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Why do Companies Hire Contractors and Umbrella Employees?
If you’re considering getting into contracting it’s important to know your worth and to understand why a company may choose to engage you instead of taking on a permanent employee.
There are a few distinct reasons that a business may choose contractors over “permies” – let’s use a very common industry in the contracting world as an example, IT.
Cost-effectiveness
The world of IT moves at an extreme pace, those at the top of their game have refined their skillset and knowledge to be able to solve problems that others simply cannot. This level of education and professional intricacy drives up your hourly or daily value significantly, so how exactly are you a cost-effective choice?
Well, you’re cost-effective because you’re temporary. You’ll be hired to fulfil a specific assignment (likely within a determined timeframe) to which your skillset will align to. It may be the case that no other person within the company’s internal organization (permanent staff) could complete said assignment with efficiency or effectiveness. Asking a permanent staff member to get up to speed to complete this task would mean investment in training, time, and software – then there is the anxiety of the first attempt being slightly off target result (trial-and-error is not an effective approach when deadlines are involved).
The alternative is much more attractive; pay a little more over a shorter timeframe for someone who has the expertise to nail the assignment in one attempt. Once the job is done the company has no further obligation to you, you were a temporary, and worthwhile expense.
Lack of sustainable work
Of course, the alternative to hiring you as a contractor would be to take you as a permanent staff member, but we’ve already established that your skillset demands a high pay rate, so your salary would likely need to be substantial. This is all well and good if there is a sustainable workload to warrant such a high salary on a permanent basis.
There are 2 risk factors here; the ongoing work (outside of the integral assignment you were hired for) is below your skillset – therefore does not justify your salary. Or, you get bored and look for challenges elsewhere.
It makes far more sense to hire you as a contractor than a permanent staff member. If there is a need for your skillset once again, they can simply set up new assignment parameters and it would be your choice to accept the new role or not.
Tax and other liabilities
Engaging you as a contractor means that the organization has very little liability for you from a tax perspective – this ties in with point #1: Cost-Effectiveness. If you are an employee of the organization then they are responsible for paying employers National Insurance costs of 13.8% of your income, that’s not exactly pocket change. If they engage you as a contractor then the end client is not liable for this expense, sure, they may have to consider paying “Umbrella Rates” which are slightly elevated to compensate the difference, but it’s unlikely that they would be consistently out of pocket to the tune of 13.8%.
Hiring a contractor also means that the business avoids any responsibility relating to pension contributions. This does not mean you’re left without a pension structure – your umbrella company should have a policy in place for you when you enrol.
Reduced recruitment and HR responsibilities
For the most part, an end client will not utilize their internal recruitment or HR structure to cater to contractors, they’ll likely turn to external recruitment experts with connections in the field that they’re approaching.
Again, this is a temporary expense – but a much more refined approach that once again would most likely yield quicker results while alleviating the need for a salary.
Contractors do not sit within the end client’s employee structure, which means standard HR procedures, practices, documentation, review/evaluation etc. would not be an essential part of the engagement – again, the workload is reduced and resources can be reallocated.
As a contractor working through an umbrella company, you do have the same rights as any regular employee, but it’s your umbrella that is responsible – not the end client.
The Booster Approach
When businesses need to evolve, adapt, re-configure or reinvent there is generally a call for quick, decisive, elaborate action. You are the solution to that problem. You’re the quick fix, the inspired rejuvenation, the newly oiled piston in the old engine set to fire cogs once again. You bring with you the brightest ideas and the skills to back them up. Your influence on that business, albeit temporary, will serve to inspire existing teams, add new exciting features and ultimately leave a legacy that will benefit the business long after your temporary assignment is over.
All in all, the attraction of contractors to businesses is easy to see. It is becoming common knowledge that progressive businesses are looking more and more towards gig economy workers for their innovation, productivity and motivated working style.
Contracting is becoming more mainstream throughout the UK, you are a valued commodity and the benefits to the end client far outweigh any perceived negatives.
If you have questions about becoming a contractor or how your assignments would work as an umbrella employee please do not hesitate to contact us. Good luck with your contracting ventures!