What Is a Contract Job?

"Contract worker" can be a confusing term, since every worker has some type of an agreement with the person or company that pays them. Today, contract worker is used to refer to someone who does a job and gets paid for it, but isn't an employee. That means that the person isn't technically employed for the purposes of income taxes and benefits packages.

Contract employees are classified as freelance workers, in business for themselves, and have very few of the protections employees enjoy in terms of wages, job stability and unemployment benefits. In exchange, they have greater independence.

When an employee is hired, they automatically step into an entire world of legal protections. Both the federal government and state governments protect employees, and some cities offer types of protection as well.

For example, there are federal, state and some local minimum wage laws that set the lowest legal wage an employer can pay an employee. Currently, the federal minimum wage is $7.25 an hour, which applies across the country. However, any state or municipality (where allowed by state law) can set a higher minimum wage, and the highest applicable minimum wage is the one that applies. Many states and some municipalities have much higher minimum wage thresholds than the federal government.

In addition, the federal Fair Labor Standards Act and similar state laws set minimum working conditions for full-time employees. These include setting a standard work week at 40 hours and requiring at least time-and-a-half wages for any hours worked above that. States like California set even higher protections in terms of workweek and overtime, mandating double-time pay in certain situations.

Independent contractors are workers hired outside an employment contract. They are considered freelance workers and said to be in business for themselves. Because of this, they do not qualify for any of the employee protections under the law. Some independent contractors look like small businesses, serving many clients at the same time and operating like a business. Others, however, are simply workers outside the employment system, doing tasks requested by their clients.

Companies that hire independent contractors do not pay toward unemployment insurance for these workers, and, generally, such workers are not eligible for unemployment insurance if the work comes to an end. They may be paid by the hour or by the project, but they have no guarantee of steady or continued work. Likewise, companies do not pay any part of their Social Security taxes, and the contractors are generally not eligible for sick leave, vacation leave or retirement programs within the company.

While some contractors are hired for a particular job, such as a handyman paid to fix a leak in the kitchen sink, or on a short-term basis for a project, others work for years for the same company without receiving any employee benefits.

There are some perks to being a freelance worker or contractor, and these are the same advantages a person enjoys when going into business for themselves. The first is independence. An employee must work the number of hours set by their boss for their position, and follow the dress code and all other rules and regulations on the job. Usually they must work in a particular location, come into the workplace at a particular time, and do the work assigned in the manner specified.

Freelancers, in theory, don't have to do this. A handyman, for example, hired to fix a sink, can arrange the timing to suit their schedule. They can show up in whatever garb they want to wear and, as long as they do the job effectively, they can do it anyway they like. If they don't like a potential client, they can walk away. They are also free to demand as much as the market will bear. This works better for skilled freelancers, such as freelance website designers, than unskilled workers who have very little bargaining power.

The second big advantage to being a self-employed independent contractor involves tax status: They do not have any payroll taxes withheld from their earnings and they declare income as a small business, meaning they can take business deductions for office costs, transportation costs and similar expenses. On the other hand, of course, they need to buy their own health insurance, auto insurance and disability insurance, as well as setting aside money for retirement. Again, this may be advantageous to a highly paid, skilled contract worker, but it will be difficult for an unskilled worker to reap the same type of financial benefits.

While skilled workers may benefit from freelance status, unskilled workers usually are better off as employees. But some companies rely heavily on contract workers, hiring most workers as freelancers even in full-time positions. There are some efforts on the state level to put a check on this practice, like the California law, passed in September, 2019, requiring Uber and Lyft and other rideshare companies to classify drivers as employees, not contractors. But the companies put a proposition on the ballot the following year to allow them to continue to treat drivers as contractors that prevailed.

Anyone considering whether to take a job as an independent contractor needs to weigh the pros and cons of contract work before signing on. Keep in mind that this may be a step toward getting a permanent employee position. For example, someone who steps in as a freelance worker on a contract basis to fill a temporary position might have a leg up to get the actual permanent role once it is being filled. However, some workers have the prospect of becoming employees dangled before them only to see it evaporate without explanation. And years or decades of contract employment might work against someone later seeking permanent employment as an employee.

While it may be possible to make a living as a freelancer, it is not a decision to be taken lightly. As the years go by, the cost of not having the job security of employee status may seem higher, given the complete lack of benefits and protections. On the other hand, a skilled worker who deliberately chooses contractor status in order to stay independent may be very satisfied outside the employer/employee framework.