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JL
James Liu
The tech sector, an industry known for high wages and generous benefits, has accelerated its use of contract workers that work alongside full-time employees but who are employed by staffing agencies. While many contract workers are increasingly employed in core functions such as engineering, design, and research, they miss out on different forms of compensation and benefits and incur additional costs such as job instability. This pay disparity exacerbates existing social inequities, since contracted workers are more likely to be racial and gender minorities compared to their full-time counterparts. As part of their stated commitment to equity, companies should adopt a more equitable compensation strategy for contractors that take into account the hidden costs of contract work.

Who are professional services contractors?
Professional services contractors are individuals work at technology companies and perform similar roles as full-time employees, such as engineering, design and research, but are not directly employed by these companies. Instead, they are hired by subcontracting agencies such as Adecco and Pro Unlimited, which manage the workers’ benefits and pay. Despite having substantially similar responsibilities as full-time employees, they are not often compensated equitably for their work. In a study of comparing full-time and contract workers working in similar roles at tech companies, contractors were found to be:
Three times
more likely to be Black or LatinX compared to their full-time counterparts
More likely
to be a first-generation college graduate than a full-time employee
Paid, on average, 35% less
than their full-time counterparts

The totality of the different experiences between full-time employees from their contractor counterparts goes beyond compensation (integration with company culture, legal protections, etc.) and cannot be completely captured by compensation, but
ensuring pay equity is a step in the right direction
.

Why this matters to you
By maintaining pay disparities between full-time and contract workers, companies extend social inequities that are incongruent to their stated values.

The 2016 survey of white-collar workers also found that white-collar contracted employees were 2.6 times more likely to be Black or Latino. Data published by Project Include and TechEquity Collaborative underscores in October 2021 further showed that “Black, Indigenous, Latinx, Asian, women, and nonbinary people are overrepresented as contract workers compared to the directly-employed tech workforce.” To this end, the practice of pay disparity between full-time and contract workers exacerbates America's well-documented racial wealth gap and other social inequities.

By underpaying large portions of their core workforce, companies increase longer term costs through increased turnover, decreased hiring competitiveness, and worsened productivity.

While there can be financial pressure to underpay workers in the short term - full-time or contractors - companies take on long-term risks maintaining such systems. Underpaying workers is associated with lower productivity and morale, and poor benefits can lead to decreased work performance and increased turnover. And this is not without costs - research on the cost of employee turnover reveals that it costs an average of 40 percent of an individual employee’s annual salary to find a replacement. As Silicon Valley companies increasingly rely on subcontractors to do “core business” work, they risk creating a second tier of less-productive, higher-turnover workers by systematically underpaying this class of workers.

As regulatory and public pressure increase, companies can mitigate risk by proactively addressing contractor compensation equity.

As of the time of this writing of this policy brief, there is public increased attention to labor issues and worker equity. At a legislative level, there is passed and pending legislation to increase pay equity transparency (e.g. California’s SB 973) and even enforce pay equity for contract workers with similar roles as full-time employees (eg. H.R.7638) Companies who want to preempt this public scrutiny, and proactively become thought leaders on pay equity need to consider their compensation strategies for contract workers.

What can I do?
As a hiring manager, you have the capacity to negotiate higher salaries on behalf of the contractor you support. Rather than letting the agency negotiate the salary directly with the contractor, use the
to advocate for an increase in the wage commensurate with missing benefits and job instability.

As a senior leader, you should take several steps to quantify and be transparent about the pay disparities between worker types. See the
for more details on how to build a more equitable compensation model.
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