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Context

Money is not what is at issue here. What is at issue is independence and to make sure I will contribute by working at my field of expertise, tactfulness, and ensuring everyone's expectations are in-line.

Companies that are trying to develop new software products tell me they want me as an in-house employee, and not as a contractor.

After just finishing my PhD, I am an expert in a very specialized kind of data analysis, not in general programming. My programming skills were gained as a by-product of my academic research.

I believe I am called a 'domain expert' rather than a 'software engineer'. My coding is focused on implementing a specific class of data analysis algorithms, so I consider myself more of an a academic excelling at thinking of creative ways of developing tools to solve problems, who programs to test and implement these new ideas, rather then being a corporate programmer.

I am looking for work as a contractor in my field of expertise and would prefer to earn less money and have less benefits working as a short-term contractor helping people with what I am an expert in rather than being a in-house employee.

Some of the problems they have discussed seem perfectly suited for me to work with them for only a few months and then move on and let their real coders take over. I have helped academics in this manner.

I am in the USA.

The problem:

Companies say I need to be an in-house employee for intellectual property reasons.

The question:

Wouldn't it be easy for them to just have me sign a contract saying all my work is owned by them?

If I work as a contractor, they can let me go when my value diminishes and save lots of money and I could just focus on what I think is a fun way to work--moving from problem to problem.

What am I missing here?

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I hope you get an answer that helps but almost all responses should be read with the caveat "I am not a lawyer". Also employment law varies from place to place so I'm not sure how helpful any answers will be without your location, but then you may run foul of the "too localised" rule. –  Kevin D Jun 3 '11 at 8:07
    
Oh, what a delightful can of worms you have opened :) Unfortunately, it's not so easy. –  Tim Post Jun 3 '11 at 8:30
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What makes you think that you cannot move from project to project as an employee? Being an employee is "just" the way the contracts are formulated and for employers a safequard wrt copyright etc (as others have mentioned). Being an employee, there is still nothing stopping you from moving to another project. It may take quitting your current job, but how is that any different from quitting a project as a contractor? I honestly think it's a matter of perspective. –  Marjan Venema Jun 3 '11 at 8:59
    
@Marjan Venema comment and @Ant's answer leads to the paradox. Ethically, I want the employer's expectations of the work timeline and role to be in-line with my own expectations. The tricky tact part is that, as a person without a reputation and negotiation skills, I want to avoid putting idea in empployer's head of jumping ship. I want more confidence that their perspective of my domain expert role is not cloudy; At the same time, I am hesitant to talk openly along the lines of your comment in order to avoid making them feel I will jump ship too early. –  indiehacker Jun 3 '11 at 17:50
    
just make it clear from the outset that you are interested in "that" particular project. That you will move on when the projects is finished, whether moving on means within or outside of the company. No dilemma's there, ethical or otherwise. Companies don't expect you to stay for life, in fact they would be very surprised indeed if you didn't go looking for other challenges. Companies (should) know it is hard to hang on to good people. Plus: things change, often in unexpected ways. And companies know that too. –  Marjan Venema Jun 3 '11 at 18:10

10 Answers 10

I suspect 2 possible situations

  1. Non-compete
  2. The W2 vs 1099 situation.

Non-compete My suspicion is that they want you to sign a non-compete agreement. Depending on which state you are in, and which state the company is headquartered in, non-compete agreements might be worthless (such as in California) or they might have vicious fangs (such as in NY or OH). Non-competes are quite common for employees and most companies make them a requirement of employment. No consultant or contractor would sign a non-compete agreement.

Up until the 1970s, it was quite common for a non-compete clause to last 10 years after termination of employment. Since then, such contracts have been whittled down to about 1 year.

Signing one might mean that you can't work for a year if you quit working for them - if your research is "hot stuff". It might also mean that they can prevent you from working for their competitor and that hiring you as an employee would be the cheapest way to deny their enemy of your expertise.

The quickest way to determine if this is the reason that they want you as an employee would be to say "OK, I'll be an employee, but I refuse to sign any non-compete clause".

W2 vs 1099 Doctors, lawyers and accountants may set up "professional corporations". The Tax Reform Act of 1986 added restrictions to make it almost impossible for programmers and engineers to do so (if you remember the guy who flew his plane into an IRS building last year, this was what his complaint was about). This means that if you want to be a contractor/consultant as well as a programmer, you'll need to be an employee of some other company. The rules for being a 1099 contractor for engineers and programmers are strenuous enough that the vast majority of companies can't be bothered to figure them out - so they flat out don't bother and require you to be a W2 employee of some other company.

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This is a bit of a tangent, but - part of the reason why some companies want all fulltime employees is because their projects are a (long term) mess.

The only way things get done (and maintained) is by having people around who've been there forever and know the Big Ball of Mud (and the huge "inner platform") inside out. I've worked at companies where the ramp up time to learn the beast and get comfortable with it is as much as 12 months or more. In this scenario, it makes sense to find stability-oriented people who will stick around and put up with the beast forever. Simply because whenever anyone leaves - the ramp up time for a new warm body to get productive is so expensive.

I don't know how this might relate to your specialty. Maybe the companies you are approaching think they could use someone with your specialty on staff forever, rather than to just solve a one-off problem. But this is a rather typical case: companies often want a huge manifest of fulltimers (perhaps even ALL fulltimers) because their stuff is too hard to pick up for a shorter term stint. And once they have someone on the hook they want to keep them.

(Even more tangentially - I now think of this as a job smell. If I hear in a interview that "there is a lot to learn" and that there is a massive ramp up time at the shop, I'm out the door. Unless of course, there is some very very specific domain-based knowledge to learn, but definitely not just orientation with the programming side of things itself.)

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While it's certainly possible that cost, not intellectual property, is really the driving issue, there are cases in specialized fields where there are substantial intellectual property issues.

How close is your specific area of data analysis to what a company would regard as core to their business or key to their competitive advantage? How likely would the analysis you do for one company inform your future analysis for its biggest competitor?

If you were an expert in, for example, data analysis to provide recommendations to shoppers, it would be very unlikely that a company like Amazon would want to hire you on a short-term basis rather than as a full-time employee. Amazon has already invested quite a bit in this type of data analysis and would tend to be concerned that you would come in for a few months, help them improve their recommendation engine, but also end up absorbing a lot of their existing tricks and discoveries. That would make you particularly attractive to competitors to Amazon that have much less invested in recommendation engines and would potentially erode Amazon's existing competitive advantage. If they hired you as an employee, on the other hand, it would generally be much easier to restrict you from working for a competitor doing the same thing for some time.

If this is really their issue, you could potentially negotiate that sort of non-compete agreement with the companies you do work for. But that would require some good lawyering to ensure both that you don't end up in a situation where you can't legally work for anyone for a period of time and that the company doesn't end up in trouble with the IRS for treating you like an employee while paying you as a consultant. On the other hand, companies may just feel more comfortable ensuring that only employees have access to their "secret sauce".

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If it's cheaper or not is arguable (total cost of full-time employee is 2-4x his salary).

I'd rather believe it's about loyalty or rather how corporation middle management perceives it. Many managers think if someone is full-time employee, then he's "part of the team", thus automatically loyal forver to the corporation. On the other hand the perceive external contractors as the name indicates — something external. Also full-time contract most often means exclusive contract, while external contractors might have other clients. Generally middle managers perceive full-timers as more stable option.

Of course this is logical fallacy. Actually it's much easier to get guarantees from contractor, than full-timer. In fact most countries have laws protecting employee rights, but not really contractor right. So employee may leave, and company can't do anything about it, on the other hand contractor usually has no easy way of terminating his contract short. Also non-competence contracts in many countries have been deemed to have no legal value in case of employees, but they still apply to contractors.

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Besides intellectual property their are also tax concerns to deal with independent contractors. If you are going to hire a contractor they need to be treated like a contractor and not an employee. The employer looses a fair bit of control in the when and how things get done with a contractor versus an employee.

Also a disgruntled contractor can always come back later and try to claim they really should have been an employee and the state department of labor or the IRS will audit the company. If the disgruntled contractor wins they get the employer half of FICA taxes and the employer owes taxes, penalties, and unemployment insurance. The differences between employee and contractor are particularly vague making it hard for a company to know if they are in fact complying with the law. It is easier to default to hiring employees than to hire contractors that may be questionable. If you only do business with one company, work from their office, using their equipment the company is going to have a very hard time defending their decision to classify you as a contractor rather than an employee.

Some more information from the IRS on contractors versus employees.

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+1 for pointing out that there are certain situations where one MUST be a full-time employee, by law. –  Joshua Carmody Jun 3 '11 at 14:43
    
To clarify the last point, if they hire the contractor through a placement firm that has the contractor on staff (i.e. receiving a W-2) they are not treated as a contractor for IRS purposes. Thats why you see postings for short term contractors with CORP to CORP only because they do not want to open up the can of worms that exists with IRS when hiring indviduals as contractors. –  ben f. Jun 3 '11 at 21:10

Hmm. From the question it appears you want to be a consultant, not a contractor. You want to go to a company, give them the benefit of yout specialised expertise and then move on to the next.

From my knowledge of how businesses work, what you want to do is set up a consulting company that can be hired to present your knowledge to the company and then be hired to transfer that knowledge to the company's employees. Companies like this - they get better trained employees rather than spending money on the same skills that would then leave the company.

The benefit to you is that you get to charge loads more - consultants are expected to be expensive, and worth every penny (even if really, they're not, trust me on this). The disadvantage to you is that you have be more professional, you have to provide a service (of education) as a company selling something rather than a person popping in for a month or two to have a few chats. That means you'll need to formalise your training in powerpoints and white papers and thick bound reference manuals.

The latter is probably not as much fun, but then.. I got to tell you, work generally isn't.

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Very nice and needed explanation that clarifies a new perspective I need to contemplate. Thanks. –  indiehacker Jun 3 '11 at 17:12
    
Given @Dave_Post's answer, I am unclear about the threat even a consultant poses to intellectual property. It seems the value of a consultant to a small start-up team depends on the consultant becoming intimately aware of the product's design and customizing his/her expertise educational presentations and white papers to showing how the client can innovate her specific product. So it seems a small start-up team would avoid risk of a out-of-house consultant. –  indiehacker Jun 3 '11 at 17:30
    
not necessarily, lots of companies buy in education - ie training - for everything. I've been trained in Oracle for example, the trainer didn't need to tailor it to my company's products. He might tailor the training to the aspects we are most interested in, but that's to be expected. You can provide x days of customisation and tailored on-site consultancy if you want. You can provide whatever service you want to a company, there's no fixed templates you must use. –  gbjbaanb Jun 4 '11 at 22:32

It's cheaper

Hiring people is generally much cheaper than normal contractor rates, not many companies will come out flat and say this though so they state a number of "non-reasons".

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I don't know what country you are in but ion the U.S. a full time employee costs a lot more than a contractor. Companies where I live ALWAYS want to hire contractors. FTE cost more becuase of insurance, unemployment, etc –  Jonathan Kaufman Jun 3 '11 at 13:08
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It also depends on the workplace. A lot of workplaces expect you to work extra hours and nevermind about the overtime pay you are missing. Long story short - know your employer, know what you value. If you want stability (gives you a chance to focus on things other than looking for the next consulting gig), then go in-house. Typically, if you're young, it makes a lot of sense to get some advanced experience as a consultant. –  altCognito Jun 3 '11 at 13:56
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@ataddeini Not exactly. No one who fails to calculate cost of labor stays in business very long. What happens often though is the internal accounting is sort of broken such that FTE work "for free" on projects whereas contractors have to be paid directly from the project budget. If project sponsors can get work done and bury the cost they will. –  Jeremy Jun 3 '11 at 13:59
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I agree with Jonathan Kaufman: It certainly is not cheaper (at least in the U.S.). After benefits, and all the other payroll taxes etc., it's much cheaper to hire a contractor. Especially if something happens. It's harder to fire an employee, the employee can try to sue you for all sorts of reasons etc. It's a much bigger deal to hire an employee than to a consultant. –  Richard DesLonde Jun 3 '11 at 17:00
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@vartec: Yeah, I understand that, but double is a lot. Maybe you have an additional 30% on top of a salary for an FTE at most, but no way you have 100%. And really, whether or not it ends up being more or less expensive depends hugely on the organization size/structure/industry/market/etc...I'm just saying it's difficult for some clients to get past the shock value of hourly rates for contractors/consultants. –  ataddeini Jun 3 '11 at 21:01

I'm fairly sure the main reason we prefer full-time employees over contractors is that we pay them less...

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I was under the impression that to a company a contractor costs roughly the same as a regular employee once you've factored in everything (National Insurance in the UK for example). Perhaps it's different in the US. –  ChrisF Jun 3 '11 at 9:18
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In my region benefits will probably account for around 15 to 20 percent of your overall compensation. Contractors around here generally make 1.5X to 2X more. The main difference is that contractors are not getting paid when there is not a big project to work on, where employees can muddle through the slow times, making it much more stable. –  Morgan Herlocker Jun 3 '11 at 13:13
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@ironcode, benefits usually actually cost roughly twice your salary –  HLGEM Jun 3 '11 at 16:53
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@HLGEM - I did a bit of research. It varies company to company, but the general figures I saw were between 15%-35% of the average employee's gross salary. This is not counting operational costs such as work equipment, office space, etc. Even so the estimates on that seem to add around 10%. This would put some of the beefiest benefit packages at around 45%, which is no where near the 200% you suggest. I can add up my own as well and come to around 20%. Am I missing something? –  Morgan Herlocker Jun 3 '11 at 17:13
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Its generally budget constraints, stop thinking in terms of who gets what, start thinking in terms of having a chunk of money to spend on getting the project done. A contractor can fit in the project budget and be fired when its complete. –  gbjbaanb Jul 7 '11 at 16:03

You'll run into this frequently, depending on where you live and where the company lives.

The first thing we need to do is disassemble the term intellectual property. You have:

  • Copyright
  • Patent
  • Trademark

Lets look at these things individually.

Copyright

Under normal employment, depending on what you sign, your employer owns your output, sometimes during off hours. That is not the case when you are contractor, as you are a vendor that owns the copyright unless it is specifically assigned. This can be a managerial headache that many companies want to avoid.

Patent

I hate software patents, with a passion. However, if you come up with what decision makers deem to be a patentable process for 'doing something', the company needs to own it first. That brings us back to copyright.

Trademark

This isn't really a key issue. Many companies furnish their logo to be printed on devices, literature, etc to third party vendors that produce devices and literature. However, we get back to administrative stuff, you need (in many places) explicit written permission to produce builds that contain trademarked media (text, logo, etc).

This is all solved by hiring employees and not worrying about holes in a master contractor agreement, project specific agreement and how any of the above might nullify your existing NDA. Remember, project contracts do tend to change often due to scope creep. This is the work of lawyers, who cost money, and they'd probably rather save that.

If you live in another country, under a different legal system, the potential problem multiplies, when in fact it's probably a null scenario.

In reality, seldom do these problems actually surface .. but they could and that's what guides policy decisions.

You can't hate the world for what it is, all you can do is work around it.

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@Tim_Post Thanks for this answer. It is now clear why in-house is demanded. BUT now I am curious about how this plays out with @gbjbaanb's answer of being in a role of a consultant below. –  indiehacker Jun 3 '11 at 17:21
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There's other forms of intellectual property, like trade secrets. Copyrights, trademarks, and patents are legal constructs that let companies put information out in the public. If a trade secret gets out, like their code or who their clients are, they have no legal recourse. This sort of thing is usually covered by contract though. –  Philip Jun 3 '11 at 21:46
    
@Philip - Trade secrets are also covered by non-disclosure agreements and (sometimes) non-compete agreements. The specific issue of copyright with a vendor is, the vendor has to assign ownership to you, in many places that isn't an automatic thing. An NDA, which would protect trade secrets, only asserts ownership of stuff by the company, which you aren't allowed to talk about. –  Tim Post Jun 3 '11 at 23:00

"Intellectual property" aside, there are other very good reasons not to take on an expert who can leave on a whim.

Let's take you out of your comfort zone. Imagine you run a company that has decided to start a new project researching the genetic makeup of a particularly obscure virus. What you personally know about this virus could be written on the back of an envelope, so you hire a PhD graduate to work on the project. The graduate has very in-depth knowledge of this virus because he studied it as his PhD research topic.

The chances of you finding another graduate like him are tiny. You really need someone who is a domain expert in this very specific field. He wants to be taken on as a contractor so you hire him.

Six months into the project. You've spent a few hundred thousand dollars so far. Your graduate contractor decides he wants to leave. Tomorrow. The project isn't finished. It's too far along to scrap without taking a massive loss and you can't find anyone to replace him.

If only you'd have the foresight to hire him as a full-time employee.

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Having hired him as an employee is not going to safeguard you against his knowledge leaving the company. Employees can also decide to leave, possibly not tommorrow, but within two weeks to a month in almost all jurisdictions, unless a specific notice period has been agreed upon. And that is something you can put in a contract with a contractor as well. –  Marjan Venema Jun 3 '11 at 8:16
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And in this scenario the difference between the contractor leaving tomorrow and the full time employee leaving after the minimum contractual notice period is what? You still can't replace him, he can still leave, the project still won't be completed (unless you happen to be very close to completion anyway) –  Kevin D Jun 3 '11 at 8:16
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I know that in the US it doesn't make much difference - people can leave whenever they like. Here in the UK it makes a huge difference. My notice period is 3 months, which I am legally obliged to adhere to. If I was a contractor I'd never agree to such a long notice period. Full time == security for both sides here. –  Ant Jun 3 '11 at 8:33
    
@Ant: 3 months notice period would be exceptional where I live (Netherlands). Notice period by law is the same as the payment period, but that can be extended in the employment contract. –  Marjan Venema Jun 3 '11 at 9:02
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+1. Of course full-time employees can leave as well. But statistically speaking, the don't. At least not as quickly as short-time contractors/consultants. (If they do leave as quickly, that's a sign that something is terribly wrong with your company!) –  nikie Jun 3 '11 at 9:08

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