Data Show Small Firms Hiring Contractors at Lower Salaries

Small businesses are hiring, but are paying lower salaries, according to new data from payroll firm SurePayroll.

The company's February data show that hiring increased by 0.3 percent over January. Year to date, hiring is up 0.6 percent.

However, the data also show that most of the new hires are contractors -- for every 100 workers engaged by small businesses in January, 3.82 are 1099 independent contractors and 96.18 are W-2 employees. This is up from 3.78 percent in the prior month, and it's the highest level SurePayroll has seen its "Contractor Index" since it started publishing economic data.

Small businesses are hiring contractors in lieu of salaried employees because the nation's economic future is uncertain, and it's easier to terminate a contractor than to terminate an employee, said SurePayroll President Michael Alter. Contractors also cost small businesses less because they don't receive benefits, and employers are not required to withhold employer payroll taxes for contractors.

The data also show that the Midwest, Northeast and South experienced hiring growth in February. The West experienced a hiring contraction. Monthly hiring gains for these regions were 0.6 percent, 0.7 percent, 0.5 percent and -0.2 percent, respectively. The Northeast led the country in small business growth for February and January.

The numbers are based on actual payroll data for about 25,000 small businesses and SurePayroll defines a small firm as having 100 or fewer workers.

By Sharon McLoone |  March 6, 2009; 8:05 AM ET Data Points
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I had to let three people go from my small association and replaced all of them with contract employees.

We had absolutely no choice, but it has worked out well for the association and particularly the contract employees.

The real message going forward, however, is that this trend will continue long into the future. Paying benefits, etc, to employees is just not necessary in a lot of skill sets (particularly here in Washington).

Posted by: SwellLevel5 | March 6, 2009 9:10 AM

Aha, like the government.
Actually hiring contract employees allows you to pay for skills rather than years of service.
Also, if one "spouse" is employed with benefits, the other can contract for a higher paying cash payment without benefits.

Posted by: lrmc623 | March 6, 2009 9:26 AM

"most of the new hires are contractors"
"3.82 are 1099 independent contractors"

Since when was 3.82% most of 100%???

An increase of .04% is not what I would call worth writing about.

Posted by: qballgeek | March 6, 2009 11:09 AM

"Small firms hiring contractors at lower salaries." What? I agree wholeheartedly with qballgeek that the data printed here do NOT support the title and claims of the blog post. Rather disappointing for Washington Post.

3.82% is not a majority of hires ("most"), and an increase of .04% is of questionable significance. What is the margin of error for the study? Likely that this change is not statistically significant.

In addition, how do you draw the conclusion that firms are paying less? Not even clear if you mean companies are reducing their payroll burden by shifting the workforce toward contract, or if you are saying that firms are paying contractors less than they used to pay contractors. Either way, there is no pay data reported here to support either claim.

Just because a business is not paying payroll taxes and benefits does not mean that the hire is costing them less than a full time hire. You say nothing about how much is being paid per head, total cost. I might fire a full time hire who is costing me $60k total with benefits and payroll taxes, and instead hire a highly skilled contractor that I pay $100k a year but get more value out of.

As a side note, businesses are exposed to reclassification risk if they classify workers as contractors and not employees solely to avoid paying payroll taxes and benefits. The status of 1099 versus W-2 is not decided by the hiring company, but by the IRS and other regulators. Even if your business is hiring contractors for the right reasons, and using them in the right ways, you still need to make sure you are compliant.

Small businesses can ensure their hiring decisions are compliant by sending contractors through a Portable Employer of Record or another independent contractor engagement specialist rather than paying the 1099 directly or using a firm which does not specialize in 1099 compliance. Doing this the right way is cost effective and well worth the reduction in IRS risk.

Posted by: lgreene93 | March 9, 2009 6:25 PM

Ok, I got interested and wanted to see the original report from SurePayroll. It's here:

The drop in salaries is not a drop in "contractor salaries" or contractor pay. It's a .8% drop in the aggregated small business salary data, which includes both employees and contractors. To attribute the drop in pay to the 3.82% of the workforce that is contract is a major stretch, especially since the increase in contractors was only .04%, and to conclude that contractors are getting paid less than they did previously is unfounded based on this report.

I think it is more likely that small firms are offering lower packages to new hires and also freezing pay/not offering raises. This is not unexpected in a talent marketplace with high unemployment. When you have twenty people competing for a given position, who want a job even if it isn't ideal, you can get away with offering less than you did for the same position back in November, especially given the climate of worry.

Anecdotally, we've all heard of a shift toward contractors although that isn't seen clearly in this four tenths of a percent change from SurePayroll. There are other research reports that bolster that claim with significant data, including the 2009 Aberdeen Contract Labor report and the Human Capital Institute's "State of Contract Talent" study.

Personally, I am in favor of more flexible work modes, as long as people aren't being misclassified unjustly. Independent contracting can be an excellent career option for the independent person who has a mind to be a self-employed business person, and a good thing to consider for small businesses that don't need to "marry" a worker for the long run and just need work performed on a project basis.

Posted by: lgreene93 | March 9, 2009 6:46 PM

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