Re: Atlas Shrugged Off

In article <46bf74dc@xxxxxxxxxxxxxxxxxxxxxx>, David Clegg says...

In one such case, a
full-time employee was given notice on Friday, and found themselves
back at work as a contractor the following Monday.

Quite often this is/was a deliberate mechanism (in the UK at least).


I'm not quite sure how making someone redundant, having to pay a
termination payout, and then contracting them back at a greater rate of
pay would save the company money.

I doubt they were made redundant, since if they were the employer would
not be able to re-hire anyone to replace them, on any basis (without
first offering them their job back, and if they refused the
employer/client would then be stuck).

More likely (in cases where the arrangement is deliberately used) the
severance would have been by mutual agreement on the understanding that
the contract based re-hire was to take place.


As for how it saves money - there are two ways:

1) It can save money in accounting terms, even where it costs money in
actual terms (which it usually doesn't).

Salary for permanent employees is typically accounted as a fixed cost,
where contract fees are accounted as a variable cost. So sacking a
permie then rehiring as a contractor allows money to be moved around on
the balance ***.

Often in larger companies, the payments also come from different budgets
- departments often accounting for their own wages, with contractors
being paid for from centralised or project oriented budgets.


2) Employers typically have costs to pay for an employee, over and above
the employees actual wages, that simply do not apply to contractors.

In the UK, espec. - an employer has to pay employer's National Insurance
contributions on wages in addition to deducting the employees
contributions, as well as holiday pay (4 weeks per permanent employee
per year) and sick pay etc etc. Plus if they did eventually decide to
eliminate the position, a contractor gets no redundancy entitlement and
no pension etc etc.

An employee can be sacked and then re-hired on a contract that pays the
employee more (gross) than they earned as an employee whilst costing the
employer/client less.

On top of that, when incorporated as a company (in the UK at least) the
contractor is able to maximise tax efficiencies in taking drawing from
their gross income. i.e. pay themselves a wage sufficient to utilise
tax free allowances and then draw the majority of their income as
shareholder dividends, rather than wages, thereby avoiding National
Insurance.

If espoused to a non-wage earning partner, where the partner is also a
shareholder in the company, a far, FAR higher combined income can be
drawn without either entering higher rate tax bands etc.


So employer/client costs can be reduced, even whilst providing financial
benefit to the employee/contractor, even before you factor in the fact
that as an employee, sickess, holiday, training, equipment, licensing
costs are born by the employer, where-as as a contractor they themselves
are responsible for making allowance for such things out out their gross
income.

Usually of course, the client still incurs equipment and licensing
costs, but they are not obliged to. Certainly it would be rare indeed
for a contractor to be paid any sort of "annual leave" or "sick pay".


It was these accounting tax/dodging devices that led directly (in the
UK) to IR35, designed to catch contractors found to be in a "defacto"
employee relationship with their clients.

To the extent that this was the intent I wholheartedly supported IR35,
but the way that the regulations were drawn up was a mess and I don't
think anyone was ever properly "caught" by the regulations - all they
did was hurt the contracting sector by introducing uncertainty on BOTH
sides.

Clients could conceivably have found themselves being sued for
retrospective holiday payments/sick leave/training costs etc if a
contractor was found to have been in a defacto employment relationship,
since employees are statutorily entitled to annual leave and other
obligations, especially if the relationship had existed for a period of
time.

For this reason, many larger contracting clients started requiring
contractors to join the permanent staff after a certain period of
contracting (usually 12 months), presumably to eliminate the uncertainty
and to establish a point in the relationship where the nature of that
relationship explicitly changed, thereby reducing the possibility of a
defacto relationship being recognised.


--
JS
TWorld.Create.Free;
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