The Pros and Cons of Working as a Contractor

I have not been an employee since I lost my job shortly after 9/11. A dramatic change occurred in my town around that time. Many of the large corporations began laying off their employees and hiring contractors in their place. It was simply a matter of economics for them. They do not have to pay for any health insurance for contractors. Nor do they pay for any time off, including sick time. In addition, should the need arise, the company could fire an entire workforce in a moment's notice without having to offer any severance pay.

For quite a while, I was very angry with these changes and I was unwilling to accept that this is now the way of the world. Although the differences between an employee and contractor look subtle on the outside, there tends to be an undercurrent that implies otherwise. Many companies, for legal reasons, require contractors to take a mandatory break after working in the same place for two years. After the two year mark is when contractors tend to view themselves as employees, even though they are not. The law tends to agree with the contractor on this one. Two people could work side-by-side for years, doing the same work. The employee gets all the benefits that come with being an employee - the raises, the health insurance, promotions, stock options, bonuses, paid time off, recognition for a job well done - while the contractor gets none of these perks. Although the contractor gets paid a handsome salary or hourly rate, "benefit envy" begins to settle in. As a contractor, it has taken me almost six years to get over "benefit envy."

On the surface, contracting looks like it is a raw deal. Some contract agencies offer health insurance, 401k plans and paid time off with a salary. The health insurance is generally crappy, with high premiums and minimum coverage. Most 401k plans are not matched. Usually there is the option of foregoing the salaried plan and going hourly on contracts. When going hourly, do not expect to be able to participate in the health insurance plan, 401k plan or paid time off. You will generally get paid $10k to $15k more annually if you opt for the hourly rate. The salaried rate is automatically lowered to help pay for the benefits you've opted for, so in essence, you are still paying for your own benefits.

The thought of going without health insurance is enough to scare the pee out of most people; so many contractors opt to go the salary route. A word of caution if you go this route: your contract may end at any time with no notice. This means an immediate stop to health insurance, and the COBRA premiums could easily rival your monthly mortgage payment. Contract agencies are not obligated to find another contract for you, either. Your obligation to each other ends when the contract does.

The lack of obligation is probably the number one thing that makes contracting so frightening. Most folks are not independently wealthy, and a sudden job loss could result in a myriad of financial difficulties that quickly snowball out of hand. It takes nerves of steel to move past this fear. However, facing this fear has a tendency to force people to get up close and personal with their finances and get serious about their goals in life. Suddenly the value of a dollar goes way up.