This tool is intended for hiring managers and senior leaders at companies with contingent workforces; it should be used to highlight and address inequities in compensation between contractors and full-time employees. Closing these gaps is not just the morally right thing; it also makes business sense. Use and adapt the calculator as necessary to reflect the needs and values of your organization and its workers.
The tech sector, an industry known for high wages and generous benefits, has accelerated its use of contract workers who work alongside full-time employees but 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 social inequities, since contracted workers are more likely to be racial and gender minorities than their full-time counterparts. As part of their stated commitment to equity, companies should adopt a more equitable compensation strategy for contractors that accounts for the hidden costs of contract work.
Who are professional services contractors?
Professional services contractors are individuals who work at technology companies in roles similar to those of 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
, which manage the workers’ benefits and pay. Despite having responsibilities that are substantially similar to those of 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:
The disparity between the experiences of full-time employees and their contractor counterparts goes beyond compensation (integration with company culture, legal protections, and so on) and cannot be completely captured by compensation, but ensuring pay equity is a step in the right direction.
Companies should reduce pay equity disparities between employees and contractors for three reasons:
By maintaining pay disparities between full-time and contract workers, companies extend social inequities that are incongruent with their stated values. A 2016 University of California, Santa Cruz study found that white-collar contract employees were 2.6 times more likely to be Black or Latinx. Data published by Project Include and TechEquity Collaborative 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,15 and poor benefits can lead to decreased work performance and increased turnover.16 And this turnover is not without costs: research shows 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 through systemic under-compensation.
As regulatory and public pressure increases, companies can mitigate risk by proactively addressing contractor compensation equity. Public attention is increasingly being paid to labor issues and worker equity. At the legislative level, there is passed and pending legislation to increase pay equity transparency (such as California’s SB 973) and even enforce pay equity for contract workers with roles similar to those of full-time employees (such as HR 7638). Given the increased attention to tech companies in particular, companies that want to preempt this additional angle of 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 competing priorities to support your reports and effectively manage a business unit. As someone who knows that fairly compensating contractors makes both moral and business sense, you have the responsibility to ensure fair compensation for your reports. During the hiring process, you often have the autonomy to set compensation expectations and/or negotiate for higher salaries on behalf of the contractors 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. The following summarizes steps that a company can take to reduce the pay gap between contractors and full-time workers. The attached
Step 1: Understand the hidden costs that are passed on to contract workers
Companies that are hiring contractors, or are considering doing so, should evaluate their compensation strategy and understand whether they are fairly compensating contractors compared with full-time employees in similar roles. They can use the
Step 2: Define a contractor compensation framework tied to full-time compensation
Companies should create contractor-specific pay bands pegged to the median full-time salary for the equivalent full-time employee (same role, same band), and set goals accordingly to close the average gap.
Step 3: Promote self-transparency
Some Silicon Valley companies have begun publishing pay equity reports, segmenting their pay data by gender, race/ethnicity, and/or age, areas where there has historically been abuse and inequity. They should also disclose these data on full-time/contractor pay to the public to increase transparency and accountability.
Step 4: Update compensation strategy to minimize gaps
Companies should consider the following levers to increase pay equity between full-time and contract workers:
Evaluate whether a portion of their contract workforce can be converted to full-time employment;
Require that subcontracting agencies that they work with provide some of the same benefits as they provide full-time employees;
Address job instability issues inherent to contract work; and
Increase the hourly wage to compensate for benefits that contractors may need to pay for out of pocket.
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