How Can Companies Do Better?

Companies are ultimately at the center of pay equity. They set the pay scales, employment terms, and minimum standards (if any) that their subcontracting partners follow. While there can be financial reasons to underpay workers, full-time or contractors, companies do a disservice to themselves and their stakeholders by perpetuating systems of inequality. Beyond issues of equity, underpaying workers can damage productivity and morale, hurting business interest in the long term.

1. Assess 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. In particular, they should consider the myriad factors that contribute to the pay imbalance between full-time and contracted workforces, broken down into formal monetary compensation (such as equity and bonuses), benefits (for example, health insurance, family planning, retirement) and job stability (such as contract length, employment protections).

See:

Contractor Pay Gap Calculator⁠

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2. Define a contractor compensation framework tied the full-time compensation

This analysis should draw from the concept of pay bands, and 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.

How to calculate the average compensation gap

For example, imagine Contractor A, whose total compensation is $100,000, and Contractor B, whose total compensation is $200,000. Based on the work that Contractor A and B do, they are paired with Full-Time A (total compensation: $150,000) and Full-Time B (total compensation: $250,000), who do very similar jobs as A and B but are full-time employees. The pay equity metric would be calculated as follows:

Average Pay Gap for Contractors A and B:

[(Full-Time A - Contractor A) / Contractor A + (Full-Time B - Contractor B) / Contractor B] * 0.5

= [ ($150,000 - $100,000)/ $100,000 + ($250,000 - $200,000)/ $200,000 ] * 0.5

= 37.5%

3. Publish aggregate pay gaps

Some Silicon Valley companies have begun to publish pay equity reports, cutting pay data by gender, race/ethnicity, and/or age, areas where there has been historical abuse and inequity.

Technology companies should publicly disclose the average pay gap for contractors and full-time employees performing the same duties (see above for sample metric). The disparities should be calculated using an equitable compensation framework including factors that are frequently “hidden.” We’ve developed a sample disclosure form that can be used to publish this type of report.

See:

[Example] Pay Equity Report⁠

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4. Update compensation strategy to minimize gap

Although each tech company will have its individual goals and constraints when it comes to compensation, there are a few levers that they can consider to reduce the gap:

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Assess whether a portion of your contract workforce can be converted to full-time employment.

While there are unique business needs that may make hiring full-time employees for every role challenging, companies should continually review opportunities to transition contractors to full-time positions. For example, hiring managers often cite temporary factors such as project urgency and inflexible headcount as reasons to hire contractors. In these cases, the motivations for hiring a contractor may change and full-time employment may be more desirable for both worker and employer; companies that are committed to pay equity should seriously consider transitioning some of these contract roles to full-time status.

Require that subcontracting agencies you work with provide some of the same benefits you offer to full-time employees.

Although the benefits that a contractor receives are technically defined by subcontracting agencies, the hiring tech company can influence this by demanding minimum standards from these organizations. For example, in 2018, Survey Monkey published

“Vendor Standards”⁠

that required agencies to provide minimum benefits such as 80 hours of PTO, 40 hours of paid sick leave, and health insurance at the Affordable Care Act’s “Gold” tier. These benefits are different for full-time employees at different organizations; companies should focus on reaching “parity” for benefits, which means that there is no difference between the benefits that full-time and contract workers receive.

Address job instability issues

Part of the business case for using contractors is the flexibility that subcontracting provides to staff up or staff down on skill sets. This flexibility has a corresponding effect on contractors, who are more likely to experience layoffs and less economic security given their short-term contracts. Within the structures of the subcontractor relationship, technology companies can address some of the instability experienced by contractors.

Technology companies can share statistics on contractor conversion to full-time employment so contractors have an accurate understanding of the likelihood of converting to full time.

Technology companies can explore the feasibility of longer employment contracts and can require that their partner agencies provide the same severance benefits that the company offers to full-time employees.

Increase hourly wage to compensate contractors for benefits that they may need to pay for out of pocket.

In cases where it is not feasible to provide direct full-time parity in benefits or experience, increase the hourly wage of the contractor to close any additional gaps. For example, it may not be possible for a company to provide performance bonuses or stock equity to contractors; in that case, it should increase the contractor hourly wage by the expected value of the benefits that it cannot offer.

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