Independent Contractor Usage Hits a Record High
In this down economy, many unemployed individuals may be moonlighting as contractors.
It's a way to make ends meet without a full-time job. Moreover, it has become a de facto way of doing business in the small business economy.
As part of our SurePayroll Small Business Scorecard, we track how reliant small business owners are on independent contractors.
The economic index we generate to track this trend — the SurePayroll Contractor Index — represents the percentage of employed individuals who are working as independent contractors.
As evidenced by the chart below, the Contractor Index has been steadily rising during the recession and reached an all-time high in April 2009.
As of the end of April 2009, the 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. However, an increase in the number of independent contractors means a growing population of workers who likely cannot afford quality healthcare, which exacerbates the nation's healthcare problems.
In addition, it's 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 the rules. 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. Both these scenarios raise some tricky policy and enforcement issues that, no doubt, are being hotly discussed in federal and state tax agencies.
It's our estimate that 75 percent of the new independent contractors are "reluctant entrepreneurs." In other words, they are working as independent contractors out of necessity because no full-time positions are available. 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.
In aggregate, however, we would agree that there will be a long-term rise in contractors and that this current recession has accelerated that inevitable trend. This is not your grandfather's employment era. These days, workers are engaged on a plug-and-play basis. They are tapped for a job and then thrown back into inventory when the job is done.
Small Business Optimism Dips
For April 2009, we saw a small drop in small business owner optimism levels. 66 percent of respondents indicated they are optimistic about the small business economy.
That's a drop from March when 71 percent of respondents were optimistic, but it's still solid ground as compared to, say, February 2009 when our small business optimism survey indicated that only 48 percent of surveyed small business owners were optimistic.
For the April 2009 SurePayroll Small Business Scorecard, we are pleased to report that optimism has continued its comeback.
The April survey was completed on April 30. It consisted of 203 respondents randomly selected from the 25,000 small businesses we use to calculate our economic indicators.
The SurePayroll Hiring Index
Our SurePayroll Hiring Index rose 36 points to 11,404 in April, up from 11,368 at the end of March. This represents a 0.3 percent increase in the average small business size, meaning that on average small businesses were hiring last month.
Year to date, the Hiring Index is up 1.2 percent, which puts small business hiring on track to increase 3.5 percent for calendar year 2009.
The Hiring Index is calculated from the actual payments made by over 25,000 small businesses that use our payroll service. The Hiring Index tracks the total workforce for a small business, including employees and contractors.
Salaries Now at August 2006 Levels
There's no relief in sight for small business salaries. They are doing the limbo rock. Remember that Chubby Checker song with the lyrics "How low can you go"?
Indeed, our SurePayroll Pay Index is now at a level we haven't seen since August 2006.
Our SurePayroll Pay Index now stands at 1,001, down from our March reading of 1,010. That's a one-month drop of 0. 9 percent, a similar decline to what we saw in the previous month. That's three consecutive months of deep salary cuts.
Year to date, salaries are down 2.7 percent. The average small business annual paycheck in the United States is now $30,756. In April 2008, it was $32,567. That's a fairly large drop in purchasing power for the average American.
Clearly, to truly turn the corner on this bad economy, workers will need to see a rebound in salaries. It's great that small businesses are filling the gap for workers who have been laid off from large companies, but at the end of the day payrolls have to be sufficient to cover workers' costs. Until that happens, don't expect much in the way of consumer spending.
For business owners, it's a great time to buy people. But you need to be doing well enough to justify the investment.
Regional and State Performance
The West was the only region that experienced a hiring contraction in April. The other regions – the Midwest, Northeast and South – all experienced hiring growth in April.
Monthly hiring gains for the Midwest, Northeast, South and West were 0.4 percent, 0.7 percent, 0.5 percent and -0.1 percent, respectively. As it did in March, the Northeast led the country in small business growth for April.
Average salaries declined in all four regions last month. In the Midwest, Northeast, South and West, salaries declined -0.9 percent, -1.4 percent, -0.7 percent and -0.2 percent, respectively. Salaries in the West had the dubious honor of declining the least.
With respect to year-to-date performance, hiring changes for the Midwest, Northeast, South and West are 2.1 percent, 2.9 percent, 1.9 percent and -0.7 percent, respectively. Year-to-date salary changes are -1.7 percent, -3.6 percent, -2.8 percent and -0.3 percent, respectively.
As depicted in the graphic below, year-to-date results vary by state. The Scorecard comprises data from all 50 states, but we pay close attention to states that we have earmarked as "benchmark states," specifically Arizona, California, Colorado, Florida, Illinois, Maryland, Minnesota, Nevada, New Jersey, New York, Oregon, Pennsylvania, Texas, Utah and Washington.
Data for our benchmark states are available – just send me an email requesting the data for your state.
I welcome any questions or suggestions regarding our Small Business Scorecard initiative. You may contact me at malter@surepayroll.com or by phone at
(847) 676-8420, ext. 7229.
Best regards,
Michael Alter
President
SurePayroll, Inc.
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