Report: Independent Contractor Usage Rises to Record Level

A report by SurePayroll says the use of independent contractors by businesses rose to a record level in the month of April, as businesses placed in economic peril by the economic downturn look for ways to cut costs. For the contractors, this shift in hiring tactics has proved beneficial for those looking for work.

As of the end of April 2009, the company’s contractor index now stands at 3.94 percent. This means that for every 100 workers engaged by small businesses in April, 3.94 are 1099 independent contractors and 96.06 are W-2 employees. In other words, for every 25 workers earning money at a small business, approximately one of them is paid as an independent contractor.

“Using more independent contractors is a win for business owners because the owners are not responsible for the contractors’ payroll taxes or benefits,” said company President Michael Alter. “However, an increase in the number of independent contractors means a growing population of workers who likely cannot afford quality health care, which exacerbates the nation's health care problems.”

Alter says that in addition, it is likely that many workers paid as independent contractors should instead be paid as employees: Many small business owners are not entirely clear on the rules, or they know the rules and are taking a calculated risk that they will not get caught breaking them, he said.

Similarly, it's likely that many individuals working as contractors may be collecting unemployment benefits even though the contracting work should invalidate their eligibility for unemployment benefits. Alter said both these scenarios raise some tricky policy and enforcement issues that, no doubt, are being hotly discussed in federal and state tax agencies.

Alter said those who say that entrepreneurship is on the rise are erroneously counting these reluctant entrepreneurs as long-term entrepreneurs. To the contrary, once the economy completes its rebound, the vast majority of these entrepreneurial contractors will revert back to full-time positions. “It's our estimate that 75 percent of the new independent contractors are ‘reluctant entrepreneurs’,” Alter explains. “In other words, they are working as independent contractors out of necessity because no full-time positions are available.”

Although the small business optimism index had shown encouraging signs of growth in March, April represents a dip in confidence, the survey found. However, 66 percent of small businesses surveyed said they are optimistic about the economy. The April survey was completed on April 30 and consisted of 203 respondents randomly selected from the 25,000 small businesses SurePayroll uses to calculate their economic indicators.

“We remain cautiously optimistic about the economy having turned the corner, in large part because we are still seeing some latent strength in hiring within the small business economy,” Alter said. “This is not your grandfather's employment era.”