I work for a contractor and I’ve always wondered why they hire us when I get paid $30 a hr and obviously my boss is making a cut on top of that. But the company I’m painting for only pays there employees $18 per hr? Wouldn’t it be easier just to hire an extra employee to preform simple tasks like painting, shoveling stone, ect these are all none skilled labor jobs.
In: Economics
Benefits are expensive, and contractors frequently don’t need as much equipment and workspace. Additionally, some companies find a lot of value in having some of their workforce being contractors, as it gives them a lot more flexibility.
Because I can hire you for a specific job for an agreed upon price and duration, and have no further obligations to you after the job is over- or if I decide to fire you. You come with your own insurance, your own management, your own equipment (generally), and your own pay system. You exist completely separate from my business.
Hiring employees is a lot more complex, and usually takes much longer and costs more. For specific jobs that you aren’t going to do regularly, contractors are the way to go.
Facilities/benefits markup is 1.8x to 2.0x salary. $18/hr * 1.8 = $32.40
If the expansion in volume of work isn’t expected to continue too, the relative ease of terminating a contract employee v an on-staff employee is an added benefit
I see a few explanations here for how it’s cheaper than it seems, but additionally, sometimes a company is willing to pay extra both for the flexibility of being able to fire you without having to announce that they are laying people off, and also because of accounting technicalities at publicly traded companies where a contractor comes from a part of expenses that investors are more comfortable with.
It depends.
Generally a contractor is great for a high churn and high volatility business. They don’t need to carry much overhead, and have much less paperwork to chase.
Let’s say you take home $20 (easy numbers). You probably cost $40 in general expenses to whoever you work for. More if you have decent benefits.
If a firm needs a few extra bodies for six weeks (or months) to fulfill a contract, paying your contract house $45 an hour might be cheaper than risking having to lay you off in a few months because they’re not going to have work. It may still be a great deal for them because their internal payroll and accounting only needs to track a few folks, not all of the contract staff. If you’re billed out at $75 an hour theyre still making money off your labor, but moving some overhead costs to the contract company. A good HR and accounting department is expensive.
A contractor doesn’t get benefits like health insurance or 401k, and can be quickly hired/fired as needed for specific projects, busy times and such.
From an accounting perspective, contractors are an expense and employees are on the payroll. These two things often have different amounts of budget and different constraints on how money is spent.
This doesn’t necessarily address “cheaper”, really, but can explain why contractors may be used in some situations that don’t appear to make sense. If you have project money but no extra payroll budget, you’ll use contractors.
You don’t have to pay the payroll tax, benefits etc for contractors. And you have zero obligation to them – the moment the contract is over, they are out.
Sometimes, rich corporations want to be even richer. But they don’t want to share their riches with peons. So instead they structure their business so other people with fewer resources have to do the messy business of dealing with real human beings, who we’ll call workers for the sake of this explanation.
Now, because the rich corporations and their owners (“hedge funds” and “private equity” and “investment houses” and “rich people”) view other humans as “capital” or “resources” (like buildings or consumables like oil or paper), they also view dealing with real humans to be not only beneath them but a big pain. Humans need things like pensions and healthcare and things that might cause a rich person to have to wait another day to buy that sixth yacht they’ve been desiring recently. So, they have devised a way to use humans like kleenex without having to deal with those messy profit-siphoning things like vacation days or health insurance.
Sometimes smaller companies are hired to do jobs the rich people and corporations don’t want to worry about, and their job entails, among other things, having to worry about those nasty gross poor and middle class people they call “employees.” Now, those smaller companies don’t have as many resources as the big companies, so the benefits they offer to their workers won’t be nearly as nice as the big company can afford. But there’s hope! Some companies have even found ways to make individual workers into contractors, meaning the individual worker is left to seek all those messy benefits like retirement savings, worker’s compensation, and healthcare all on their own. Unsurprisingly this is both inefficient and much more expensive. But it isn’t more expensive for the rich people and their corporations.
tl;dr: it’s a way to get around worker protections workers worked hard to get a hundred years ago, because rich people gotta rich
It might be cheaper per hour for them to hire that employee, let’s say $20/hour. But if they don’t have enough stuff to paint, then that employee is getting paid to do nothing. Or they only have the employee as part time/casual which means they may not be available to work.
Now comes in the contractor. They pay me $30/hour and I pay you $25 per hour. So I send you in to that same location to do 8 hours worth of work once a week. But I also have four other businesses that also only require 8 hours worth of work every week. So each individual place pays more per hour, but less overall. And they have someone available whenever they need it. And I make money being the middle man, providing you with supplies and storage and benefits. And you are working 40 hours a week instead of 8. Everyone wins.
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