Plato was right, necessity is the mother of invention. The Pandemic sped up the process of digital transformation and enabled businesses to adopt futuristic practices. And as it goes, breakthrough inventions cause breakthrough evolution. Digitization also helped businesses embrace new work orders like the gig economy and freelancing, more enthusiastically.
McKinsey’s latest iteration of the American Opportunity Survey revealed that about 58 Million Americans identify themselves as independent workers. This number represents 36 per cent of the employed respondents in 2022 and can be compared to the recorded 27 per cent of independent American workers in 2016. The gig economy consists of different types of independent workers - they can be freelancers, temporary independent workers or full-time independent contractors. According to the World Bank, the gig economy accounts for up to 12 per cent of the global labor market. The debate whether it’s a viable career option is over and the conclusion is that it is. Independent Contracting is a massive global sector, mostly informal but a goldmine of opportunities.
Understanding the Role of an Independent Contractor
The gig economy is still an unorganized sector where navigating and adopting the best practices can be challenging. To begin with, we must first understand the notable differences between a freelancer and an independent worker. Freelancers engage with clients, whereas contractors are essentially employed (think long-term freelancers). A freelancer typically represents a one-off engagement for tasks outside the main team's core competencies. Independent contractors are at the opposite end of the spectrum of an employee. They are highly skilled and often serve as an alternative to regular employees with fewer constraints.
When you take on a full-time employee, you grant them the necessary permissions to do their work for you. Engaging contractors, however, involves agreeing on mutual limitations and the absence of certain benefits that regular employees usually expect. A contractor agreement might include stipulations regarding time commitments to the employer and prohibitions on working for competitors. Contractors have many names - The Ghost Workforce, 1099 Workers, Freelancers, Shadow Workforce, and so on.
The State of Independent Contractors in the IT Industry
One industry that has embraced on-demand labor is the IT industry. Both businesses and contractors seemingly understood the freedom and the challenges that come with this style of working. With a dramatic increase in investment in the IT industry, there lies a skill gap that regular employees struggle to bridge. Independent contracting bridges this gap perfectly by enabling businesses to access a global talent pool with in-demand skills, well-seasoned contractors, and an assurance that the outcome will be achieved.
Adam Jackson has described this as the Unbundling of the Corporate America where more and more highly skilled contractors create a freelance business of sorts and go on to market it to work with major clients. He urges businesses to not look at contracting as a way of skirting getting a full-time employee. Today's workforce composition shouldn't hinge solely on the decision between hiring full-time employees or long-term contractors. Instead, the crucial question to ponder is which specific skills, projects, or roles are best suited for an employee, and conversely, which ones align more effectively with the hiring of a contractor. This is called a blended workforce and most tech businesses have adapted this to meet their organizational goals faster.
However, this work style is not unique to the IT industry. The IT industry in the West has consistently engaged in offshoring or outsourcing non-KRAs (Key Responsibility Areas) to skilled labor outside their countries. It's widely known that contracting has significantly contributed to saving a substantial portion of their income. In the current landscape, businesses are transitioning their emphasis from cost savings to generating more revenue by optimizing each operational area.
In some sectors of the IT industry, the proportion of hired contractors is even higher than the IT average. We have noticed that among Arbonum Gamedev clients, the ratio of in-house staff to contractors is roughly 30/70. 30% comprise the business team and management, including producers and scriptwriters, while around 70% are contractors scattered across the globe, including 3D and 2D artists, developers, narrative designers, level designers, QA testers, and others. Typically, Gamedev teams strive to convert a freelancer into a permanent team member if they see talent and value for the project. To secure such a specialist, all available tools that are typically used for employed specialists are used by the companies: bonus programs and options, team building, team gatherings for holidays, paying for insurance and other family benefits. Such a specialist is still not a full-time employee, but as a global contractor, they receive a similar set of additional perks.
Some challenges can keep your business from optimizing’ productivity and delivery of your Contractors. A few of them are:
More Ownership
Independent Contractors are not full-time employees and must enjoy ‘independence’ in choosing their work style beyond a particular project. They are often constrained by confidentiality and a competitor clause. Apart from these standard practices, the employer can not limit the contractor’s professional interactions.
Disguised Employment
Numerous businesses resort to the disguised employment of contractors as a means to circumvent tax legislation applicable to regular employees. When drafting the employment agreement, it is imperative to take tax regulations for contractors into account like IR35 in the UK, 1099 in the US, and similar statutes to ensure compliance and transparency. Businesses misclassify employees as contractors which leads to contractors losing thousands of dollars in overtime and lost benefits. Contractors can sue their employers or demand an investigation in such cases. Also in many Eastern Europe and CIS states, there are laws and regulations that are intended for businesses to clearly identify whether an independent service contract or employment agreement should be used in a given case.
Read more about Missclassification here.
Employee Benefits
With the difference in commitment, pay, and work, the benefits of a contractor also differ from that of an employee. An average employee is entitled to benefits such as pension or 401k, insurance, employee state insurance, workman’s compensation, gratuity, statutory bonus, maternity benefit, leaves and holidays, etc. However, a contractor may not be entitled to the same benefits.
Perks
Perks are bonuses on top of benefits. Apart from a primary benefits package, some perks can be Flexible work arrangements, child care reimbursement, employee discounts, wellness programs, ESOPs, and food coupons. Employees enjoy such perks but there aren’t any in place for contractors usually.
Managing Contractor Expectations
Businesses strive to build their culture. A culture is not the result of ‘free coffee’ for regular employees, but an outcome of the values a business follows. A remote team enjoys freedom, and personal accountability, or individuality, which also translates into the company culture. A decent benefits package is always a matter of importance for potential employees. Integrating such competitive advantages can help you attract and retain high-quality independent contractors in a competitive market. This can do wonders for your employer brand while hiring employees and contractors.
The aforementioned challenges, coupled with the exponential rise in companies engaging global contractors, contribute to the significant growth observed in the EOR market. Companies like Arbonum, specializing in professional services, have experienced remarkable expansion over the past three years. These expert intermediaries, handling numerous contractors worldwide on a daily basis, provide businesses with the means to navigate the legal intricacies of contractor hiring. Additionally, they ensure compliance for businesses collaborating with global contractors and offer guidance on managing contractor expectations while crafting effective benefits packages.
To manage the expectations of your contractors, here are a few ideas:
Create a Global Benefits Package
51 per cent of contract workers do not receive any benefits from their employer. This causes a major difference in expectations and can be a winning strategy for employers. A Global Benefits Package is a bundle of benefits offered to contractors that brings parity between the standard benefits in the country of the contractee and the contractor. This can help motivate and retain contractors.
The question of ‘equal’ benefits for employees and contractors still remains irrelevant for most employers. However, a place of ‘equitable’ benefits can be a relief for both contractors and employees. This must be built keeping in mind the necessary benefits as per the law in both countries. For IT contractors, equipment upgrades, paid time off and even mental health perks can come in handy.
If your business is struggling to build or administer a stellar global benefits package for your contractors, Arbonum can help. Arbonum has helped hundreds of clients build a perfect package for their contractors hassle-free. Our approach to pricing reflects both our values and our strategy. We do not take a share of your contractor’s income.
Defining the Scope of Work
Most contractors are experts but they do not possess supernatural powers to make the numbers ideal for your business within a short period. If the nature of the project is long-term, chances are the outcome will take more than a few months to present itself. Such expectations can deteriorate a healthy employer-contractor relationship. Objectives, clear targets, and timelines should be communicated and discussed between both parties. The agreement must also be reviewed carefully to retain this relationship.
Remuneration
As obvious as it sounds, pay your people well. The basic compensation of an Independent Contractor for a certain role is usually less than a full-time employee in that role. This is usually because businesses in the developed countries hire contractors in the developing countries. You can easily exceed the median income of a developing country sitting in the US. However, it is not ethical to pay a contractor a minimal wage due to their geographical constraints.
Remuneration is a pivotal aspect, and it goes beyond merely compensating Independent Contractors for their services. Establishing enduring relationships with global contractors is a common objective for businesses, mirroring the efforts made to retain key employees. To retain top talent among contractors, offering a competitive remuneration and benefit package becomes instrumental. This approach aligns with the recognition that these contractors often play a vital role, and investing in their satisfaction and well-being contributes to the overall success of the business-client relationship.
- Competitive Compensation: The Contractors also demand competitive compensation. Unequal pay for equal work is demotivating. You must also consider the contractor remuneration of your competitors. While setting a budget for contractors, you must look at the salaries that top-tier companies in that country are paying.
- Equal Pay: In this context, it's imperative to acknowledge that the basic compensation for Independent Contractors may differ from that of full-time employees, particularly when engaging contractors from developing countries for roles typically found in developed nations. While there may be a potential to surpass the median income of the contractor's home country, ethical considerations should prevail, and offering fair compensation that aligns with industry standards remains paramount. Unequal pay for equivalent work contradicts the principles of fairness and should be avoided. You can refer to the minimum wage requirements for the CIS region and Eastern Europe.
- Compliances: When delineating a budget for contractors, a comprehensive analysis is required. This involves examining the salaries offered by top-tier companies in the contractor's home country and factoring in the remuneration structures of competitors. Additionally, for contractors who operate as digital nomads, proactive discussions about compliances, taxation, and payroll considerations are essential. Ensuring that the remuneration and benefits package is not only competitive but also tailored to meet the specific requirements of the contractor enhances the chances of establishing a mutually beneficial and enduring collaboration.
Parting Note
Offshoring, contracting agencies, and now the contractual workforce - businesses have understood the need for delegation and outsourcing to save business costs over decades. Contractors have been invaluable in achieving optimal productivity with little cost - saving businesses from not just employment costs but also complex legal compliances. Arbonum has gone above and beyond in helping great businesses hire great contractors and follow great, exemplary practices.
If you are a business seeking help hiring or administering great contractors, let’s chat.
