Monthly Archives: December 2011

“Supplemental” temporary/term employee; the worst of both worlds

e9c724eeb5636d1c1c1a2c2e85d40377_XLMany people seeking employment these days are tempted by the question:  do I want to be an independent contractor or an employee?

While the choice has always existed, many organizations are back to promoting a third option:  contractual/term-employee (supplemental) – which may sound good for a short engagement, but could be costing you more than you think.

Lets put our roles in context first.

Employees

Employees are, for all intents a purposes, true servants (and beneficiaries of) the company they work for.

In exchange for regular employment, there are laws and standard practices that allow for minimum and maximum working hours, overtime, benefits, paid holidays, etc.

Similarly, you have a number of protections that apply against abuse, misuse, harassment, etc.

Contractors

Independent Contractors enjoy a different kind of relationship with the hiring organization; while generally appearing to be like an employee (working 9-5 beside their employee counterparts) they are still nominally engaged in a business-to-business relationship between the hiring organization and their own service delivery company (often consisting of just one employee – the contractor themselves) – although many contractors work through some 3rd party organization that serves as a placement/sourcing agency and “consolidator” for the end-client organization.

Many of the governing agreements and regulations concerning the engagement of the contractor are contained in the agreement between the employing organization and the service delivery company; there may be no governing laws outside of general contract law.

As a result, the contractor usually does not get any holiday or sick days (or any benefits for that matter).  While they don’t get overtime, and they must be able to prove they worked for every hour they bill, they also get to bill for every hour they work (think about that carefully, especially when thinking of their salaried employee counterparts – who may be expected to work a lot of overtime, but are held to a fixed compensation level).

Now the contractor’s home service delivery company that sent them to the hiring organization may be responsible for the standard employee benefits, and for adhering to the normal employment laws – but in reality, most contractors are independent, and therefore they own/manage their own companies; its hard to bring yourself to court for not paying you enough, giving you overtime or not recognizing your reasonable expectations of benefits.

That said, contractors generally enjoy a more lucrative revenue (although not necessarily salary), but they often do so at a cost in terms of the degree of effort they must put in for their end client, and the long periods between engagements where there may be no revenue coming in.

There are some other unique benefits however – such as being to write off various business expenses off of the pre-tax income of the company or contractor.

Term/Contractual Employees

As the name implies, term/contractual employees (also sometimes called “supplemental” employees) are individuals that are hired by companies on a short-term, contract basis.

While they have the appearance of being employees in many cases, they are not fully employees, nor are they contractors.

These “supplemental” employees often work 9-5, and have their client take care of taxation issues such as deduction at source.

The client/employer however is rarely required (nor offers) any kind of health or medical coverage (just as if you were an independent consultant) or any vacation days (although, depending on the employment law in your region, the employer may be required to set aside a “vacation entitlement” of about 3-6% of your gross pay which you may be eligible to draw upon after a year of service – if you are still employed.

If not, then it is usually paid out upon the conclusion of your contract, or at the end of the fiscal year in which it was accrued.

The other problem that supplemental employees face is inequitable application of employee vs. contractor policies.

For instance – as a contractor, I must work every hour I invoice for, but I also get to invoice for every hour I work.  As an employee, I’m given a fixed wage for 37.5 or 40 hours per week, and I’m generally expected to work at least those many hours.  Some companies may even track hours, ensuring that you work every hour that you bill.

What has been a growing trend however is the concept of “inherent overtime” – where an employer expects the employee to put in extra hours above and beyond their 37.5/40 should it be necessary, and not expect any supplemental remuneration (ie- overtime, or time-off) as these periodic surges are inherent with their employment, but supposedly their additional efforts will be considered during end-of-year employee reviews, and for the awarding of bonuses.

Supplemental employees often work on an hourly basis like contractors, but while they must work every hour they bill, they can’t bill for every hour they work – because they are also expected to adhere to the inherent overtime rule.

This means that a supplemental who works only 35 hours in a given week can only bill for those 35 hours; but if they put in 45, they may be restricted to only billing 37.5/40.

The supplemental winds up being bound to the “inherent overtime” rule, but they are also term employees – so they don’t get annual reviews, bonuses, etc.  The only faint hope they have is that their additional efforts be recognized when considering them for continued employment.

One final threat to the supplemental or term employee is that in some jurisdictions (such as the Province of Quebec in Canada for instance), in order to minimize the risk of employers exploiting term/contract workers, they specifically prohibit continuous employment as a supplemental employee for any term longer than 2 years, lest the employer be forced to automatically convert the supplemental to employee status.

As a result, many employers will have a spontaneous renewal of supplemental employees every two years.  Some have even gone so far as to extend this policy to their independent contractors – although it’s not really required by law.

TABLE OF “BENEFITS” – comparing types of employment

BENEFIT EMPLOYEE CONSULTANT/ INDEPENDENT CONTRACTOR TERM EMPLOYEE/ SUPPLEMENTAL
Vacation Usually some, per your employment agreement as well as vacation-pay accrual under law. None. Generally none,  except maybe vacation-pay accrual under law.
Medical and other benefits Yes, but the degree of benefits varies with each employer benefit package. None, except what you arrange for yourself through your own company. Generally none, although some employers may allow you to “buy in” to their benefits program on a term basis, but this is rare.
Expenses Usually reimbursement of pre-authorized, directly work-related expenses may be eligible. Some expenses may be billable back to your client, but all other expenses are at your discretion (and tax law) for expensing against your own company. Generally none, although some employers may allow work related expenses to be reimbursed per normal employee standards.
Source Deductions (taxes taken automatically from your pay) A requirement of the employer. Your responsibility – and don’t be late or miss them. Yes, usually as a requirement of the employer.
Other Issues May be subject to inherent overtime, but in consideration for annual reviews and bonuses. Could be restricted to maximum of 2 year mandates with a single client.Some governments also insist that you have multiple clients over a 3-5 year term, lest they assume you are just an “incorporated employee” – which is illegal. Often subject to inherent overtime expectations, but no annual review/bonus considerations – except possibly continued employment.Some jurisdictions have specific limitations on maximum supplemental periods (ie- 2 years) with the same employer.

WHAT ARE THE ADVANTAGES?

Employee vs. Contractor

This is the classic problem many people face; do I become a serf of the organization, or am I going to be a hired gun (or prostitute) hired out for a special job.

Tough call – and often it comes down to a combination of what benefits do you want/need vs. the rate and advantages of being independent (such as being able to write off almost anything associated with running your business).

Generally speaking, employees have the stability of a recurring paycheck and benefits.

Contractors, if the rate warrants, have their own corporation – and while they generally only have short-term engagements, they usually have much higher rates than employees and can afford time off between mandates to search for work.

They do, however, have the added burden of running their own company – including managing source deductions, government reports, book keeping and end of year accounting responsibilities.

Employee vs. Supplemental

Other than perhaps specifically enjoying a short term engagement (say working for the fall and winter and taking the spring and summer off) there really doesn’t seem to be much advantage to the supplemental engagement – unless you really want to avoid the burden of running your own company – in which case you are nominally “outsourcing” the headache of bookkeeping, accounting and deductions at source to your employer.

Contractor vs. Supplemental

As with Employee vs. Supplemental – there appears to be no advantage, unless you are trying to avoid having to run you own company.  Also keep in mind that you are losing out on the ability to write off your business expenses – such as travel, cell phone, some meals, paper, internet access (if you have a home office), etc.

Summary

Truthfully, short of being a retiree with few business expenses and no interest in running my own company, there is little or no advantage I can see to being a supplemental employee.  I find such programs abusive of the good will and spirit of the employer/employee relationship.

Also be wary when negotiating such “supplemental”/term employee deals.  The last one I had was established in good faith with a fortune 500 consulting firm – and they claimed to not know the specifics of the supplemental program, but sold it as being essentially just like being a contractor, and I could buy-into whatever employee programs I wanted if necessary.  Worst case, I could even switch back to contractor if I chose.

Of course, it was nonsense… and contrary to what was implied, they had all the differences between the types of engagement at their fingertips.

Don’t trust the recruiter – even when dealing with large, supposedly reputable firms.  As always, get everything in writing, and weigh the advantages and disadvantages of the written agreement carefully before signing.

It’s often what you aren’t getting (such as write-offs, loss of overtime, forced maximum engagements, etc) that may be costing you more than you realize in the end.

Top 5 Consulting Scams

A demotivational slide about "Consulting" - intended as a joke.We’ve all heard the stories of the unscrupulous consultant who billed more hours than he actually put into a project; or the consultant who charges high rates for his work, and turns around and outsources the contract to a lower cost consultant or off-shore resource.

The truth is there are a lot of other scams going on – and they aren’t all being perpetuated by the consultants themselves.

Now I want to start off by saying that there are a lot of ethical consultants and recruiters out there; the practices listed below aren’t common across the industry – but they do occur.  Knowing about them in advance is a great way to recognize and prepare yourself accordingly – whether as a vendor, or as a client.

All the examples are hypothetical of course; we’re all friends here… so I’m borrowing liberally from academic examples.  I’ve crossed my fingers as well.

SCAM 1:  The kickback

Ever wonder where those huge markups some recruiters place on a contractors rate go?  Especially if the only “service” provided by that recruiter is collecting a cheque from the client and passing your share on to you – usually forcing you to wait the 30-days (+1 day for them to write a cheque) .

Well, in some cases, where multiple vendors are involved – each applies a markup to cover their “expenses” of maintain a sales force, office, etc. – and these multiple layers of markups have, on a few of my contracts, been as high as a 150% markup once everyone gets their cut (yes, that number is correct – I was being billed out at $2.50 for every 1.00 I billed).

Insane as it is, sometimes it takes multiple vendors leveraging their contacts to open the doors to a very lucrative client.

With single vendors however, it’s harder to understand where that 30%plus markup goes (I’m talking 45-60 or more)  – and in many cases it may just be going back to the hiring manager or procurement department with the client who, in turn, provides “preferential” treatment to some recruiters/vendors over others.

Look out for vendors that consistently win bids when they are often at a higher rate than others, or offer lower quality/less skilled consultants than other firms – but always seem to hold favor with key decision makers within the firm.

Likewise, if you know the rate being charged for the consultant is significantly higher than what you think the consultant is earning (not that you should be asking of course) – then be suspicious of the recruiter; unless they are offering lots of other incentives to the consultants, they could be exploiting them.

SCAM 2:  Hiring manager is the recruiter

Sometimes discovering that the hiring manager knows every detail of your negotiations with the recruiter, in an embarrassing level of detail?

On at least one occasion, after some careful research, I discovered that the “president” of the preferred recruiting firm/vendor just happened to be the hiring manager (or family of the hiring manager).

Similar to “kickbacks” – in this scenario someone within the company is directly double-dipping; taking both a salary from the company, plus taking a cut of your contract fee as your recruiter/representative.

Research your recruiters thoroughly as part of the due diligence you should be doing with any new business contract.  Getting to know your boss and some of the hiring staff isn’t a bad idea either; they are going to Google you – doing the same back isn’t necessarily a bad thing.

If you find a connection – get out.  You could be implicated in the mess as well, and criminal charges are possible.

SCAM 3:  Win and swap

This is similar to the recruiting scam of “bait and switch” – where an incredibly good “potential” offer is put on the table by a recruiter as an incentive to join them on a bid; once they get the contract however, they turn around and offer the position to a less senior (and less costly) resource.

From the hiring organization’s perspective they award a “win” to a vendor – and the vendor advises that the consultant whose resume was attached to the bid is no longer available; but, in accordance with the contract, they will provide an “alternate”.  This alternate, however, is often at a lower rate to the vendor – but the contract rate to the client/employer is not adjusted accordingly.

Be wary of these alternates, and ensure that your initial request for proposal includes the fact that you get to assess the suitability of any replacement contractors/resources due to lack of availability post-contract award.  Always have the ability to terminate the contract, adjust rates or change vendors should you find that the proposed very senior resource is no longer available.

SCAM 4:  Leveraging what you don’t know

Hey… we often hire consultants to bring us experience and skills that we don’t already have in the organization, and may not be able to afford in a long-term permanent resource; it goes to the heart of why we use consultants.

But be wary of those consultants who exploit the gats in knowledge of your employees.

I knew of one consultant who, during a financial crisis with his client, would go to great lengths to ensure they saw him finding ways to cut a few thousand here and there in savings from their primary outsourcer (a large international business machines company that I won’t name).

What the client didn’t realize (a former government organization, whose employees didn’t always understand the subtleties of cost of ownership and return on investment) that much of this consultants work was actually “billable effort” to the outsourcer (by using time and effort of front line delivery and support teams).

As a result, the client was actually SPENDING more money than they were getting back in savings.

Now, that’s not to say that there weren’t ways to secure those savings – by engaging business/portfolio managers and other customer relationship management teams between the client and the outsourcing partner.

The problem with that approach, of course, is that the consultant wouldn’t be able to readily claim that HE personally saved the client thousands of dollars at the end of the day.

He put his own interests before those of his client – and at their cost.

More interesting of course is the fact that one of the previous clients of that consultant happened to be that outsourcing company – so it’s not as if he didn’t know what he was doing was wrong in the first place.

SCAM 5:  Learning on your dime

Sometimes you can’t get employees or consultants who are already highly skilled with your new system, service or tools – so you need to train them or, at the minimum, give them time to gain experience and confidence with those new tools.

While there’s nothing wrong with that scenario – just be careful to ensure that you aren’t necessarily taking on the full burden for training a vendor’s team and giving them skills that they can turn around and sell elsewhere on your dime.

If it’s a long term engagement you have with the vendor, or it’s a unique system/service not readily used elsewhere (or again) – then fine; you should carry the burden.  If, however, this is a short engagement, and the training creates significant value for the vendor, it would not be unreasonable to expect some kind of discount or reduced pricing on the time of the staff while they are being trained (and before they can bring their full value to bear for you).

During the height of the PeopleSoft/SAP/other ERP craze, many many integrators exploited their clients for training and experience – often slipping a junior into the team – but billing them at top rate as they gained the hands-on experience they needed to really be useful post training.

A BONUS SCAM

I couldn’t resist throwing in a “bonus” one – and I’m not quite sure how to fit this one in – but it’s great, and subtle.

Senior Manager X decides to launch a multi-year project just prior to his retirement.

He selects an independent contractor to take on the assignment at a very good rate.

Now after a year the senior manager retires.  The organization has a standing order that retirees cannot immediately return as contractors without either at least a 1 year break of employment, or special (and difficult to get) waivers from the most senior levels.

Oddly enough, however, due to the background knowledge and history retained by this former manager, he turns out to be the “ideal” candidate to become the assistant to the contractor – and since this was technically a different company in an existing B2B relationship, not technically a conflict under the rules.

Conclusion

Now don’t get too depressed; I’ve generally found more ethical individuals than unethical ones in my 20+ years as a consultant/professional.

That said, situations like these do happen – but they are the exception.  Knowing what to look for in advance can help you prepare, and take action if necessary.