As companies strive to cut overheads in the COVID-19 slump, I expect a spike in workers being “invited” to convert their job into a "business" that contracts back to the employer. Whether you’re a business owner proposing a “job” business to your staff, or you’re a prospective “job” business owner, there are some red flags to look for in setting up.
These “job” businesses are more common than you might think. E.g. Uber, “franchise” plumbers, pizza delivery, bike messengers, video editors, call centre agents, even the age-old newspaper kid on a bicycle.
It could look mightily appealing to be self-employed, a business owner, especially if it’s your boss selling the idea. After all, it’s worked well for some people, especially knowledge workers, like IT consultants. But it comes with many hidden costs that will surprise anyone new to running a business.
A recent-ish saga highlights some of these challenges. SAB and its subsidiary ABI famously implemented this by converting their beer and soda delivery drivers’ employment to owner-drivers. They helped them own their own trucks and contracted them to operate certain routes. Many drivers earned good money, initially.
The romance ended when SAB increased targets, affecting driver’s pay and, ultimately, ended many drivers’ contracts. The ex-drivers equally famously sued for lost earnings of about R6.3 billion in a highly politicised saga. (City Press, Nov. 2015)
If you find yourself facing the lure of contracting back to your ex-employer, here are the key caveats:
1. Is it legal?: there’s a long legal checklist, like compliance with labour law and the terms of your employment contract, but at the heart of it, you can smell how legal it isn’t if the parties can’t negotiate as equals.
If you can’t refuse the offer without fearing reprisal, there’s probably something fishy going on. Get a lawyer.
2. Related, will you control your production process?: to be deemed an independent contractor, your client must have very little say, if any, about when and how you work. Criteria like output standards and deadlines can be contracted but cannot be unilaterally imposed – see above, it’s a contract between equals.
Warning: it cuts both ways. Your client is not obliged to hire you for the next contract if you can’t agree on the terms, regardless of anyone's opinion of how in-/sane the terms are.
3. Are you free to engage customers?: again, this is a key test separating employees from service providers. There’s nothing wrong with exclusivity, especially if there’s a genuine win-win for both sides.
Just beware the risks of having all your eggs in one basket and falling into the consultant’s trap, the repeated cycles between too much work and no work.
4. Is it feasible?: does the business case make sense and, more importantly, have you factored in all the costs in your forecast?
This is where all those hidden costs can cripple your new “business”. The obvious costs are everything you indirectly “earned” as employee, like paid leave, medical aid and other benefits, training and non-productive time like staff meetings that you will now have to pay for yourself.
The more your work looks like pure consulting, the easier it is to calculate your compensation for downtime when paid by the hour. I recommend your contractor pay should be at least 133% of your salaried cost to company. If your work involves more than just consulting time, budget way more than this.
I’ve heard too many stories of workers, like ABI’s owner-drivers, converting to a service provider only to be burned by unexpected costs. As a truck owner, you’d also look after maintenance, licencing, and HR admin (for co-drivers and loaders). These are the costs your employer wants to lump onto you.
But the real hidden costs don’t all show up as expense items on the income statement. Instead, they look like gaping gaps against “dividends to shareholders” or “retained income” on your balance sheet.
Even more insidious, even if you do earn good money, doing your marketing, HR, invoicing, tax returns and business admin will probably happens after hours. For many small business owners, this is the most common complaint we hear – working too much for too little reward.
While 20-20 vision is perfect, you can probably pre-empt most of these surprises by simply drawing up not only a detailed budget forecast of money in and out, but of your time needed to make it worthwhile.
If your take-home pay as a business owner is not significantly better than your salary, why would you want to ditch your job for owning the same job, just with heaps more stress?
This applies to the employer, too – if you won’t see significant savings, then the re-organisation is not much different from most other company re-orgs: wasted time.
Whether you’re a current small business owner or soon to be invited to resign for this scenario, do your homework!