the contractor and client from financial harm to the client's business caused by the contract's actions.

Adequate individual coverage for both General Liability Insurance and Errors & Omissions Insurance can cost several thousand dollars per year.

All P.A.C.E. Division Managers are automatically covered for both General Liability and Errors & Omissions Insurance up to $5,000,000 aggregate. This coverage is free to all P.A.C.E. Division Managers.

P.A.C.E. is a Win - Win - Win - Win Solution for Downsized Employees, Contract Employees, Independent Contractors, and Client Companies. Check out P.A.C.E. for the best benefits package available to ANY employee in ANY company in the USA.

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Contract Employee's Handbook

IRS Recognizes Two Categories Of Individual Workers

The IRS recognizes two categories of individual workers.

  • Independent Contractor
  • Employee

Independent contractors may be sole proprietorships, partnerships, limited liability companies, or corporations. Most technical and professional consultants are either sole proprietorships or one-person corporations. These are the two business forms that we usually associate with individuals who operate as independent contractors.

There is some disagreement about the precise definition of an independent contractor. Some authors restrict the term to individuals working as an independent business. Others include all businesses ranging in size from a one-person operation to the largest mega-corporation.

As far as most government agencies are concerned, an employee is any individual worker who does not qualify as an independent contractor.

The Contract Employee's Handbook has an excellent discussion about the factors that distinguish an independent contractor from an employee. The factors center around the issue of control. Employers control the work of employees. They do not control the work of independent contractors. When the IRS conducts an audit of employee status, the auditors look for evidence of control. The IRS training manual published in 1996 puts it this way:

“Following the common law standard, the employment tax regulations provide that an employer-employee relationship exists when the business for which the services are performed has the right to direct and control the worker who performs the services. This control refers not only to the result to be accomplished by the work, but also the means and details by which that result is accomplished. In other words, a worker is subject to the will and control of the business not only as to what work shall be done but also how it shall be done. It is not necessary that the business actually direct or control the manner in which the services are performed; it is sufficient if the business has the right to do so.” Independent Contractor or Employee? IRS Training Course 3320-102(10-96), pg. 2-3.

Click through to The Contract Employee's Handbook. Chapter 1 discusses why it is so very important that Contract Professionals thoroughly understand the factors that distinguish an independent contractor from a regular employee.

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Contract Employee's Workshop

Have LCD Projector, Will Travel

I am developing an all-day Saturday Workshop for technical and professional contractors. I call it The Contract Employee's Workshop. (How original!)

During the initial shakedown period I will offer the workshop in the San Francisco Bay Area. Cost of admission will be in the neighborhood of $50, provided I can locate an inexpensive yet comfortable venue large enough to hold at least 50 people. It would be nice to have a corporate sponsor for the workshop, especially if I don't have to sell my soul (and halo) to qualify for their support. Ideas anyone?

Participants will leave the workshop with a solid understanding of how this crazy contracting industry works. Agency contractors will learn how to increase their earnings by 30% to 50% on their very next contract assignment. The handouts alone are worth the cost of admission.

After the initial shakedown I'll take the workshop on the road to those cities across the US that express the greatest interest in The Contract Employee's Workshop.

I'm open to suggestions. E-mail your ideas and suggestions to Workshop@pacepros.com

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The Contract Employee's Project

The Contract Employee's Project is the larger context under which the following interrelated vehicles operate to promote and defend the interests of Contract Professionals:

  • The Contract Employee's Handbook
  • The Contract Employee's Newsletter
  • The Contract Employee's Workshop
  • Professional Association for Contract Employment (P.A.C.E.)

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Copyright and Publication Info

Copyright (c) 2001, James R. Ziegler. All rights reserved.

You may copy or forward this free publication provided it is left intact with all links and this notice unchanged. Any unauthorized duplication, including republication in part or in full for commercial use, is an infringement of copyright.

Published by:
P.A.C.E. - Professional Association for Contract Employment
1355 Willow Way, Suite 244
Concord, CA 94520
U.S.A.
http://www.pacepros.com/

Editor:
James R. Ziegler, Ph.D.
Executive Director
P.A.C.E. -- Professional Association for Contract Employment
(925) 680-0200
ziegler@pacepros.com

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Disclaimer

The Contract Employee's Newsletter is designed to provide information in regard to the subject matter covered. Use is granted with the understanding that the publisher and authors are not engaged in rendering legal or financial advice. If expert assistance is required you should seek the services of a competent professional.

The purpose of this information is to educate and entertain. The publisher and contributors shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly, by the information contained in this Newsletter or by information contained in any web site or resource referenced by citation or hypertext link within the pages of this Newsletter.

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Sign-off

I hope you have found the information in this newsletter to be interesting, informative, and provocative. I encourage you to share the CENewsletter with your friends, colleagues, coworkers, clients, and agency recruiters.

Why clients? Because you need every ally you can get. Why agency recruiters? Because they need to know the jig is up.

Wishing you success in your contracting career,

James R. Ziegler, Ph.D.
Executive Director
P.A.C.E. -- Professional Association for Contract Employment

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