Thursday, January 29, 2009

The New World of Employment

At banks, government offices and many other employers, a large proportion of the staff is on contract - in some cases as many as 50%. This has been going on for a long time; the incentive for employers is that they don't have to pay vacation, holidays, benefits, CPP, or other costs of having full-time employees, and they can ditch people at will. Contracts tend to be three months in length and the contractor is informed within the last few weeks whether it will be rolled over. In many cases it is rolled over for years and years, but the contractor never has any job security. Even within a contract period the employer can sever the contract, usually with only ten days notice.

A while back a Royal Bank contractor who'd been on contract for many years was let go and sued for severance. Since then the banks don't hire contractors directly; they go through staffing agencies to protect themselves from law suits. These agencies collect money from the employer and pay it to the contractor; for this middleman role they often pocket at least 15% of the contractor's gross. In many cases they do nothing other than pass through the money: the contractor gets the job, negotiates the contract, and then is directed to an agency. In some cases the employer contacts the agency to find candidates, and while there are cases where the agency performs a useful service, in many cases they do no more than leaf through workopolis and monster.

The staffing agency business appears to be completely unregulated. You'd think that there might be limits on how much they can charge for their services, or rules about having to disclose to contractors how much they're skimming off their backs, but there don't appear to be any at all. I've heard rumors of people who got shafted by unscrupulous staffing agencies, finding out too late that much more than 20% of the employer's payouts were staying in agency pockets. And once you have a relationship with an agency that has contracts with employers, your options are limited.

Employers use contractors to reduce their costs, but some contractors like being on contract because they can reduce their taxes. They are self-employed, and so can deduct the costs of driving to work and working at home and the like. (Strangely, though, the self-employed cannot deduct health costs or the costs of buying benefits.) Smart contractors form co-ops with a few other contractors and so reduce health costs, as well as share accounting and incorporation costs.

White collar labor is a seller's market right now, so it doesn't seem so foolish to be a contractor at the moment - lose the contract and you can move into another one quite quickly. (I can attest to that: I posted my CV on workopolis a while back and have been flooded with offers from staffing agencies.) But with the economic downturn starting to get serious, that's likely not going to last.

The self-employment white collar world is chaotic and unregulated, and everyone is taking advantage of the situation. It creates distortions that are unproductive. For example, contractors can write off the vehicle they drive to work, so are incentivized to buy expensive gas guzzlers. Short-term budgets lead employers to think they're saving money by using hired guns, but they end up with a work force that lacks experience and institutional knowledge, and who takes care not to get their budgeted work done before the deadline. Staffing agencies are expensive, but add very little to productivity. Their necessity for domestic contracts also makes off-shore contracts more affordable. This is a situation that is crying out for some government attention.



penlan said...

Interesting post & good insight. I had no idea how any of that actually worked. Disgusting. The rich get richer, the poor get poorer.

Anonymous said...

Yappa, isn't this the real problem behind the York U strike, the lack of security, the lack of pensions or any benefits? This has also been happening in the retail industry for years by the way but people haven't noticed.