401(k) Plans: Solo W-2, Inc. vs. IBM

July 15, 2009 – 5:12 pm

IBM’s “Gold Standard” is Not Enough –

I am always amazed when I read reports of how this big company or that big company has a particularly great retirement plan. Why? Because no big company – I repeat, NO BIG COMPANY – has a retirement plan that comes even close to being great. Companies simply do no want to contribute enough money to their employees’ retirement accounts to take full advantage of IRS contribution limits.

The 2009 maximum contribution limit for an individual under age 50 is $49,000. Both the employee and the employer may contribute to the plan. By law, the employee may contribute no more than $16,500 as a voluntary deferral from gross wage. The employer may contribute an amount up to $32,500, allowing for a total contribution of $49,000. Individuals over age 50 may contribute an additional $5,500, called a catch-up contribution, allowing for a total contribution of $54,500.

If the employer contributes less than $32,500, the employee cannot max out his or her plan. And, if the employer contributes nothing, an employee under age 50 is limited to just $16,500 per year.

We are entering an era of rapid inflation, at a time when many employees can look forward to being retired almost as long as they have worked. Retirement contributions of $16,500 a year, or even twice that amount, will not endow a comfortable retirement.

BusinessWeek just published an article titled IBM Reinvents the 401(k), in which it reports that the IBM plan “could be the new gold standard” for corporate retirement savings plans. The article reports: “At a time when more than 200 companies have cut matching contributions, and the typical match is 50 cents on the dollar up to 6% of pay, IBM matches [the employee’s voluntary contribution] dollar for dollar up to 6%.”

OK, so the IBM plan is better than most corporate retirement plans, but that is not to say it is a good plan. You see, for all its acclaim in the world of big-company retirement plans, the IBM 401(k) does not allow the maximum contribution allowed by the IRS, no matter how much the employee earns as gross wage. The IBM “Gold Standard” is simply not good enough.

How the IBM 401(k) Plan Works

In the IBM plan, an employee under age 50 can contribute up to $16,500 as a voluntary deferral from gross wage. IBM then contributes one dollar to the employee’s account for every one dollar that the employee contributes up to 6% of the employee’s gross wage.

Thus, for an employee under age 50, the IBM formula limits the total contribution to $33,000 a year, regardless of how much the employee earns. This is $16,000 below the IRS upper limit for total contributions. Moreover, by limiting the employer match to just 6% of wage, the IBM plan makes it difficult for most employees to reach even the IBM maximum of $33,000. Table 1 illustrates what I mean.

Table 1. IBM Plan maximum contributions at various levels of gross wage.

Gross Wage	Employee Contribution	Employer Contribution	Total Contribution	% of Gross Wage
$49,000	$16,500	$2,940	$19,440	39.67%
$100,000	$16,500	$6,000	$22,500	22.50%
$130,000	$16,500	$7,800	$24,300	18.69%
$150,000	$16,500	$9,000	$25,500	17.00%
$200,000	$16,500	$12,000	$28,500	14.25%
$275,000	$16,500	$16,500	$33,000	12.00%

Table 1 shows that an IBM employee must earn an annual wage of at least $275,000 in order to qualify for the maximum 401(k) contribution allowed by IBM, which is still $16,000 less than the $49,000 allowed by the IRS. The table also shows that the IBM retirement plan in fundamentally regressive, meaning that the more you make, the less you can contribute as a percentage of gross wage.

The Self-employed Business Person’s Option

Now, consider the case of Mary, a self-employed consultant who has signed a long-term contract with IBM. As an independent contractor, Mary must provide her own benefits and may not participate in her client’s retirement plan. What Mary can do, however, is set up an individual 401(k) plan for her owner-operated consulting business. She may contribute $16,500 from her gross earnings and her business may make an additional profit sharing contribution equal to 25% of Mary’s gross earnings. Let’s look at how Mary’s 401(k) plan would perform over a range of gross earnings.

Table 2. Individual 401(k) plan maximum contributions at various levels of gross wage.

Gross Wage	Employee Contribution	Employer Contribution	Total Contribution	% of Gross Wage
$49,000	$16,500	$12,250	$28,750	58.67%
$100,000	$16,500	$25,000	$41,500	41.50%
$130,000	$16,500	$32,500	$49,000	37.69%

Mary’s business must generate sufficient revenues to cover operating expenses, so her revenue stream will be somewhat higher than her gross wage. Nevertheless, the table shows that at every level of income, Mary is able to contribute a higher percentage of gross wage to her 401(k) than can an IBM employee earning the same wage. Moreover, Mary can contribute the IRS maximum of $49,000 to her 401(k) when she attains a gross wage of only $130,000. An IBM employee earning the same gross wage can contribute only $24,300, or slightly less than one-half the $49,000 amount that Mary can contribute to her individual 401(k) plan.

Clearly, an individual 401(k) is more than twice as powerful as a typical big-company retirement plan, even one as progressive as IBM’s.

The Solo W-2, Inc. Option — The Real Gold Standard

Amazingly, there is another retirement option that is even twice as powerful as an individual 401(k) plan.

Like Mary, Bob works at IBM as a consultant. The only difference is that Bob is employed by Solo W-2, Inc. as a consultant-at-large. The Solo W-2, Inc. Roth 401(k) Retirement Savings Plan lets Bob contribute one dollar to his 401(k) account for every dollar of year-to-date gross wage up to the IRS maximum. This arrangement lets Bob load his 401(k) twice as fast, or with just one-half the cash flow, when compared with an individual 401(k).

Because Bob has opted for the maximum contribution schedule, he will max out his 401(k) as soon as year-to-date gross wage reaches $49,000. Not only can Bob contribute almost twice as much to his Solo W-2, Inc. retirement savings plan as can a self-employed professional with the same income, but he is able to do so much earlier in the year, greatly leveraging the investment potential of his retirement plan contributions.

Table 3. Solo W-2, Inc. Roth 401(k) Retirement Savings Plan maximum contribution.

Gross Wage	Employee Contribution	Employer Contribution	Total Contribution	% of Gross Wage
$49,000	$16,500	$32,500	$49,000	100.00%

To sum it up let’s compare the investment potential of the IBM plan, an individual 401(k) plan and the Solo W-2, Inc. Roth 401(k) Retirement Savings Plan.

Table 4. Maximum Contribution by an employee under age 50 with a gross wage of $49,000.

Plan Type	Gross Wage	Maximum Contribution	% of Gross Wage
IBM 401(k)	$49,000	$19,440	39.67%
Individual 401(k)	$49,000	$28,750	58.67%
Solo W-2, Inc. 401(k)	$49,000	$49,000	100.00%

Table 4 shows that in 2009 a Solo W-2, Inc. employee with a gross wage of $49,000 can contribute almost $30,000 more to his or her 401(k) account than an IBM employee with a gross wage of $49,000. A self-employed person with the same gross wage can contribute over $9,000 more than an IBM employee.

Table 5. Gross wage required for an employee under age 50 to make the maximum possible contribution.

Plan Type	Gross Wage	Maximum Contribution	% of Gross Wage
IBM 401(k)	$275,000	$33,000	12.00%
Individual 401(k)	$130,000	$49,000	37.69%
Solo W-2, Inc. 401(k)	$49,000	$49,000	100.00%

Table 5 shows that a Solo W-2, Inc. employee requires only $49,000 in gross wage to contribute the IRS maximum amount of $49,000. A self-employed person requires a gross wage of $130,000 to contribute the IRS maximum. An IBM employee requires a whopping $275,000 to contribute the IBM maximum of $33,000, the most that any IBM employee can contribute in 2009, regardless of how much the IBM employee earns.

If IBM really wanted to reinvent the 401(k), it would design a plan like the Solo W-2, Inc. Roth 401(k) Retirement Savings Plan. Can there be any doubt whose plan is the Real Gold Standard?

You can read more about the incredible power of the Solo W-2, Inc. Roth 401(k) Retirement Savings Plan in an earlier blog entry, http://www.solow2.com/blog/?p=29.  You will find a complete discription of the plan in the Solo W-2, Inc. web site at http://www.solow2.com/401kPlan.html.

James R. Ziegler

Posted in Solo Benefits, Solo Business, Solo Mindset, Solo Retirement, Solo W-2, Inc., Solo vs. Employee | No Comments »

Man Bites Dog: Reverse Misclassification

June 25, 2009 – 5:32 pm

The Old Worker-Status Horror Story –

In the hackneyed “dog-bites-man” version of the old worker-status horror story, a court of law reclassifies a company’s contract workers as regular employees. The court then orders the company to pay hundreds of thousands of dollars in back taxes, penalties and interest to the government. The court also finds that the misclassified employees are entitled to the same employee benefits that the company provides its other regular employees.

Reclassification horror stories like this are the primary reason why many companies use third-party employers of record — including our favorite, Solo W-2, Inc. — to mitigate the risks of co-employment. The overwhelming bias by companies is to ensure that every contract worker is either a legitimate business or the employee of a legitimate business.

In a reversal of the usual course of action, New York Attorney General Andrew Cuomo gives us the “man-bites-dog” version of the worker-status horror story. Cuomo announced recently that he wants to reclassify a lawyer as an independent contractor after six school districts originally classified him as a regular employee, entitling him to receive health benefits and a public-sector pension.

It is rare that the IRS or a court of law will actually reclassify an employee as an independent contractor because doing so would strip the employee of his or her government entitlements, including unemployment insurance and workers compensation, while yielding no net increase in the payment of payroll taxes and income tax withholdings.

In other words, if you are the IRS or a class-action attorney, there is money to be made by turning an independent contractor into an employee of the company where he or she works. But converting an employee into an independent contractor is usually pointless.

In this case, however, there is a financial incentive for the government to reclassify the worker as an independent contractor.

Several school districts had listed Attorney Lawrence W. Reich, a private practitioner since 1978, as a full-time employee, at one time or another over a period of 28 years. Reich accrued 42 years in the New York State and Local Employees’ Retirement System and, upon his retirement from the system in 2006, began collecting an annual pension of $61,459.

At issue is whether Reich perpetrated a ruse through which he enjoyed rights under the New York state retirement system that he would not be eligible for as a private practice attorney operating as an independent contractor. Reich claims through his attorney that there is no evidence to suggest that he was intentionally misleading anyone.

You can read more about this curious case online in the ABA Journal and in the web site of the New York State Office of the Attorney General.

James R. Ziegler

Posted in Solo Benefits, Solo Business, Solo Mindset, Solo Retirement, Solo W-2, Inc., Solo vs. Employee | No Comments »

The Size of Staffing Agency Overcharges

May 18, 2009 – 9:18 pm

There Ought to be a Law –

A reader of an earlier blog entry asked, “Can billing rate disclosure be enforced by law? Is there a way to promote change legally?”

Yes, there is a way to promote change legally. State or federal legislators can pass laws requiring staffing agencies to disclose the billing rate.

Every year, a state legislator in one state or another submits a bill that would require staffing agencies to disclose the billing rate, and every year the staffing industry lobby successfully blocks passage. Rarely do the bills even make it out of committee.

I believe the primary contributor to staffing agency abuse and overcharging is the privileged position of staffing agencies as both a job matching service and a payrolling service. This dual role makes it possible for staffing agencies to hide their true cost from the very individuals they are selling their job matching service to.

A lack of transparency hides the true cost of using a staffing agency from normal market forces, making it possible for staffing agencies to charge inflated hidden fees.

By the way, one definition of extortion is the use of one’s privileged position to attain personal financial gain at the expense of another through coercion or intimidation. I believe that, by this definition, many staffing agencies engage in systematic extortion.

A RICO Violation?

There could be a federal RICO (Racketeering Influenced and Corrupt Organizations) case here. As I see it, if a staffing agency advertises that it will find you a temporary job, then that staffing agency is selling a service to you. If the agency is selling a service, then there must be a price for that service. If the staffing agency systematically hides the price for that service, and intimidates individuals who try to learn the price, then the agency’s actions would appear to be a clear violation of the RICO Act.

There could be a juicy settlement in it for any RICO lawyer who decides to take on the case of systematic overcharging of temporary employees (and, therefore, systematic underpaying of gross wages) by staffing agencies.

The True Cost of the Staffing Agency Model

I previously showed that the true hidden cost of using a staffing agency can range from 25.25% of collected revenues (for an agency that takes 35% off the top) to 42.50% (for an agency that takes 50% off the top).

The True Cost of the Hollywood Model

In contrast with the staffing agency model, the Hollywood model is completely transparent. In the Hollywood model, the talent agency matches a talented individual (an actor, for example) with a project. A separate payrolling service then employs the actor for the duration of the project.

The separation of the job matching function and the payrolling function exposes talent agency fees and payrolling service fees to the daylight of full disclosure. Consequently, there are no hidden fees and all costs are out in the open. Market forces, therefore, are able to keep costs reasonably low.

Talent agencies typically take 10% off the top and payrolling services take another 5%. Therefore, the true cost of the Hollywood model is 15% of what the production company pays the talented individual.

Staffing Agency Overcharge is 10.25% to 27.50% or More!

How big is the staffing agency overcharge? One measure is the difference between the true hidden cost of using a staffing agency and the openly transparent cost of using a Hollywood talent agency to find temporary work.

For an agency that takes 35% off the top, the overcharge would be 10.25% (25.25% minus 15%). For an agency that takes 50% off the top, the overcharge would be 27.5% (42.5% minus 15%).

A Possible RICO Judgment: How Much is at Stake?

Regarding the size of such a RICO lawsuit, just multiply the average overcharge by the total number of contractors employed by large staffing companies such as Manpower and Adecco.

Consider the following assumptions and do the arithmetic:

• Average billing rate of $50 per hour.
• On average, 1680 hours billed per contractor per year.
• One hundred thousand, or so, contract professionals at this rate.
• Overcharge is ten percent (or more) of collected revenues.

These figures compute to a total overcharge of $840 million per year. How many years do you want to go back? The total size of a RICO judgment could number in the billons of dollars!

You can play with the assumptions but, any way you figure it, the numbers are staggering. Maybe the lawyers base their case on only 10,000 members (the infamous Viscaino vs Microsoft class-action lawsuit had about 8,000 member contractors), that is still $84 million per year.

If a big RICO law firm believed the case had merit, they just might want to take it on.

The legal battle would be a long, drawn-out dogfight. Recall that the infamous Vizcaino vs. Microsoft permatemp case took eight years and five appeals (Microsoft lost each appeal) until the plaintiffs finally prevailed in 2000 to the tune of a mere $97 million. A RICO lawsuit against staffing industry giants would undoubtedly take as long or longer to reach a settlement. But what a settlement it would be!

James R. Ziegler, Ph.D.

Posted in Solo Business, Solo Marketing, Solo Mindset, Solo Pricing, Solo W-2, Inc., Solo vs. Employee, Staffing Vendors | 1 Comment »

Information Week Editor Hits a Foul Ball

May 14, 2009 – 6:17 pm

Three Strikes And You’re Out, Mr. Preston

Rob Preston, VP and Editor in Chief of Information Week, wrote an editorial piece titled “Down To Business: What If Major League Baseball Had H-1B Caps?” (Posted online May 9, 2009 12:00 AM. From the May 11, 2009 issue).

In his article, Mr. Preston attempts to refute the argument that “U.S. tech employers are just trying to flood the market with cheap labor” by importing young, entry-level, foreign tech workers and displacing American citizens who are often older, more experienced and more expensive.

Mr. Preston’s reasoning is so far off base you would need binoculars to find the logic. But don’t take my word for it. First, read the article and then read the comments from readers. As of May 14, readers left twenty-four printable, on-line comments. I suspect many more had to be deleted for indecent content. The first twenty-three comments ripped Mr. Preston every which way from Sunday. Finally, on May 14, one lone reader named “Guest” - possibly Mr. Preston’s secretary - posted a single, brief, positive comment.

I have never before read such a unified and reasoned backlash to such blatantly stupid reporting. If only Mr. Preston had thoroughly investigated the subject of H-1B visa abuse. Instead, he allowed himself to be overcome by a silly, and utterly irrelevant, baseball metaphor. Three strikes and you’re out, Mr. Preston. It’s back to the dugout for you.

If you doubt that US companies systematically use the H-1B visa to promote age discrimination and depress wages, I recommend that you visit Professor Norm Matloff’s H-1B and Offshoring Web Page. You can subscribe to Dr. Matloff’s e-newsletter by writing him at matloff@cs.ucdavis.edu.  Dr. Matloff is a statistician and computer sciences professor at the University of California at Davis. His analysis of the data on H-1B usage is impeccable and beyond criticism. His critiques of media coverage and industry shenanigans are always insightful and illuminating.

James R. Ziegler, Ph.D.

Posted in Solo Business, Solo W-2, Inc. | No Comments »

The True Dollar Cost of Staffing Agencies

May 13, 2009 – 4:26 pm

Busting the Myth That Staffing Agencies Are Free –

In earlier posts, I have examined - and busted - the industry-promulgated myth that staffing agencies charge no fee to help independent professionals find a temporary job. I have shown that staffing agencies charge a very high hidden fee and that, in fact, staffing agencies take a much higher percentage of gross compensation than what Hollywood talent agencies charge to represent entertainers or what sports agents charge to represent professional athletes.

In this post, I will put a dollar value on staffing agency charges. But first, I want you to answer as honestly as possible this one question:

How much am I willing to pay someone else to successfully market my consulting services to prospective clients?

Is a three-month (500-hour) project that pays $50 per hour worth $500 to you or, maybe, $1,000 or $2,000? Would you be willing to pay someone $5,000 or $10,000 or more for a three-month gig?

How much more would you be willing to pay if the project had a duration of six months or a full year? Would you pay more if the project paid $100 per hour, $150 per hour or $200 per hour? How much more, if anything at all, would you be willing to pay?

Recall that I wrote:

“Staffing agencies do, indeed, charge a fee for helping independent professionals find temporary work, and the true fee for that service is 25.25% of billings on the low side and 42.5% - or more - on the high side.”

The true fee is the amount of the billing rate that you give up when a staffing agency finds a temporary job for you. In practice, it is the difference, or margin, between what your staffing agency bills the client and what it pays you as gross wage less the employer’s share of payroll taxes and payroll processing costs.

The table below shows the true fee of using a staffing agency to find a temporary job, expressed as a percentage of the staffing agency’s billing rate to the client.

Table 1. True Fee Varies with Agency Margin

Agency Margin	Percentage of Billing Rate
50%	42.50%
35%	25.25%
25%	13.75%

Notice that the true fee varies with the agency’s margin. When the agency takes only 35% off the top, the true fee is 25.25% of the billing rate. The true fee increases to 42.50% when the margin is 50% of the billing rate. The fee decreases to just 13.75% when the margin is only 25%.

The percentage varies because the payrolling overhead is a fixed percentage of gross wage. When the agency’s margin is high, your gross wage is low and the agency’s payrolling overhead is also low. Conversely, when the agency’s margin is low, your gross wage is higher and the agency takes a bigger hit on the payrolling overhead.

This is one reason why staffing agencies rarely accept a margin that is less than 35% of the billing rate. Their profits get squeezed two ways by lower margins; first, by the lower margin itself and, second, by the higher payroll costs.

Staffing agencies have a strong incentive to take more than 35% when they can get away with it, because their gross profit - the true fee for using a staffing agency - increases disproportionately when staffing agencies take more off the top.

If you knew the agency margin, you would have the information you need to negotiate the lowest possible fee and, thus, the highest possible gross wage. You would know if you were being treated fairly or not.

Learning the billing rate should be easy, shouldn’t it? You just ask the staffing agency how much it is billing for your direct consulting services to the client. Subtract your gross wage from the billing rate and, ta-da, you have the agency’s margin.

Running Up Against the Code of Silence

Oh, you say you asked the agency rep how much the client was paying for your direct services and the rep refused to tell you? You say she murmured something about proprietary and confidential information? I see. Then she said if you asked again she would put you on her agency’s do-not-call list and if you asked the client what it was paying for your consulting services the agency would pull you off the project and terminate your employment contract.

Congratulations, you have just run up against the staffing industry’s code of silence. Staffing agencies have long enforced a code of silence around the terms of employment in order to intimidate their temporary employees and prevent them from learning the billing rate or from revealing their pay rate to other temps or to the staffing agency’s client. It would be just too embarrassing for the staffing agency if either you or the client were to learn how much the agency took off the top.

Nevertheless, it is highly desirable that you do learn the billing rate because that is the only way you can learn how much the staffing agency is charging to place you on a temporary project with the client. If you ask discretely, many project managers will disclose what they are paying the agency for the work you are performing.

Professional Service Providers Publish Their Fees

A hallmark characteristic of professional service providers is full disclosure of services and fees. Staffing agencies are the only service providers I know of that systematically prohibit their employees who are actually doing the work from knowing the price of the work they are doing.

Therefore, in the interest of full disclosure, I will publish the actual dollar cost of using a staffing agency to find a temporary job. Using the values in Table 1., I will show the true dollar cost of using a staffing agency as a function of these three variables:

1. Agency Margin
2. Billing Rate
3. Duration of Contract Assignment

I think the results will astound you.

Table 2. The True Dollar Cost of a Three-Month (500-Hour) Gig

Agency Margin	Hourly Billing Rate
	$50	$100	$150	$200
50%	$10,625	$21,250	$31,875	$42,500
35%	$6,313	$12,625	$18,938	$25,250
25%	$3,438	$6,875	$10,313	$13,750

Table 2. gives the true cost of using a staffing agency to find a temporary job that lasts only three months (500 hours). Most staffing agencies take 35% off the top. Would you be willing to pay an agency that takes 35% off the top $6,313 for a three-month gig that paid only $50 per hour?

Remember, if you located the gig on your own and signed directly with the client, this money would be yours to keep. Would you be willing to give an agency that takes 50% off the top $10,625 for a three-month gig? Would you be willing to give up twice as much, $21,250, for a gig that paid $100 per hour?

Table 3. The True Dollar Cost of a Six-Month (1000-Hour) Gig

Agency Margin	Hourly Billing Rate
	$50	$100	$150	$200
50%	$21,250	$42,500	$63,750	$85,000
35%	$12,625	$25,250	$37,875	$50,500
25%	$6,875	$13,750	$20,625	$27,500

Table 3 gives the true cost of using a staffing agency to find you a six-month gig. Assuming your consulting services are worth $100 per hour to a client company, would you be willing to pay a staffing agency the price of a new car to find you a six-month gig?

Table 4. The True Dollar Cost of a One-Year (2000-Hour) Gig

Agency Margin	Hourly Billing Rate
	$50	$100	$150	$200
50%	$42,500	$85,000	$127,500	$170,000
35%	$25,250	$50,500	$75,750	$101,000
25%	$13,750	$27,500	$41,250	$55,000

Table 4 gives the cost of using a staffing agency to keep you in temporary work for an entire year, regardless of whether the work is one gig or several gigs.

I do not know of anyone who, knowingly, would gladly pay a staffing agency more than $25,000 to keep them employed full-time in a $50-per-hour job. Do you? Would you pay a staffing agency more than $50,000 a year to keep you employed as a $100-per-hour consultant? What about more than $100,000 for a $200 per hour gig?

So, there it is. Now you know the true dollar cost of using a staffing agency to find a temporary job. What are you going to do about it?

James R. Ziegler, Ph.D.

Posted in Solo Business, Solo Marketing, Solo Mindset, Solo Pricing, Solo W-2, Inc., Staffing Vendors | 4 Comments »

You are Not Unemployed, Sir. You are Self-employed.

May 8, 2009 – 2:49 pm

Statistics Breakthrough by Canadian Agency

Statistics Canada is the official government agency that “produces statistics that help Canadians better understand their country — its population, resources, economy, society and culture.” In addition to conducting a census every five years, Statistics Canada conducts about 350 active surveys on virtually all aspects of Canadian life - including employment.

Today, May 8, 2009, Statistics Canada released its Labour Force Survey for April 2009. One of its findings, reported today in the Statistics Canada Daily online report, (borrowing a phrase from Barry Asin, the highly excitable EVP and Chief Analyst for Staffing Industry Analysts, Inc.) “just about caused me to fall out of my chair.” Apparently, Statistics Canada has discovered how to eliminate unemployment. To wit, the following statement:

“Employment grew by 36,000 in April, the result of an increase in self-employment.”

Yes, folks, the secret to eliminating unemployment is to increase the roles of the self-employed! I can hear it now: “Here’s your pink slip, hey. Welcome to the growing ranks of the self-employed.”

Thank You, Statistics Canada!

It does make sense, you know. Here is how the logic might play out for citizens of the United States.

1. Every citizen and resident alien in the United States, as well as every non-resident alien with a valid work visa, has a US Social Security number.
    
2. Everyone with a US Social Security number is a sole proprietor, the default business status in the United States.
    
3. Solo Proprietors are, by definition, self-employed.
    
4. Therefore, everyone in the United States with a Social Security number is employed, albeit by their own sole proprietorship.
    
5. If everyone in the US is employed, then the rate of unemployment must be zero.

Ta da! We have just eliminated unemployment in the United States.

Thank you, Statistics Canada, for your invaluable insight and contribution to the economic well being of all Americans. Idle workers of the world, unite! You are not unemployed. You are simply between customers.

James R. Ziegler, Ph.D.

Posted in Solo Business, Solo Mindset, Solo W-2, Inc., Solo vs. Employee | 1 Comment »

Talent Agents and Sports Agents Charge Much Less Than Staffing Agencies

May 7, 2009 – 3:06 pm

Temporary Help Agencies are Very Expensive –

Let’s say that you are an independent professional and you work on temporary projects under the terms of a contract that you negotiate and sign with your clients. Let’s say also that you bill $100 per hour for your consulting services.

You are an independent contractor, so when your clients pay you, they do not deduct payroll taxes or withhold income taxes from the money they pay you. Paying taxes is your responsibility as an independent contractor. If you bill $100 per hour, the client will pay you $100 per hour.

Now, let’s say that you use a staffing agency to find a temporary job. The staffing agency will bill the client $100 per hour because that is what your services are worth to the client. The staffing agency will then employ you and pay you a gross wage.

You should understand that the staffing agency will NEVER pay you more than $65 per hour. That is because staffing agencies virtually always take at least 35% of the billing rate off the top. Many staffing agencies routinely shoot for a margin of 50% or more as their gross profit.

Some of the staffing agency’s margin is unavoidable. For example, employers must pay the employer’s share of Social Security and Medicare taxes, which self-employed independent contractors must also pay. Employers must also pay for unemployment insurance and workers compensation, which self-employed professionals seldom pay. Additional costs include overhead for invoicing, collections and payroll processing, which self-employed professionals must also bear.

From my experience as an employer of independent professionals at Solo W-2, Inc., these payroll related costs amount to about 15% of gross wage. In other words, if gross wage is 65% of billings, then [15% * 65% =] 9.75% of billings is related to payroll overhead. In this case, the staffing agency’s margin is 35% of billings, so its fee for the service it performs is [35% - 9.75% =] 25.25% of billings. If we plug in a staffing agency margin of 50%, we arrive at a fee for service equal to 42.5% of billings.

Staffing agencies do, indeed, charge a fee for helping independent professionals find temporary work, and the true fee for that service is 25.25% of billings on the low side and 42.5% - or more - on the high side.

Other Job Matching Business Models Charge Much Less

In my previous post, I wrote:

“Not only do staffing agencies charge the independent professional for finding a temporary job, what staffing agencies charge for finding that job is disproportionately high compared with the fees charged by Hollywood talent agencies, that find work for creative artists, and the fees charged by sports agents, who find work for professional athletes.”

I will document two examples that support my assertion.

AFTRA, the American Federation of Television and Radio Artists, represents professional actors, dancers, singers and broadcasters. Paragraph 3 of the Standard AFTRA Exclusive Agency Contract states the following:

3. (a) The Artist agrees to pay to the Agent a sum equal to _______ per cent (not more than 10%) of all monies or other consideration received by the Artist, directly or indirectly, under contracts of employment entered into during the term specified herein as provided in the Regulations. Commissions shall be payable when and as such monies or other consideration are received by the Artist or by anyone else for or on the Artist’s behalf.

AFTRA franchised talent agencies that find work for AFTRA members may charge no more that 10% of received monies. Compare that with the 25% (or more!) that staffing agencies charge for performing essentially the same service.

The National Football League Players Association mandates the fee schedule for NFL sports agents (called contract advisors) who represent players in the National Football League. The following is from NFLPA Regulations Governing Contract Advisors, Section 4: Agreements Between Contract Advisors and Players: Maximum Fees.

(1) The maximum fee which may be charged or collected by a Contract Advisor shall be three percent (3%) of the “compensation” (as defined within this Section) received by the player in each playing season covered by the contract negotiated by the Contract Advisor, except as follows:

(a) The maximum fee which may be charged or collected by a Contract Advisor shall be:

(i) Two percent (2%) for a player who signs a one (1) year tender while subject to a Franchise or Transition designation, or as a Restricted Free Agent;

(ii) One-and-one-half percent (1.5%) for a player who signs a one (1) year tender while subject to a Franchise or Transition designation for the second time he is tagged; and

(iii) One percent (1%) for a player who signs a one (1) year tender while subject to a Franchise or Transition designation for the third time he is tagged.

(2) The Contract Advisor and player may agree to any fee which is less than the maximum fee set forth in (1) above.

Yes, folks, the maximum that an NFL sports agent can charge a player is 3% of compensation unless it is 2%, 1.5% or 1%. Moreover, NFL players are free to negotiate a fee that is lower than the recommended maximum. What a concept!

Can there be any doubt that the fees charged by traditional staffing agencies are hugely disproportionate to the value of the temporary job matching service they provide for temporary workers?

In future posts I will discuss how it is that traditional staffing agencies can get away with charging as much as they do. And, no, the reason has nothing to do with a need for union representation. However, it does have everything to do with the need for transparency and full disclosure of billing rates and fees by staffing agencies.

James R. Ziegler, Ph.D.

Posted in Solo Business, Solo Mindset, Solo Pricing, Solo W-2, Inc., Solo vs. Employee, Staffing Vendors | 1 Comment »

The High Cost of Traditional Staffing Firms

May 5, 2009 – 8:04 pm

Help, I Fell Down and I Can’t Get Up! –

Somebody send Barry Asin, EVP and Chief Analyst for Staffing Industry Analysts, Inc., a medical alert device right away! He just fell down on the issue of staffing firm charges and I’m afraid he can’t get up.

Asin writes in his blog that one of the results of his organization’s latest research study “just about caused me to fall out of my chair.” What possibly could have caused such a strong response in an otherwise healthy industry insider? It was the answer to this survey question:

“What cost, if any, do you think a typical temporary staffing agency would charge you for finding you a temporary job?”

Asin writes that fully 50% of people who had never worked as a temporary employee or independent contractor “thought that a temporary staffing firm would charge them some sort of a fee.” Moreover, about one-third of the respondents who had actually worked for a staffing firm held the same view.

Asin was surprised that anyone at all should have thought that staffing firms charge for finding temporary work. Would someone please help this man get back on his feet!

Frankly, I am surprised that more people do not think that staffing agencies charge a fee for helping someone find a temporary job. After all, staffing is not charity work. Staffing agencies have to make a profit and the money must come from somewhere.

Obviously, staffing agency profits come from the money that temporary workers generate for the agency. The staffing agency’s fee for helping someone find a temporary job is the difference between what a staffing agency collects from the client and what it pays the temporary worker! Who could argue with that?

If the worker had not used a staffing agency to land a particular temporary assignment, the entire revenue stream would have gone to the temporary worker. When a staffing agency enters the loop, the agency takes a significant portion of the collected billings as its gross profit before paying what is left over to the temporary worker.

Granted, staffing agencies do not advertise or publicize how much they take off the top. What staffing agencies take off the top as their profit is a hidden fee, but a fee nonetheless.

How about this for a more realistic survey question?

“What hidden fee, if any, do you think a typical temporary staffing agency would charge you for finding you a temporary job?”

Not only do staffing agencies charge the independent professional for finding a temporary job, what staffing agencies charge for finding that job is disproportionately high compared with the fees charged by Hollywood talent agencies, that find work for creative artists, and the fees charged by sports agents, who find work for professional athletes. I will analyze the disproportionately high cost of staffing agencies in a later post.

The Low, Low Cost of Solo W-2, Inc.

Solo W-2, Inc. charges a very low percentage of collected billings for all that it does to support your consulting career. When you consider the very low cost, direct savings, tax-advantaged earnings and the convenience of Solo W-2, Inc., the cost is very low, indeed. You might even say that Solo W-2, Inc. pays for itself. Read about the low, low cost of Solo W-2, Inc.

Solo W-2, Inc. is an Open Book

As with every other professional service provider, Solo W-2, Inc. has no hidden fees. In sharp contrast to the traditional staffing vendor business model, the Solo W-2, Inc. business model is completely open to scrutiny. Solo W-2, Inc. proprietary systems are automated and efficient. With every payroll, every Solo W-2, Inc. employee receives a complete accounting of every penny generated by the employee’s efforts and every penny spent to fund the employee’s benefits and tax-advantaged payroll. Read about the many ways that Solo W-2, Inc. manages and preserves your cash flow.

James R. Ziegler, Ph.D.

Posted in Solo Business, Solo Marketing, Solo Pricing, Solo W-2, Inc., Staffing Vendors | 3 Comments »

Good News, Bad News

April 30, 2009 – 8:13 pm

Leading Indicators –

I recall hearing a pundit explain that a rally in the stock market typically leads a rally in the general economy by about six months, and an up-tic in the general economy leads an increase in hiring by another six months. So, if you are unemployed, a rise in the stock market is good news. The bad news is that you can expect to be out of work for another year or so.

Temp Agencies Hit Hard by this Recession

The Contingent Workforce Strategies Daily News, published daily by Staffing Industry Analysts, http://www.staffingindustry.com/, reports regularly on staffing industry trends. Recent issues contain some very grim statistics. Below are some snippets. Follow the link to staffingindustry.com for the full stories:

From April 30, 2009:

“Spherion Corp. (NYSE: SFN) reported first-quarter revenue fell 26.1% year-over-year to $425.9 million.”

“First-quarter revenue fell 22.2% year-over-year at CDI Corp. (NYSE: CDI) to $228.7 million.”

“Revenue fell 11.3% year-over-year in the first quarter at Comsys IT Partners Inc. (NASD: CITP) to $162.7 million.”

“General Employment Enterprises Inc. (AMEX: JOB) reported revenue fell 36.4% year-over-year to $2.5 million in its fiscal second quarter ended March 31.”

“The Monster Worldwide Inc. (NYSE: MWW) employment index for Canada fell 19 points to a reading of 99 in the first quarter. It’s down 50 points year-over-year.”

From April 28:

“First-quarter revenue fell 24.9% at Kelly Services Inc. (NASD: KELYA) to $1.04 billion from $1.39 billion in the year-ago quarter.” Kelly is the nation’s oldest staffing firm.

From April 21:

“Manpower Inc.’s (NYSE: MAN) first-quarter revenue fell 32.3% year-over-year amid a dismal global economy, and the company reported a $6.9 million reorganization charge for severances, office closures and consolidations.” Manpower is perhaps the largest non-governmental employer in the USA.

This is the bad news: Companies are not hiring or, perhaps, they have simply cut way back on using expensive staffing firms to fill their open positions for regular employees, temps and contract workers.

So, what is the good news? The Bureau of Labor Statistics today issued the latest Employment Cost Index news release (http://www.bls.gov/news.release/pdf/eci.pdf). Here is a summary statement from the BLS:

“Total compensation costs for civilian workers increased 0.3 percent, seasonally adjusted, from December 2008 to March 2009. For the year ended March 2009, compensation costs rose 2.1 percent. The 12-month increase for wages and salaries was 2.2 percent and the benefits increase was 2.0 percent.”

Apparently, if you are still lucky enough to have a job, your employer is paying more to keep you on board. I cannot say how much of that increased cost actually trickles down to your gross wage, but at least it appears that employers are not yet cutting labor costs (and wages) — at least, that is, for those of us who are still employed!

More Good News

I am pleased to report that, unlike the trend in traditional staffing companies, Solo W-2, Inc. has been relatively unaffected by the current jobs crisis. In fact, the number of consultants-at-large employed by Solo W-2, Inc. is actually increasing, partly due, I think, to the tendency of companies to lay off regular employees and then bring them back as consultants on a project-to-project basis. In this regard, I am happy to say, Solo W-2, Inc. seems uniquely well positioned, not only to survive the current economic downturn but to thrive because of it. Read more on this subject in my earlier blog post, Forward to the Past — The Fall of Traditional Employment and the Rise of Contingent Work.

James R. Ziegler, Ph.D.

Posted in Solo W-2, Inc., Solo vs. Employee, Staffing Vendors | No Comments »

Forward to the Past — The Fall of Traditional Employment and the Rise of Contingent Work

March 12, 2009 – 10:36 pm

Where Are the Tech Jobs in the USA?

Chances are, they are not in Silicon Valley! Yep, that’s right. If you are an independent professional in the tech industry, your best bet to land work is in the Washington D.C.  or New York City metropolitan areas. According to the most recent monthly Dice Report, as reported March 10, 2009 in eWeek Careers, Silicon Valley (2,666 job openings) lags a distant third behind the Washington D.C. / Baltimore (7,904 job openings) and the New York / New Jersey (5,527 job openings) metropolitan areas.

Dice reports that job postings for the New York metro area are down 44% compared with a year ago, a logical result of the financial services implosion. Yet, on any given day there are still over 5,000 technology job openings in the New York area.

And, nationwide, the market for tech jobs is not nearly as soft as it has been in recent memory. eWeek reports that, according to Dice SVP and CMO, Tom Silver, “Dice is seeing about 50,000 job postings in a given day, compared with about 19,000 a day during the post-9/11 tech-bubble recession of 2002.”

The Rise of Contract Labor

Nevertheless, we have been reading a lot lately about massive tech industry layoffs. What they are not telling you is that many of the laid off tech workers will be invited to return to their old projects as contractors. In a fundamental restructuring of the way tech companies (if not all companies) staff their projects, departments are eliminating head count but they are keeping the live bodies attached to those heads by converting them to contractor status.

This past January, the Aberdeen Group released a white paper titled, “Contract Labor Management, Superior Workforce Strategies for a Demanding Market.” The paper reports the results of an evaluation of more than 330 enterprises made in December 2008 and January 2009. Aberdeen research discovered that 16% of the average enterprise’s overall workforce is considered contingent labor. Slightly more than one-half of enterprises surveyed believe that the use of contract labor will increase over the next two years.

In its report, Aberdeen ranked various fields according to their representation by contingent labor. Not surprisingly, information technology led the field with an index of 83%, followed by office and clerical with an index of 79%. Interestingly, professional services came in with an index of 67% followed closely by finance/accounting/banking at 64%. Clearly, enterprises are staffing white-collar positions with contingent workers almost as much as they are technology and clerical positions.

Outsourcing and off-shoring have taught companies how to plan their work around discrete projects manned by contingent workers, such as temps, consultants and contractors. The realities of global competition have taught companies about the importance of flexibility and cost containment. Healthcare reform will soon disengage health insurance from employment, allowing independent contractors to pay the same for medical insurance as corporate employees. These and other factors set the stage for a permanent restructuring of the labor force favoring an increase in the number of independent professionals. I would not be surprised to see the contingent labor force rise from 16% today to 40% or 50% ten years from now.

Are We Returning to the Ways of Yore?

Before the introduction of employee benefit packages during the Second World War and the subsequent rise of unions and legislation protecting employee rights in the workplace, all workers were essentially contingent. To be employed meant only that someone was paying you to do a job. There were no group benefits, no payroll taxes, no income tax withholdings, no pay stubs and no IRS Form W-2 at the end of the year. Working for an employer gave you no more security than did working for yourself. Either way – employee or independent contractor – you were on your own.

Might it be that we are returning to a model of work that will closely resemble the model of work prior to World War II? Or might there be a more progressive model that retains the best of W-2 employment while it acknowledges the reality of an increasingly contingent workforce.

The Solo W-2, Inc. Business Model

Independent professionals employed by Solo W-2, Inc., www.solow2.com/, enjoy the freedom, flexibility, independence and tax advantages of self-employment. They also enjoy unparalleled back-office support and the comprehensive employee benefits of corporate employment. Truly, they have the best of both worlds!

Solo W-2, Inc., is a full-service employer of record, providing comprehensive, on-going back-office support to independent professionals. Solo W-2, Inc. also provides low-cost, contractor payrolling and co-employment risk mitigation for its client companies. No employer of record costs less or delivers more than does Solo W-2, Inc. for both independent professionals and the companies that engage their contract services.

Solo W-2, Inc. provides the following back-office support for its W-2 employees:

• Contract Administration - including contract negotiation, online time and expense reporting, timely invoicing and assertive collections of accounts receivable.

• Payroll processing - including payment of unemployment insurance, workers compensation, income tax withholding and IRS Form W-2.

• Personalized Administrative Support - Solo W-2, Inc. assigns a dedicated staff person to provide personalized administrative support for each employee.

• Benefits administration - including medical insurance (choice of HMO, PPO, or HSA Major Medical), dental insurance (choice of HMO or PPO), vision insurance, Roth 401(k) plan with 200% employer match. The Solo W-2, Inc. benefits package is arguably the best benefits package available to any independent professional anywhere in the USA.

• Long-term Disability Insurance - with tax-free benefit equal to 60% of gross wage up to $10,000 per month.

• Business Expense Reimbursement - with tax-free dollars for out-of-pocket business expenses and leaseback program for expensive tools-of-the-trade.

• Medical Expense Reimbursement - with tax-free dollars for out-of-pocket medical expenses up to $10,000 per year.

Solo W-2, Inc. provides the following support for its client companies:

• Employment of Direct-sourced Contractors - Solo W-2, Inc. employs a company’s direct-sourced contractors, including re-deployed former employees who already know the company’s systems and procedures. Companies do not have to pay high consulting firm prices; they simply outsource their contractor payment processing to Solo W-2, Inc. for maximum efficiency and minimum cost.

• Cost Containment - Solo W-2, Inc. reduces the cost of engaging contingent workers by 20-30% or more compared with traditional staffing vendors. There is no charge for compliance testing and there is no charge to convert a non-compliant independent contractor to Warranted W-2 employment status. Solo W-2, Inc. does charge the consultant’s account a nominal administrative fee equal to 6% of collected revenues. Some of our clients opt to subsidize part or all of the administrative fee as a mark-up on billings, but that is between the client company and the consultant.

• Compliance Testing and Certification of Independent Contractors - Solo W-2, Inc. assesses internally sourced independent contractors for compliance with government standards and selects the most appropriate method for mitigation of co-employment risk.

• IRS-Compliant Independent Contractors - Solo W-2, Inc. certifies IRS-compliant independent contractors and serves as their agent of record through while working on your projects.

• Non-Compliant Independent Contractors - Solo W-2, Inc. converts non-compliant consultants to W-2 worker status and serves as their employer of record while working on your projects.

• Strong, Reliable Mitigation of Co-Employment Risks - Solo W-2, Inc. provides the strongest, most reliable protection against contingent worker reclassification, class-action lawsuits and other co-employment risks. Contractors employed through Solo W-2, Inc. are covered by $5,000,000 aggregate insurance for general liability and errors & omissions. Contractors are also covered by unemployment insurance, workers compensation, life insurance, guarantee-issue long-term disability insurance, employee assistance program, Roth 401(k) plan with employer match and access to true group medical insurance (choice of HMO, PPO, or HSA), dental insurance (choice of DMO or DPO) and vision insurance.

• Automated Administration - Solo W-2, Inc. employs simple and efficient online systems for time and expense reporting, consolidated invoicing, payroll processing, and benefits administration. Solo W-2, Inc. partners with Automatic Data Processing, Inc. (ADP) to ensure absolute compliance with local, state and federal tax and employment regulations.

View a listing of all services provided by Solo W-2, Inc.
www.solow2.com/ProprietaryServices.html.

View a PowerPoint presentation that shows how Solo W-2, Inc. supports solo professionals.
www.solow2.com/Library/Solo W-2 Presentation_General.ppt

View a PowerPoint presentation that shows how Solo W-2, Inc. protects organizations that engage contingent workers.
www.solow2.com/Library/Solo IC Compliance Presentation_General.ppt

James R. Ziegler, Ph.D.

Posted in Solo Benefits, Solo Business, Solo Mindset, Solo W-2, Inc., Solo vs. Employee | 2 Comments »