Contracting after being laid off - would you do it? should I?

March 19, 2016 9:41 AM

My CEO gave me a heads up that there's a coming crash crunch for our small company, and when it comes they won't be able to afford to keep me on staff. When I asked about the possibility of contracting, this was greeted with abundant enthusiasm, and my CEO is almost pushing me to go in this direction now.

But I'm not sure where this new enthusiasm is coming from and I'm wondering if I might be disadvantaging myself somehow. I'd like to understand if there is a flaw in my approach and if so, is there a better way to negotiate things?

Is there some downside to coming on as a contractor I'm not seeing. Could they be worried about me claiming unemployment benefits, otherwise?

Also, I am heavily involved in several key products/initiatives, but I don't see how me being a contractor changes the cash flow issue. I'm not going to take a pay cut to do those jobs just because I'm contracting.

Something is just not adding up and I'm not sure what it is. Why would they be letting me go, but happy for me to be a contractor? I'm certain I'd only be getting contracting work if the cost/benefit works out for them. So does becoming a contractor and then having them say "sorry no work for you" have some advantage for them?

Or is it as simple as they're just very happy that they have flexibility in doling out the work?

Other random bits of information:
* I like the people and the company in general, I'm not interested in burning any bridges, but neither do I want to be taken advantage of.
* Insurance is not an issue, as I have coverage through my wife.
* I am actively looking for other jobs (both as employee and contractor).
* I will have a lawyer review things before making any binding decisions.
* I've already taken a pay cut to work for this company (for stock options) and recently took an additional 20% reduction in pay in return for stock options.
* It would be nice not to lose those options, but I'm not holding my breath.
* I believe this cash crunch is real, but that it will also resolve itself in 6 - 18 months, at which point the company will become self-sustaining.

posted by forforf to Work & Money (13 answers total)

Sometimes contractors come from a different part of the budget than permanent staff, or so I've heard. It could also be that even if you cost more or the same per week as a contractor, they don't expect to need you for a full year.

I'd worry less on how this benefits them and more about whether or not the terms of contracting work for you. I wouldn't turn down contracting for them if I didn't have something else lined up. You can always quit after you get another job.
posted by bunderful at 10:01 AM on March 19, 2016 [6 favorites]

Let's see. They don't lay you off so they don't have severance or COBRA/health insurance or unemployment headaches, they get to keep you and not pay your taxes, unemployment contributions or insurance for you, and then while you're still working for them more cheaply they can end the agreement at any time and still not be responsible for severance, COBRA/health insurance, unemployment claims* or anything else.

*I'm not sure how unemployment claims work if you were officially laid off and then for the same company you just worked for works. I guess work is work. I was eligible for unemployment (partial) after a layoff on weeks I worked part time.

But from my worms eye view the benefit to you is simply a short term possibility of not losing current income that might turn back into a full time job one day.
posted by tilde at 10:02 AM on March 19, 2016 [12 favorites]

My thinking is that they would love for you to contract because they will save the cost of your staff benefits as well as various termination obligations. Furthermore depending on how they choose to pay you, either 1099 or through an EOR, they might be able to offset their side of FICA / payroll tax. Even at the same wage it is still a net savings for them.

Tell them you plan to S-corp and raise your rates accordingly and watch how they respond...
posted by jnnla at 10:05 AM on March 19, 2016 [16 favorites]

Your employer has to pay other things for you beyond your salary either as a percentage of what you pay or on your behalf: worker's comp, unemployment, local/state/federal taxes, social security/FICA, possible other insurance, as well as any other benefits like a 401k match or paid vacation/sick days you may have. So an employee actually costs far more than just their salary/wage. Your becoming a contractor might mean that cutting those things out may be enough to help with the cash flow problem while keeping on a valued employee, which may explain their enthusiasm.

So, for example, an employer pays 6.2% of your salary as an employer share towards Social Security, and 1.45% of your salary towards your Medicare (as of 2014). As an employer based share, the employer shoulders those cost - they do not come directly out of your wages.

If you become a contractor you will be responsible for paying those costs (although percentage and what will vary according to state law -I'm sure others will weigh in on that); at minimum you will pay income and FICA.
posted by barchan at 10:07 AM on March 19, 2016 [2 favorites]

Sometimes contractors come from a different part of the budget than permanent staff, or so I've heard. It could also be that even if you cost more or the same per week as a contractor, they don't expect to need you for a full year.

Depends on company structure. I've been some places where temps work this way. Also where temps worked for one part of the company but were billed to another dept to improve the billed dept's diversity rates.

But you don't have to be a contractor for your salary to be paid from different places. One place I worked had fte's keep track of which hours they worked on specific projects so the salaried hours could be billed as an R&D expense to each project.
posted by tilde at 10:09 AM on March 19, 2016 [1 favorite]

In addition, you'll be billing them for your time, so they can delay your payment versus paying you every 2 weeks like clockwork.
posted by heathrowga at 10:09 AM on March 19, 2016 [2 favorites]

Yeah you kinda blew your chance to get a severance package, THEN to offer to contract for x # of weeks at 2x your salary. Another hidden benefit is the stability of you not being fired. It hurts morale to see an employee go, especially if your work is necessary which it seems like it is. Now they will say "ABC&D are being laid off, but F is becoming a contractor!" One less blow to the remaining staff's energy and loyalty.
posted by Potomac Avenue at 11:11 AM on March 19, 2016 [2 favorites]

But to answer the question in the headline, yes I'd say do it, even if you can't raise your rates. Get a minimum length of contract and make sure you can do it from home (if possible) so you can save the cost of commuting. Not as good as a sweet severance package but definitely allows you to look for a job as if you still employed which is a huge advantage.
posted by Potomac Avenue at 11:14 AM on March 19, 2016

* I've already taken a pay cut to work for this company (for stock options) and recently took an additional 20% reduction in pay in return for stock options.
* It would be nice not to lose those options, but I'm not holding my breath.
* I believe this cash crunch is real, but that it will also resolve itself in 6 - 18 months, at which point the company will become self-sustaining.

Well, probably don't take the options in lieu of money again -- there's just too many variables you have no control over. As for the cash crunch, it seems like an open question whether the company can simultaneously cut staff and become self-sustaining. Generally speaking more staff means more specialization means more productivity, and when you unwind that, it can snowball pretty hard.
posted by pwnguin at 12:01 PM on March 19, 2016

Best answer: I would do and have done this in the past, though in my case it wasn't planned in advance. (Well, maybe the company had planned to offer me contracting opportunities post-layoff, but it wasn't something we discussed prior to layoffs.) Even when I was too green to get the standard contractor fee (2x my regular hourly), what I made was substantially more than unemployment paid out, so it was worth it.

Does the company currently have other contractors? Can you find out if their rates are competitive? And whether they have work?

Something is just not adding up and I'm not sure what it is. Why would they be letting me go, but happy for me to be a contractor? I'm certain I'd only be getting contracting work if the cost/benefit works out for them. So does becoming a contractor and then having them say "sorry no work for you" have some advantage for them?

If you're honestly concerned that it's a bait and switch, that they have no intention of ever giving you contract work, and simply want you to change your status so you forfeit your unemployment payments... then no matter how much you like them, you fundamentally consider this company SHADY AS HELL, and in that case no, don't contract with them.

But if you're just wondering whether there's any way that having you as a contractor benefits them, well yes, there are a number of ways that it possibly would. Others have mentioned savings on the tax front, and the possibility of drawing on a different budget. But there's also the benefit of not losing your skills and maybe keeping you out of a competitor's clutches long enough to resolve their cash issues and re-hire you.
posted by We put our faith in Blast Hardcheese at 12:58 PM on March 19, 2016 [1 favorite]

You shouldn't give up any severance pay or Unemployment benefits in this scenario.

Regardless of if they bring you back as a contractor, they are ending your full-time employment. They you owe you everything they owe to any other employee they terminate.

As far as unemployment, if you're going to be working 40 hours a week as a contractor, it's probably not worth filing. If it's more like, "Oh we'll throw you some work when we have it," definitely file. You should be eligible to receive benefits during any week you are un- or under-employed.
posted by drjimmy11 at 2:16 PM on March 19, 2016 [3 favorites]

Also, find out what happens to your stock options if you quit/get laid off. You might be forced to sell them back to the company. At the very least if will stop you vesting in any new ones. Stock options may or may not have any long term worth (most don't if it is that small and cash-tight) but you should at least know where you stand.
posted by metahawk at 3:02 PM on March 19, 2016

Best answer: Until the actual layoff comes, you have some additional leverage with the terms of the contract. In short, they should know you're weighing the benefits of a severance package or unemployment claims before you go the contractor route. In any case, don't let them think you're desperate for any work, even in the best of situations. If they're laying you off, but open to you contracting, its because there is a financial upside for them, but you still have value. Just be sure they pay as much as they can for that value, from your rate, to other conditions. But, as previously mentioned, be sure there is a minimum contract length and penalties for them breaking the contract before then.
posted by Unsomnambulist at 3:43 PM on March 19, 2016