Contract Employee's Newsletter
Helping Contract Professionals Manage Their Careers

July 01, 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 of general interest to all Contract Professionals.

Mail your suggestions to suggestion@pacepros.com.

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Featured Topic

Where Did All Those Recruiting Firms Come From?

In the last installment of this series I contrasted high-end Hyperskilled Contract Professionals and low-end Deskilled Temporary Employees. In the next several issues I will discuss the recent rise of contingent work in America and the factors that have contributed to the phenomenally rapid, pervasive, and insidious growth of staffing agencies in the corporate arena, especially with respect to highly skilled and highly compensated Contract Professionals.

In this second installment on the rise of contingent work in America I discuss specific events that have contributed to the political and regulatory environment that has so favored the staffing industry that it has literally wrested control of highly skilled contingent workers away from the corporate HR departments and into the offices of gatekeeper agencies such as preferred staffing vendors and vendors on premise. In doing so the contingent staffing industry has come to dominate and control virtually all access by Hyperskilled Contract Professionals to client companies (and visa versa).

Where Did All Those Recruiting Firms Come From?

Over the past 15 years the staffing industry in the United States has positioned itself squarely in the role of gatekeeper between corporate HR departments and highly skilled contract professionals. Like schoolhouse thugs demanding their due outside the lavatory door, recruiting firms use their privileged position as trusted intermediaries to extract (some might say extort) unreasonably high margins in the form of gross overcharges to client companies and low wages to the contract professionals who must agree to be employed by the gatekeeper as a condition of working at the client.

Prior to 1986 recruiting firms operated exclusively in the realm of full-time, executive employment. And temporary help agencies operated exclusively in the realm of less skilled, low-paid, clerical, light industrial, and seasonal temps.

Temp agencies had not yet "discovered" highly skilled and highly compensated contract professionals who operated for the most part as self-employed, project-oriented consultants.

1970's: IRS steps up enforcement of employment taxes.

In the early 1970's the Internal Revenue Service stepped up its enforcement efforts and increased the number of employment tax audits. These audits were often aimed at the worker status of individual consultants. As a result, many businesses faced severe economic consequences when bona fide consultants were reclassified as employees of the company. Companies were hit for back payroll taxes, state and federal income taxes, penalties, and interest up to 41% of what a company had already paid to their reclassified consultants. Needless to say, the financial consequences to a company of worker reclassification could be devastating.

Companies found it difficult to defend against IRS reclassifications, largely because there was no single set of independent criteria for determining worker status. If the IRS said that a bona fide consultant was really a company employee the company had no effective defense.

Needless to say, the increased enforcement efforts by the IRS put a damper on the hiring of self-employed consultants because companies had no way to protect themselves from the risk of overzealous and arbitrary reclassification of self-employed consultants.

1978: Congress tries to rein in the IRS.

Companies complained loudly to their congressional representatives about the abusive and excessive tactics used by the IRS during company audits. Eventually, Congress stepped in to fix matters by enacting Paragraph 530 of the Revenue Act of 1978.

Paragraph 530 established a safe harbor for companies that were faced with IRS reclassification of self-employed consultants. Essentially, Paragraph 530 stated that if a company acted in good faith, had relied on prior IRS rulings, and a significant segment of the industry treated similar classes of workers as independent contractors, then there existed a safe haven that companies could invoke as an affirmative defense against worker reclassification.

Congress intended for Paragraph 530 to be a temporary stopgap measure until Congress could come up with a definitive definition of independent contractor.

In the meantime, and as a direct result of this Safe Harbor legislation, the IRS suspended most of its employment tax audits between 1978 and 1984.

In the absence of aggressive employment tax audits, companies could once again feel secure in outsourcing specific projects to self-employed consultants. The result was a significant increase in the number of skilled knowledge workers added to the contingent workforce.

During this period, the staffing industry was still confined to the permanent placement of full-time management and executive employees on the one hand, and clerical, seasonal, and light industrial temps on the other hand.

With the constant threat of reclassification eased, companies gradually began to outsource more mundane tasks to self-employed consultants. In addition to Management Consultants, HR consultants, Operations Consultants, Trainers, Budget Analysts, and other project-oriented consultants, companies began to hire hourly-paid programmers, hardware specialists, writers, and other skilled workers to perform jobs ordinarily performed by salaried employees.

As companies downsized their workforces in the late 1970's and early 1980's, they mostly replaced their downsized employees with contract workers.

The ranks of highly skilled and highly compensated, self-employed, project-oriented consultants and hourly-paid contractors were growing rapidly. And yet the staffing industry had no way to get a piece of it.

1982: Congress tries and fails to define employee and independent contractor.

In 1982 the US Senate Finance Committee proposed a simple five-factor test, which if enacted would provide specific criteria for determining independent contractor status. The legislation failed to pass, and it was clear to everyone, including the IRS, that Congress was incapable of providing leadership in this area.

1984: The IRS resumes aggressive employment tax audits.

Motivated by the inability of Congress to provide a rigorous definition of Independent Contractor, the IRS resumed its efforts to generate additional revenues through aggressive employment tax audits. In 1984 the IRS introduced a test program in seven districts called the Special Compliance Employment Tax Examination Program, and later expanded it to 26 districts.

The program specifically targeted employers who allegedly misclassified their employees as "independent contractors." The IRS reported that in the first year of this new program 92% of companies that were audited on the issue of worker classification were assessed additional employment taxes.

As a result of large revenues generated by the test program the IRS subsequently rolled out the Special Compliance Employment Tax Examination Program to all districts, and the program continues today under the direction of the Office of Employment Tax and Compliance (OETAC).

The IRS was very successful at generating large revenues from companies that used ever-increasing numbers of highly skilled and highly compensated Independent Contractors. And yet, by 1986 at least, the staffing industry still had no way to cut a slice from this large and lucrative pie.

1986: Congress eliminates safe harbor for certain technical workers.

The climate for independent contractors - both consultants and generic taskmasters - changed radically in 1986 when Congress repealed safe harbor for technical contractors working through third-party consulting firms.

The Revenue Act of 1978 had earlier established that employers could appeal reclassification by the IRS if the employer's industry had consistently treated certain classes of workers as independent contractors. But section 1706 of the Tax Reform Act of 1986 changed that by amending the Revenue Act of 1978 so that employers could no longer seek safe harbor relief from reclassification for independent contractors in certain technical job classifications who were placed at the employer through a third-party agency. The affected job classifications were:

  • Engineer

  • Designer

  • Drafter

  • Computer programmer

  • Systems analyst

  • Other similarly skilled worker engaged in a similar line of work

This measure was supposed to eliminate the ambiguity between employee and independent contractor, while ensuring that the largest class of independent contractors paid their taxes.

Section 1706 finally gave the staffing industry the opening it needed to profit from the increased usage of highly skilled and highly compensated contract professionals.

Almost overnight, thousands of independent contractors found it necessary to convert from 1099 status to W-2 status, as client companies grew increasingly fearful of IRS audits that might reclassify independent contractors as employees of the client.

A mass hysteria gripped employers, as the IRS began to reclassify independent contractors working through third-party agencies under section 1706. The IRS became more and more aggressive, and employers began to discriminate against all independent contractors, even true consultants and one-person corporations.

Although Section 1706 of the Tax Reform Act of 1986 was directed at technical workers contracted to companies through third parties, all contractors, regardless of how they located work, felt its effect.

Sharks to the rescue.

Employers needed salvation, and they found it in traditional temp agencies. By converting independent contractors to regular employees of a temp agency employers could mitigate the risk of reclassification by the IRS. Temp agencies paid the workers' payroll taxes and income taxes, thereby satisfying for the most part the IRS's concerns regarding payment of applicable taxes.

Because client companies were already familiar with the traditional temp agency model, it was only reasonable to adapt that model to highly skilled technical and professional contractors. The move was good for employers, and a boon to temp agencies, but it was a disaster for independent contractors.

Section 1706 finally provided the impetus for temp agencies to enter the market for high-end contract professionals. Companies could easily use temp agencies to staff their high-end projects, which further spurred the growth of temporary employment for all skill levels.

Applying a scaled-up version of the temp agency model to Independent Contractors disenfranchised them from their own independence. Contractors lost their tax write-offs, they lost their participation in the contract negotiation process, they lost control over the rates they charged for their services, and as a final indignity, proud Independent Contractors were reduced to the status of captive employee.

Consider also the matter of unconscionably high fees charged by unscrupulous contract employment agencies. Ordinary temp agencies bill out their regular temps at only $15 to $25 per hour on assignments that last at most only a few days or weeks. Because regular temp agencies must recover their marketing expenses and administrative overhead (and earn a fair profit) over a relatively short period, regular temp agencies must take a large cut of the billing rate just to stay in business.

But highly skilled contract workers are not regular temps. They are highly paid career professionals who frequently accept assignments lasting months, even years. Scaling up typical temp agency margins which account for low billing rates and short contract assignments creates massive profits for contract employment agencies. Agencies make more money per placement with highly skilled contract professionals owing to much higher billing rates, and they collect those high margins over a period of months, if not years, long after recouping their initial marketing costs.

In the first installment of this series I explained that there are two distinct populations of contingent workers. At the low end are Deskilled Temporary Employees, and at the high end are Hyperskilled Contract Professionals. As different as these two populations are from one another, the staffing industry addresses both groups with a single business model that is completely inappropriate for highly skilled and highly compensated contract professionals.

In this installment I have discussed specific events that have contributed to the political and regulatory environment that has so favored the staffing industry that it has come to dominate and control virtually all access to client companies by Hyperskilled Contract Professionals.

In the next issue of the CENewsletter I will discuss how recruiting firms operate as corporate gatekeepers, and how specifically they incorporate illegal restraint of trade, fraud, and extortion in their standard business model in order to reap obscene profits from both contract professionals and the companies that use their consulting services.

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Kudos and Testimonials

What People Are Saying About The Contract Employee's Project

"I've been in contract work since the last recession in '93 and have never seen a web site (or any other source) with so much beneficial information for contract workers such as yours. This is outstanding." -- R. R., Senior Control Engineer

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From The Trenches

Tech Writer Shares Tips For Finding Direct Job Listings

Often I have found the recruiter to be a roadblock to the job, not a help.

So I have developed some techniques for hitting the employer directly even though they are not named in the job listing at the recruiter's site.

  1. Zip Code. At one site they listed several jobs at 95134-1706. A couple of minutes of searching turned up that is the zip code for Cisco. Even if they don't list such a specific zip code, it can help you in limiting the scope of your search for the employer using the next two methods.

  2. Key words. If they say OLAP, Sybase, SQL and a location, for example, you can do a search and likely find them or someone similar who has job openings. This can be hit or miss, but serendipity is often a good thing.

  3. Grunt work. At JobFactory http://www.jobfactory.com/linkmap.htm is a listing of thousands of employers by geographical area or employer name that post jobs online. Their location and a brief one-line description with a link to their home page and jobs page when you click on the company link.

This is somewhat daunting as there are 50 employers per page to scan and over sixty pages, but you can do this rather rapidly by looking at the location first. Then the description will help you eliminate at least 50% more because they do not do what interests you. (If you are a *nix hack, you can script a search by location using perl, REXX, even bash.)

One caveat, however, some of the listings are for recruiters who post jobs. But can be useful as they sometimes have listings for jobs that you missed or were not listed elsewhere.

Oh, by the way, I'm looking too, so if you have a tip or two, share them 'round.

Thanks,

====================
I can lead your complex documentation project to success with my technically oriented, self-directed writing skills. My understanding of the full documentation cycle from picking up nuggets buried in the developer's ideas, to organizing it in a variety of ways to meet the needs of your target audiences, and on through the print production process will make your documentation an asset. My ability to organize my own and other's work will keep the project focused and moving even when stumbling blocks occur. Because I am picky about details and getting it right the first time, I will save you those embarrassing tech support calls where the end user, of whatever skill level, doesn't understand the manual.

Allen Schaaf, Lead/Senior Technical Writer
E-mail: soundbyte@sound-by-design.com
====================

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Marketing Tips

The Highest Paying Job You Will Ever Have

Make this your mantra.

“I am willing to conduct my job search with the same skill, persistence and creativity that I bring to my job.” -- JobSmart

In other words, your full-time job when you are not working on a contract assignment is locating your next contract assignment. Full-time means working on marketing-related activities to promote your consulting services at least eight hours a day, Monday through Friday, and then some.

The highest paying job you will ever have.

It is easy to spam the job boards and wait for the recruiting firms to call you with a dream job. Well, dream on! Recruiting firms take at least 35% off the top, of which 15% is payroll expenses and the remainder (20% or more) is profit. If you locate your own gig and bill the same amount as an agency, you get to keep the 20% or more that would have gone to the recruiting firm. If you bill $100 per hour that’s an extra $20 per hour of pure profit for you. If the gig lasts six months (1000 hours), that translates into an extra $20,000 or more for you.

The highest paying job you will ever have. Part II.

Now, let’s say it takes four weeks to land a gig on your own. $20,000 divided by 160 hours is $125 per hour. What if it only takes two weeks to land a contract assignment on your own. That equates to $250 per hour. What if it only takes two weeks to land a gig, and the gig lasts one year. Your marketing effort will have paid you $500 per hour! Doing your own marketing pays way better than using a recruiting firm. In fact, marketing your own consulting services could be the highest paying job you will ever have.

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Ask Dungaree Dan

Legal Rights If Contract Is Terminated For No Apparent Reason?

Q: Dear Dan -- I was terminated from six month assignment with no reported cause or reason for the action. What, if any, legal right do I have? -- Signed: Licking My Wounds

A: Dear Wounds -- This is a simple question with a complex but straightforward answer.

The answer pivots on the relationship between you and the client, and the nature of your contract.

For example, here are some things to consider. Were you operating as an independent contractor (that is, a vendor) or were you operating as the employee of a vendor (consulting firm, staffing agency, etc.)?

Operating as an independent contractor:
As a vendor you would have a contract with your client that specifies all relevant facts about your professional relationship with the client. The client in this case is either the ultimate user of your talent or a prime contractor through which you are subcontracting your services.

Check your contract to see what it says about early termination of your contract. Is your contract project based? Or does it specify payment by the hour? Project based vendor-client contracts often contain early termination penalties or "kill fees". Hourly paid vendor-client contracts may or may not contain early termination provisions.

If the contract specifies an early termination penalty or a kill fee, and the contract was not terminated because of your nonperformance, then you are entitled to the amount specified in the contract. On the other hand, if the contract does not specify an early termination penalty or a kill fee, then you are out of luck.

(By the way, always make sure that termination terms and penalties are symmetrical and apply equally to both parties. As a matter of fact, one of the best ways to get objectionable language stricken from a contract is to insist that the same terms apply equally in both directions.)

If your client terminated your contract in violation of the contract terms, then you have a legal right to sue the client at your expense for compensation. A good attorney with a solid case could obtain payment of legal expenses by the offending client, but only if you win.

Operating as an employee:
In most states employment is "at will", which means that either party may terminate the employment agreement without prejudice. For example, employers generally may terminate an employee for "lack of work", such as occurs when the client says that the contractor's services are no longer needed. Exceptions include termination that violates anti-discrimination laws for protected classes of workers and protected situations, or where the employment agreement specifies or implies a specific duration of employment, or where there is a separate union agreement that specifies the conditions under which an employee may be terminated.

Reality check:
Termination without notice goes with the territory when you are a Contract Professional. Come to think of it, termination without notice also goes with the territory when you are a full-time, salaried, fully-benefited, regular employee. Just ask the 1.5 millions employees who lost their regular jobs with little or no notice during the most recent economic downturn.

Unless you have a contract that expressly prohibits early termination the chances are that you have no recourse but to land another contract or get hired by another employer.

Bottom line:
Termination of either an independent contractor or an employee is almost never illegal. You asked "What, if any, legal right do I have?" My answer is that you have a legal right to seek new employment elsewhere. -- 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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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.

Gatekeeper
A gatekeeper is a staffing agency that is hired by a company to qualify and manage the company’s contingent workforce. Gatekeepers act as prime contractors through which other staffing agencies and IRS-compliant independent contractors must subcontract in order to provide contract services to the client. Gatekeepers also act as an employer of record for Contract Professionals who do not comply with the IRS common law factors for independent contractor status. The term vendor on premise is often used to describe the gatekeeper role. In some respects a gatekeeper is like a captive pass-through agency. Most gatekeepers add their handling fee on top of the subcontractor’s billing rate. Others take their fee out of billing rate.

General liability insurance (GL)
General liability insurance coverage protects the insured from claims arising out of the insured's liability for bodily injury, property damage, personal injury, or damage caused by ownership of property, manufacturing operations, contracting operations, sale or distribution of products, and the operation of machinery, as well as professional services. Clients frequently require that their vendors carry at least $1 million in general liability insurance. Because GL coverage is a “significant investment in one’s business” the IRS is less likely to reclassify an independent contractor with adequate GL coverage as an employee of the client.

Gig
A temporary contract assignment or project. In the entertainment industry a job of short duration is often referred to as a gig.

Gross earnings
Gross earnings equals a business’s gross revenues minus expenses. Generally, this is the amount subject to federal and state income taxes. Independent contractors pay taxes on their gross earnings. Employees pay taxes on their gross wage.

Gross wage
Gross wage is the hourly pay or salary earned by an employee before deductions. It is the amount reported on IRS Form W-2 in box 1 under “wages, tips, other compensation”. Your gross wage is the basis for calculating payroll taxes and income tax withholdings. Your net pay, or take-home pay, equals your gross wage minus the employee’s share of payroll taxes, state and federal income tax withholdings, and any additional deductions such as employee’s contribution to a tax-deferred retirement savings plan, and employee’s contributions for group insurance premiums and other employee benefits.

Group insurance policy
A group insurance policy is an insurance policy taken out under the auspice of a sponsoring group. The qualifying group may be the employees of a company or the members of an organization. “Group rates” for group insurance policies are based on the experience rating of the entire group, and are typically lower than individual rates for comparable insurance purchased “on the street.” Group health insurance for employees is “guarantee issue”, meaning the policy is issued without medical underwriting of the individual employee’s medical history. In general, group insurance policies have more favorable coverages than individual policies, and underwriting standards are less severe. Examples of group insurance include health insurance, dental insurance, vision insurance, life insurance, long term disability income insurance, and long term care insurance.

Guild
A professional association of people with similar interests or pursuits. Derived from the term for a medieval association of merchants or craftsmen. Examples are: The HTML Writers Guild, Writers Guild of America, Graphic Artists Guild, Screen Actors Guild, Directors Guild, National Lawyers Guild, Newspaper Guild, Software Contractors' Guild.

Guru
Guru is a Sanskrit word meaning a teacher of a specific skill who is also considered to be an expert in that skill. A guru is very highly revered. In ancient Hindu literature, it is said the four most important people in one's life are Matha (mother), Pitha (father), Guru (teacher), and Thaivam (God). By extension, guru has come to mean one who is an acknowledged leader or chief proponent, a person with knowledge or expertise, an expert.

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Contract Employee's Workshop

Look For The New, Online CEWorkshop

  • Beat the recruiting firms at their own game.

  • Get better gigs.

  • Make more money.

  • Keep your independence.

I am developing an online presentation that will allow anyone with a telephone and a browser to attend live presentations of the CEWorkshop over the Internet. The online CEWorkshop will consist of four, one-hour, weekly sessions, each covering a different aspect of marketing your consulting services.

Weekly sessions will cover the following topics:

Week 1:

 Identify and Package Your Core Competencies.
What are you selling?
Week 2:
 Short Term Marketing Tactics.
How to get work in a hurry.
Week 3:
 Corporate Intelligence and Research.
How to get inside prospective clients.
Week 4:

Long Term Marketing Tactics.
Build your credibility and your reputation.

New e-book on marketing
I am developing a new e-book called Nuggets in a Nutshell: Marketing Tips for Contract Professionals. This invaluable resource has over 250 proven tactics used by experienced recruiters and seasoned consultants to land contract assignments directly with client companies.

Every participant in the online CEWorkshop will receive a free copy of this useful resource.

The online CEWorkshops and the e-book will be available within the next 30 to 60 days. I'll let you know in the CENewsletter when we are ready to roll them out.

Would you like to see me cover a marketing specific topic in the online workshop and e-book? 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) 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
USA
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

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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, 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

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