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Consulting vs. Permanent Employment: A Comparison

The work force today is dominated by a generation to which the once prevalent occurrence of lifetime employment with one company seems highly improbable. Workers today are as mobile as the technology they support.

For better or worse (it's a little of both, really, as we'll discover), many flavors of "employment" exist in the current labor market, complicating the once simple relationship between employers and employees. Nearly 30% of all workers in the United States are employed in "nonstandard work arrangements" including consultant work, contracting and temporary assignments.

In this article, we'll define and examine these different types of relationships at different stages in the employment process, plus look at the advantages and disadvantages of each type.

Different Employee and Employer Relationships

For simplicity, let's separate the employee and employer "relationship" into four parts: the hiring process, the work, the compensation and the duration.

The Hiring Process

The relationship between employee and employer begins at the hiring process, and there are two different ways to approach this step. An employee can either contact prospective employers directly or have a third party, such as an employment agency or consultancy service, broker the employment terms on his or her behalf.

It's important to understand that this relationship applies only to the hiring process- those who choose to have an agency find employment for them may be working for the agency throughout the duration of their employment, may be working for the agency for only a designated portion of time then continue to work as a direct employee, or may completely part ways with the agency at the conclusion of the hiring process and work directly with the host company right from the beginning.

These options depend on the agency, the terms of the individual employment contract, and the wishes of the company.

Work

After the hiring process is completed, it is of course time to go to work. There are basically three different variations of how this relationship may exist.

An employee may be engaged in either a traditional "direct" relationship with his or her employer, work as a consultant on behalf of a third party, or work as an independent consultant. While behind the scenes these distinctions are very important to the company or companies involved, the employee isn't usually impacted by this aspect of the relationship. Direct employees and consultants often work side by side on projects, sometimes unaware of for whom other employees are really working.

Compensation

While direct employees and independent consultants generally receive their checks directly from the host companies for which they work, consultants working through a third party usually receive their checks from that outside agency, who in turn bills the company for the services of its employees.

Direct employees are paid through the company's payroll system and applicable payroll taxes are deducted. Independent consultants are paid either in this way or as 1099 consultants, depending on the classification of the specific position, the wishes of the employee and employer, and applicable state and federal laws.

Consultants working for a third party agency may be paid in either fashion, again depending on the specific position and the individual agencies. Those employed as 1099 consultants do not receive W-2 forms and are responsible for saving for their own tax liability each year.

Duration

Regardless of how an employee is paid or for whom he or she really works, an employee can enter into several different types of work agreements. The traditional "permanent" work status is generally reserved for direct employees. Employers are legally obligated to grant certain benefits to permanent employees, so they generally try to limit the number of employees they have on their payrolls with this status as to increase their flexibility and decrease costs.

Consultants, whether independent or working through a third party, may operate under several different types of contracts. Some contracts are set by date and either expire or must be extended after a certain amount of months have gone by.

Similar contracts are set by project and expire when the work is completed, no matter how long it takes. Other contracts are "open ended" and continue indefinitely, maintaining the same relationship between employer and employee.

Finally, others are "conversion" contracts where the consultant is converted into a permanent employee (either taken off of an agency's payroll if working for a third party OR taken off 1099-consultant status if operating independently) after a certain amount of time has elapsed.

Some employees who work through third party agencies or services agree to special terms that allow the consultants to be paid a fixed amount regardless of the project or company. This typically reduces overall wages somewhat but increases income stability. They may also be paid in between assignments, placing the burden of finding new work for the consultant onto the agency. Other consultants working through agencies may choose to operate "contract to contract," giving themselves the opportunity to shop among and switch agencies when and if they chose.

Different Employee and Employer Relationships Review Chart

Stage
Options
The hiring process
  • Direct contact
  • Brokered contact through an agency or service
   
The work
  • Direct employee
  • Consultant working through an agency or a service
  • Independent 1099 consultant
   
The compensation
  • Paid directly by employer, W-2
  • Paid directly by employer, 1099-Consultant
  • Paid via agency or service, W-2
  • Paid via agency or service, 1099-Consultant
   
The duration
  • Permanent
  • Temporary contract, time based
  • Temporary contract, project based
  • Conversion contract, 1099- Independent to permanent
  • Conversion contract, consulting through an agency to permanent
  • Open ended contract

Exploring the Advantages and Disadvantages

Taking into account people's different likes, attitudes and skills, the "perfect job" is a myth. Much the same, there is no perfect combination of relationships between employers and employees of those listed above; the ideal mix depends on each employee and his or her abilities, preferences and circumstances. Here are some points to consider when choosing the working relationship right for you:

  • Consultants generally earn higher wages. Consultants, both those working independently and those working for an agency or service generally earn higher wages than their W-2 counterparts. In return for this advantage, however, comes the likelihood of less favorable non-wage benefits, like medical coverage or retirement savings plans. Each contract obviously varies, so be sure to check with the HR department of either the host company or the agency if applicable (if they are the organization offering the benefits) to learn more. While these non-wage benefits are critical to some employees, others gladly exchange these options for higher wages.
  • Consultants generally learn more new skills. Consultants are often called upon to complete work that is either too complicated or specialized for companies to complete themselves, or that is critical and needs to be finished quickly. Either way, the consultant is often in a great position to gain hot new skills more rapidly than direct employees may be. Permanent employees, however, may be more likely to truly become experts in a single area within a company. This expertise leads to greater job satisfaction for some employees, and may increase an employee's status and importance within a company, an important distinction when job cuts arrive.
  • Some consultants do not have payroll taxes deducted from their paychecks. This gives 1099 consultants instant access to all their earnings for the purposes of investing or spending. This, of course, does not mean that they do not incur the same tax liability that their W-2 counterparts do. In fact, a disadvantage of this payment method is the increased work and burden placed upon the individual to track, withhold and pay all of his or her applicable taxes. Federal income tax, social security tax, federal unemployment insurance tax, plus state and local tax liabilities where applicable all have to be tracked and paid by the consultant. The failure to responsibly save earnings to pay these taxes can leave consultants in a financial crisis when tax day nears.
  • Consultants are highly in demand during times of economic expansion. Consultants are often needed to work in areas where growth is occurring and where existing talent is short. This works in the favor of the consultant, as they frequently seem to be "in the right place at the right time." When the economy slows, however, or even when an individual company's performance slows, consultants may be the first employees to feel the pinch. Historically, during these times, troubled companies retrench and focus on their more basic needs. Permanent employees' futures may be more secure in these instances.
  • Consultants have the opportunity to work with many different types of organizations in many different capacities. These experiences can accelerate career advancement and offer greater flexibility for future employment down the road. Permanent employment with a single company, however, also has its advantages. These employees may develop a fondness and commitment to their employer that is unknown to the highly mobile consultant. This employee commitment and loyalty is, for some, the most important aspect of their careers.

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