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Contract Employee's Newsletter
Helping Contract Professionals
Manage Their Careers
February 15, 2002
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
and time allows. 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?
Thank you for your excellent suggestions for future newsletter
topics. Keep 'em coming. Chances are, if a topic interests you as
a Contract Professional it will certainly interest the majority
of our readers.
Guest Appearances
I would like very much to publish short guest contributions
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 professional
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 might help your consulting
career. Contributions should be short and of general interest to
all Contract Professionals.
Mail your suggestions to suggestion@pacepros.com.
Return to Table of Contents.
News and Views
Perversity, Pandering, Profiteering, and PEOs
Perverse: Turned away from what is right or good. Corrupt;
Improper; Incorrect.
Pander: To cater to the lower tastes and desires of others
or to exploit their weaknesses.
Profiteer: To make what is considered an unreasonable profit
especially on the sale of essential goods during times of emergency.
Professional Employment Organization (PEO): A type of staffing
agency that signs a blanket contract with an employer to recruit,
hire, and co-employ a block of workers for the client.
Complete the following sentence: PEOs
- are arguably the most perverse form of employer of record
service.
- pander to the basest instincts of cold-hearted employers.
- profiteer from their position of power over disenfranchised
employees.
- all of the above.
A new report published by the Seattle-based Center
for a Changing Workforce provides evidence that the fastest-growing
segment of the staffing industry, professional employer organizations,
exists primarily to make it possible for employers to deny health
and retirement benefits to hundreds of thousands of long-term "leased"
workers across the nation, despite industry claims to the contrary.
The report, PEOs
and Payrolling: A History of Problems and a Future Without Benefits,
examines the history, growth and impact of the industry on employees
in the context of the larger staffing industry. The report focuses
on the failure of PEOs and other payrolling companies to provide
health and retirement benefits, and how PEOs engage in the unethical
practice of selling high-profit supplemental health insurance to
"captive" payrolled employees. The study also documents
potential conflicts of interest and fiduciary violations by PEOs.
Ever larger numbers of companies are outsourcing the entire human
resources function for a defined block of their employees to PEOs.
Most PEOs specialize in the employment of low-paid clerical and
light industrial staff, but a small proportion also employee highly
compensated employees. PEOs take advantage of economies of scale
and specialized systems to provide so-called cost-effective employment
solutions for their clients.
PEOs differ in significant ways from traditional temporary staffing
agencies.
- Blanket contracts versus individual contracts -- Whereas
temp agencies sign a separate contract for each leased employee,
PEOs sign a blanket contract to supply and payroll an entire population
of employees.
- Open ended employment versus fixed contract terms --
Employment with a PEO is open ended, and is not intended to be
temporary.
- Co-employment versus sole employment -- PEOs are statutory
co-employers of their client's workforce by design. That
is, there is no pretext as to who is the real employer. Both the
client and the PEO openly share the role of employer. In contrast,
temp agencies are considered the sole employer for all practical
purposes unless a common-law test determines otherwise,
in which case a government agency or the courts may reclassify
"temporary" employees as common law co-employees of
the client.
The Center for a Changing Workforce contends that PEOs are not,
in fact, co-employers at all. Rather, the Center argues, PEOs are
simply payrolling firms functioning as co-employers so that the
real employers, their clients, can avoid giving low-paid
employees the expensive health insurance and retirement plans that
they offer their more highly compensated "key" employees.
According to the report by Center for a Changing Workforce, the
number of employees payrolled by PEOs (1.8 million in 1997) matches
or exceeds that of real temp workers. But because PEOs specialize
in low-paid workers, total business by PEOs represents only about
27% of the US staffing market (1997 data).
I am not a fan of predatory recruiting firms and temp agencies
that work for client companies and against the best
interests of contract workers. And I am alarmed by the prospect
that these companies may attempt to apply the PEO model to independent
contractors and other highly compensated Contract Professionals.
Salvation for disenfranchised employees of PEOs may come in the
form of class action lawsuits against companies for retroactive
benefits. I discussed this issue in the January
01, 2002, CENewsletter, with regard to the class action lawsuits
against Microsoft and the Metropolitan Water District of Southern
California. But an evil movement is afoot that could make PEOs immune
from such legal remedies.
In August, 2001, employee leasing companies introduced legislation
(H.R. 2807, S. 1305) seeking changes in the tax code to allow
the PEO employee leasing business to expand. The bill would repeal
established common-law rules that define employees and employers
for purposes of taxes, pensions, health benefits, and other employee
benefits. The bill would permit employers to transform their employees
into "leased employees" by using a PEO, weakening the
link between the real employer and workers, and further eroding
the availability of low-cost, group insurance and retirement plans
to employees of these firms.
The report, PEOs
and Payrolling, is a devastating indictment of this segment
of the staffing industry. It should be required reading by every
Contract Professional and by every employer of Contract Professionals,
and certainly by every Senator and Member of Congress.
Return to Table of Contents.
From The Trenches
Networking Works!
[Submitted by Gregory
Close, Moderator of The Bay Area IT Consultants mailing list
and owner of Affinisoft
Corp. - Software Engineering Management for Financial Web Sites.]
I recently landed a new contract with a former client. Upon talking
with the hiring manager, and one of my contacts over there, I've
concluded that networking is by far the best way to find
a good gig in this economy.
My hiring manager knew me, knew what I could do, and since I
was in regular contact with them, didn't ever list the position,
nor contact an agency. I'd guess 90% or more of the good
gigs are now filled this way. Why call an agency or post the position
on monster.com when you can either bring on someone you know,
or someone your friends know? It's less risky, less costly, and
just plain makes sense.
Furthermore, I talked to an acquaintance about her attempting
to introduce me to the e-commerce department of a large local
company, where she'd worked before. She said the following, "I
forwarded your resume, but they've got a hiring freeze on, and
you know how it is, they just want to hire their friends when
something does come up."
What's the lesson for those looking for jobs/contracts? Talk
to people you know. Contact them regularly, say once a month,
without being a pest. Everyone is incredibly busy at the newly
downsized office-place, and they forget about you easily. Don't
let them. Take them to lunch, ask for introductions to their friends,
ask them for other contacts and introductions at their workplace.
Keeping up with your friends is good business.
Note: The Bay Area IT Consultants mailing list is a discussion
forum for use by IT Contractors. Despite the name, IT Consultants
from anywhere are welcome to join in the discussion. We advise one
another on negotiation strategies, marketing strategies and so on.
This is a great opportunity to network, find out what's going on
in the world of contracting, and get advice from fellow IT consultants.
Best of all, it's FREE!
To subscribe, send a blank email to:
baitc-subscribe@yahoogroups.com
baitc moderator: Gregory Close
Owner, Affinisoft
Corp. - Software Engineering Management for Financial Web Sites
gclose@affinisoft.com
[Submitted by Tara Montgomery,
Spokesperson for Laid
Off in Silicon Valley.]
"One of life's amazing wonders is how we get wonderful unexpected
surprises as we do things for other people. That's how I got my
last job. I was a reference for a former colleague, so naturally,
the hiring manager asked some questions about my role and how I
worked with the candidate they were considering. When a position
opened that required my skills, the hiring manager called me immediately.
I was practically offered the job without having provided a resume
or even participating in an interview!"
Note: Recently laid off? Laid
Off in Silicon Valley is the right place to continue building
your career. Tech and professional workers laid off in Silicon Valley
will find resources and a network to exchange ideas and moral support.
Return to Table of Contents.
Marketing Tips
Let Me Know What You Need That I Can Help You With?
I recommend that you develop a seven-second introduction that encapsulates
what you do for a living. This introduction is something, for example,
that you might say while shaking hands with someone you are meeting
for the first time.
My seven-second introduction goes like this:
"Hi. I'm Jim Ziegler. My business helps Contract Professionals
manage their careers and make more money."
The standard format is: "Hi. I'm <Your Name>. My business
helps . . ." This much takes three and one-half seconds, so
you only have three and one-half seconds left to add your "hook".
Once you have your intro, repeat it over and over like a mantra
(which it is!) until you have it down pat.
No jargon or acronyms are allowed. Just plain English that anyone,
even your grandmother, could understand and appreciate.
The word business is important, because that is what you
represent. You want to distinguish yourself as a business or vendor
of consulting services. "I help . . ." is good,
but it lacks the weight and professional cachet of "My business
helps . . ."
The word helps is essential. People helping other
people is what builds relationships.
I like my seven-second intro. But I feel a little pushy saying
it to a complete stranger. It sounds too much like a sales pitch.
This week I learned about a new approach that works better for
me. It goes like this:
"Hi. I'm Jim Ziegler. Let me know what you need that
I can help you with?"
This approach is so much more friendly, and when I introduce myself
I am truly offering my help, not just telling someone that I help
others. Invariably, the other party responds with, "I don't
know. What do you do that might help me?", or "Oh?
What can you help me with?" At this point I have their
full permission to explain that "My business helps Contract
Professionals manage their careers and make more money."
Not only have I created an opportunity to explain what I do for
a living, but I have initiated a conversation. I can now ask, "What
kind of work do you do?" and find out about someone who
may become an invaluable addition to my powerful, professional network.
Before moving on I make sure that I have handed over my business
card and have received a card in return. I never go anywhere without
my business cards.
Sure, someone is bound to say, "I'm moving to a new house
this weekend and I need help loading the rental truck."
You can choose to take that as a professional liability or as an
opportunity to cement a friendship. Which you choose is up to you.
Let me know what you need that I can help you with?
Return to Table of Contents.
Ask Dungaree Dan
How Do I Convert A W-2 Pay Rate To A 1099 Billing
Rate?
Q: Dear Dan -- I still don't know how to calculate
a reasonable 1099 rate. Almost all of my work over the past 15 years
has been W-2 contract agency work. Absolute numbers necessarily,
of course, take many factors into account, such as skill set, experience,
urgency, length of project, etc., but surely one can calculate a
rough, standard ratio that converts a W-2 pay rate quoted by an
agency into a 1099 billing rate? -- Signed: "Somewhere Over
The Ratio"
A: Dear Somewhere -- Let's consider a couple scenarios.
In the first scenario various agencies are quoting hourly pay rates
in a certain range. Given this information, you want to know how
much you could reasonably charge if you found your own client and
contracted direct. Of course, as an independent professional you
deserve to invoice the client at the same billing rate as a staffing
agency would charge, but you don't know what that rate might be.
In the second scenario an agency quotes an hourly W-2 pay rate,
but you do not want to become the agency's employee. Rather, you
want to subcontract through the agency as an independent contractor.
How much should you bill the agency as an independent contractor
given that the agency had previously quoted a certain W-2 pay rate?
Scenario 1:
An agency has quoted a W-2 pay rate of $50 per hour. How can you
estimate what your real value is on the open market? That is, how
much should you bill directly to a different client based on an
agency's offer of $50 per hour gross wage?
First, you must understand that the first time an agency talks
with you they will try to take at least 50% off the top, if not
more. And the minimum that a staffing agency will ever take off
the top is about 35%. In other words, in a best case scenario the
agency keeps 35% of the billing rate and passes 65% on to you as
your W-2 pay rate (gross wage).
If you know your pay rate, you can estimate the minimum billing
rate by dividing the quoted pay rate by 65%. If you think the agency
takes 40%, then divide the pay rate by 60%. Likewise, if you think
the agency is playing you for a sucker, divide by 50% or more. In
the P.A.C.E. website I recount a true
story where the technical writer who I replaced was being paid
$25 per hour on a $70 per hour billing rate. That is an agency take
of 64%!
Example 1: An agency quotes a W-2 pay rate of $35 per
hour. You are new to contracting, and the agency has no prior
history with you, so they are going to lowball your W-2 pay rate
at about 50% of the billing rate. Your value on the open market
is, therefore, probably around $70 per hour.
Example 2: An agency quotes a W-2 pay rate of $55 per
hour. You are an experienced contractor with a strong resume,
and the agency is aware of your high skill level. The agency also
knows that you are reasonably savvy, and that your skills are
in high demand. The rate they quoted you is probably based on
their lowest margin of 35%, leaving 65% as your W-2 pay rate.
Your value on the open market is, therefore, at least $85 per
hour.
I recommend that you always ask the agency how much they
take off the top as their professional services fee, and never
work with an agency that refuses to disclose their margin (That
is, their professional services fee). You ought to be able to shop
for agencies the same as you shop for an attorney, or a dentist,
or an accountant -- by assessing their rates and perceived value
delivered.
Scenario 2:
An agency has quoted a W-2 pay rate of $50 per hour, but you do
not want to become their W-2 employee. Rather, you want to subcontract
through the agency as an independent contractor. How much should
you invoice the agency for your consulting services as an independent
contractor? That is, what should your 1099 rate to the agency be
if they had previously quoted a W-2 pay rate of $50 per hour?
The key to understanding this relationship is to first understand
that when you convert from an employee to an independent contractor
you assume additional costs that the agency no longer has to pay
as your employer. The additional costs that pass to you are the
employer's share of payroll taxes (Social Security and Medicare),
the burden for general liability insurance, administrative overhead
for processing payroll, and the cost of money to pay you on regular
paydays. Also, there are additional savings to the agency that you
do not (necessarily) have to assume. These include Unemployment
Insurance, and Workers Compensation Insurance.
The savings to the agency totals at least 15% of gross wage. Therefore,
your 1099 rate to the agency must be at least 115% of the
originally quoted W-2 pay rate if you are to break even as an independent
contractor with the previously quoted W-2 pay rate.
Example: The agency originally quotes a W-2 pay rate of
$50 per hour. If, as an independent contractor, you invoice the
agency at the rate of $57.50 then both you and the agency will
net the same as if the agency had employed you as a W-2 contract
employee.
I discuss this relationship in detail in an article called "Inefficiency
and Greed" that you can open and read online. The relevant
section is "The Greed In Independent Contractor Subcontracts"
toward the end of the article.
Convert to P.A.C.E. at any time.
At P.A.C.E. we recommend that contractors who are being payrolled
as agency employees convert to P.A.C.E. division managers. This
way P.A.C.E. subcontracts to the original agency and invoices them
at 115% of the original W-2 pay rate. Because P.A.C.E.'s service
fee is just 5% plus the employer's share of payroll taxes P.A.C.E.'s
total margin is never greater than 15%. So the transaction is virtually
a wash.
On the downside, P.A.C.E. pays its contractors when the client
pays P.A.C.E., usually within 30 days because of our aggressive
collections policy. However, this is the only downside to
this arrangement.
On the upside, P.A.C.E. gives its contractors the best benefits
package available to any employee in any company in the USA. You
can read about P.A.C.E.'s superb benefits in the Benefits
section of the P.A.C.E. website. Select the links under the <SUBMENU>
header to peruse a complete description of P.A.C.E.'s outstanding
retirement plan, free long term disability insurance with
guaranteed issue, extensive tax-free expense reimbursement program,
and other great benefits.
And, P.A.C.E. offers a 1% referral rebate for each new contractor
who identifies a current P.A.C.E. contractor as the reason they
joined P.A.C.E. For example, any P.A.C.E. contractor who refers
just five contractors to P.A.C.E. earns referral rebates totaling
5%, enough to completely offset P.A.C.E.'s 5% service fee, at which
point, P.A.C.E.'s employer of record service becomes virtually free.
Call or e-mail P.A.C.E. if you have any questions at all about
working as a Contract Professional. Thinking about this stuff is
what I do 24/7/365, and I'm always looking for more CENewsletter
material. -- 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.
Return to Table of Contents.
Contract Employee's
Glossary
Terminology For Contract Professionals
More terms from Appendix
B: Glossary of Terms for Contract Professionals of The
Contract Employee's Handbook.
Contract recruiter
Contract recruiters are hourly-paid Contract Professionals who contract
directly with companies to recruit both regular employees and contract
workers. Generally, their only compensation is the hourly rate they
bill their clients. Contract recruiting is growing by leaps and
bounds. Companies are learning that it is almost always cheaper
to hire a contract recruiter by the hour than to go through an outside
recruiting firm. Because of this, it is quite likely that when a
contractor calls the HR department of a potential client that the
person who answers the phone will be a fellow contractor. Contractors
share a common bond, and that can only bode well for contractors
looking for a new assignment.
Contractor recruiting firm
A contractor recruiting firm is a temp agency that specializes in
placing and employing technical and professional contractors as
opposed to clerical, industrial, and seasonal temps.
Copyright
Copyright is essentially the legal exclusive right of the author
of a creative work to control how a creative work is used. Copyright
includes the exclusive right to make copies, authorize others to
make copies, make derivative works, sell and market the work, and
perform the work. Any or all of these rights can be sold separately
through the transfer of copyright ownership.
These articles by Brad Templeton are helpful in understanding copyright
basics:
For those legal/academic types here is a link to the online version
of the U.S. Copyright Law, published by the United States Copyright
Office:
Copyright notice
A copyright notice consists of the © symbol or the word Copyright,
plus the date of publication and the author's name. For example,
Copyright 1998-2001 James R. Ziegler. A copyright notice is not
required in the USA and in other countries that have signed the
Berne Convention or GATT, but it is a good idea to include a copyright
notice on all original works under your control to remind others
that your original work is not in the public domain. It is recommended
that you place a copyright notice on your resume and personal marketing
materials to prevent their misappropriation and misuse by unethical
recruiting firms.
Return to Table of Contents.
Contract Employee's
Workshop
Next Stop, Irvine, CA
The next CEWorkshop is tentatively scheduled for March 30, 2002
in Irvine, CA, in the heart of Southern California's "Technology
Coast" and Orange County.
[I had originally set the date as March 16, but pressing matters
on the home front require that I reschedule the date.]
Visit the CEWorkshop
Agenda to view topics covered during this valuable event.
Seeking a meeting space
I am looking for an inexpensive (or free) venue in Irvine that will
accommodate 50 to 65 participants, seated comfortably at tables.
Please let me know if you are connected to a professional organization
or company that might have a suitable meeting space that we can
use for the CEWorkshop.
In the meantime watch this space for more details.
I am always open to your suggestions. E-mail your ideas and suggestions
for the CEWorkshop to Workshop@pacepros.com
Return to Table of Contents.
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:
Copyright and
Publication Info
Copyright (c) 2002, 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
cenewsletters@pacepros.com
Return to Table of Contents.
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.
Return to Table of Contents.
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Return to Table of Contents.
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, co-workers, 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
Return to Table of Contents.
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