Contractor vs Permanent Job: Which is right for you?

Almost everyone who works will face a choice between contractor and permanent job at some point in their lifelong career.

The choice boils down to answering two questions for yourself

• Are you a risk-averse person?
• Do you want to pursue a management path?

If you are confident the answers to both questions are yes, a permanent job will likely suit you well.

Otherwise, it’d be worthwhile for you to spend some time considering the pros and cons of each option.

Bad news is it may take you a while (can be years) for you to figure it out. Good news is you do have chances to change between the 2 types, especially if you have not passed your career midpoint (e.g. 15–20 years, assuming normal retirement at 65).

This article provides an impartial comparison between the options with tips on what to consider when making your choice.

7 Areas of Comparison

The comparisons below assume general job offerings and requirements from most employers. Individual employers and recruitment cases will likely differ in specific areas.

1. Job Security

As a contractor, you need to find a new job at the end of each contract. But there are many cases your client may hire you as permanent staff after the contract if they see your value.

For permanent employees, there’d be better job security if your company is performing well and not on a decline trend due to changes in business model and technologies. Re-organization may change your role but only downsizing will be a risk to your job.

With increasing uncertainty in the job market due to advancement in technologies, changing demographics, and customer behaviour, there is not much difference in terms of job security between contractor jobs and permanent jobs.

In particular, there is a rising trend that companies prefer to limit the size of their permanent employees (as the fixed layer) and use contractors to satisfy variable demands of resources.

Contract lengths vary but is often between 1–3 years. Longer ones can last over 10 years especially when the employer finds good value from the contractor and strong trust has been built between them.

Contractor work availability will be more sensitive to economic conditions. For instance, when a company needs to downsize, the first to cut will be contracts and contractor resources.

Permanent employees, especially high performers who visibly add value to the company, will likely be the last to go (if ever). For those who are to be let go, there will be severance packages or other compensation equivalent to months of salary (depending on length of employment).

Therefore, young adults who do not have much savings but have a family (and children) do take a bigger risk if they are in the contractor business.

The other angle to consider is whether the industry and job role you’re in are on the rise. If so, the chance of having multiple or repeating contract offers is high and you have virtually little risk of gaps between projects. In addition, your salary will likely grow much faster than that of a permanent job.

The vice versa will be equally true. If you job is easily replaceable or the industry is on the decline, you will face challenge finding new contract after your current one ends. Even if you have a permanent job, you would still risk layoff because of downsizing. The advantage of working as a permanent employee in a large company is that you would likely have a chance to re-skill yourself to a different role.

Bottom line, job security is more relevant to your job role (i.e. the skills you have) and the industry you are in. If you are a permanent employee in a large company, you have more flexibility in re-skilling yourself. You would be on your own if you are a contractor, and you will be under constant pressure to keep your skills up-to-date and marketable.

2. Compensation

Contractors usually receive higher pay in salary terms. No other benefits to be expected. No vacation or unpaid leave during a contract.

Permanent employees are mostly compensated by a fixed salary and (variable) performance related bonus. Additional benefits may include retirement, medical, paid vacation, stock options and preferential rates for loans and mortgages in some cases.

Although total reward should be a fairly objective comparison, many people are slightly biased and attracted to the “guaranteed” higher pay of contractor work.

It will be more prudent to take an impartial and risk-evaluated approach to assess the two options.

You may believe you are young and healthy so medical benefits are not a priority. Do you travel a lot or play adventurous sports? What’s the risk of hurting yourself in accidents?

Retirement benefits are also a key difference. For those who prefer contractor work, you should at least take a portion of your salary out as investments for your retirement. This should be compared against the portion an employer will contribute for permanent employees.

Contractors, being self-employed, usually have ways to claim their expenses as tax deductibles. This can be considered a premium on top of their salary.

In general, an impartial comparison should compare the disposable income between the 2 compensation options. I.e. if you deduct your reserved pot of money for retirement, medical expenses, etc. from your contractor salary, how do they compare? And if you plan to buy a property and you are in the financial industry, compare also the difference in preferential interest rates from bank employees.

If you are on contract work, plan to buy a property or already have a mortgage, you should account for a reserve fund for mortgage payments in case you have a gap in between contracts.

In short, a permanent job’s salary gives you a stable disposable income, plus a range of benefits to protect you from certain risks and contribute to your retirement savings. A fair comparison of contractor salary is to calculate your disposable income by taking out the portion you would reserve for unanticipated spending and retirement (which in turn is based on your risk appetite).

3. Hard skills

“Hard skills” refer to the knowledge about “how to do your job” and is specific to the job and industry type. You need to re-skill or upgrade your hard skill when either element changes.

Contractors are expected to possess expert level proficiency in “hard skills” as required by your contract, such as coding, database support, design, project management, etc.

For permanent employees, while good “hard skills” are expected, they may be given more opportunities to do work in multiple areas and learn new hard skills from formal or on-the-job training.

The opportunity to acquire proficient hard skills on the job should be similar between contractor and permanent employee.

The cost of acquiring additional hard skills would be different though — contractors need to pay for their own training while permanent employees are often funded as part of training from their employer.

If you were to be more concise in the salary comparison, you should reserve a budget for your own training (e.g. training course, equipments & software) from the contractor salary.

4. Soft skills

“Soft skills” refer to people skills, or competencies. They’re about yourself and the skill you need to leverage when working with other people. These skills are “transferable” — applicable to different job and industry types.

Contractors’ soft skills are mainly required for working coherently within their client’s company environment. Networking is critical to ensure contracts keep coming.

Permanent employees will need more well-rounded soft skills to perform well in a team environment. Dealing with internal politics will be a necessary evil.

Latest researches consistently conclude 2 characteristics of soft skills:

• Soft skills are becoming more important than hard skills in the evolving trends of employment because many hard skills can be automated (e.g. AI, Robotics)
• Soft skills take much longer to develop

Contractors usually acquire and practice their soft skills on-the-ground. Some of them may pick up reading habits to self-improve. As their contract work depends on the people they work for and work with, contractors are naturally more motivated to build up their soft skills.

For permanent employees, some companies (especially the larger and well established ones) will offer personal development programs focusing on soft skills. These companies have a need to develop succession plans to ensure the management chain is not broken, therefore it is in their interest to invest on talented permanent employees.

Some companies appreciate highly technical talents and accommodate them with a technical path, reducing the need for them to demonstrate their soft skills. Therefore, nerds whose strengths are 99% on hard technical skills may better off be targeting a permanent position in this type of company.

5. Job Exposure

Contractors will likely be working in the same discipline (e.g. coding, data analysis, digital design) but gain experience from multiple companies and possibly different industries.

Permanent employees will have more opportunities to be exposed to and trained in multiple disciplines. Their exposure will be limited to the business type from a single company.

If you are very good at a certain type of work and you like what you do, contract work can be a good choice for you.

If you are a generalist, not particularly outstanding in a specific area, and have no strong preference on what you like or hate, a permanent job may offer you low-risk and broad exposure to different types of jobs. This will give you time and opportunity to try out different things to find your preference.

Keep in mind employers hire contractors based on their proven hard skills. If a contractor wants to switch to a different discipline, his past experience would be marked down when he tries to apply a job with a new employer. Permanent employees who spent a few years with the company would have built up some reputation. Their transfer to other departments and disciplines is often made possible based on trust from their bosses.

6. Personal Development

Personal development is similar to, and part of, soft skills —the difference is it’s all about you!

For example, you may have learned how to deal with difficult customers and colleagues (a soft skill) but every time you do that, you feel frustrated and emotionally drained. That may be because you are not strong on your emotional intelligence and you are an introvert. “Personal Development” would improve your ability (usually with help from a coach or mentor) to identify why you face challenges in certain “soft areas” and come up with ways to improve yourself.

The outcome of successful personal development is for you to become a well rounded person enabling you to deal with different situations and people through your internal strengths.

Contractors’ soft skills will be acquired and improved through on-the-ground experience. It will rely on their determination to find time and invest on their own personal development at their own cost (e.g. find a qualified business coach).

Permanent employees usually have the benefit of company-offered training for soft skills. There is an upward trend that companies establish talent development programs and recruit professional business coaches for personal improvement. (According to an article from Harvard Business Review, the number of business coaches worldwide has grown more than 60% since 2007).

You can easily find training courses and books for working with difficult people, public speaking, leadership, creativity and even personality assessment. You will need to pair up with a coach or mentor to identify your soft skill gaps and develop the improvements over the course of many years.

7. Career Progression

Continuing as a contractor means you are selling your hard skills and experience. You can be the top expert in a specialized field but it’s unlikely you will move into general management roles.

Permanent employees have 2 choices opened to them. They can focus on a “technical path” to develop expertise in a special field or they can follow a “management path” to be grown into an executive.

This is where the difference is biggest. Contractors can move horizontally but rarely will a company recruit a contractor into an executive position if he hasn’t been in a management role before.

Permanent employees will by nature have the channel to vertical moves. They will get the necessary training, experience and opportunity to gradually move up.

As nicely pointed out in the book “The Five Patterns of Extraordinary Careers” (by James M Citrin & Richard A Smith), the most difficult move from contractor to management is to find a company that trusts him for a management role.

As a young adult, a management position seems far away so picking a contractor job may not matter.

However, after a few years when you have seen what management looks like, you should seriously consider if you aspire to become an executive one day. If you do, you need to plan to move into permanent jobs. You can still switch jobs once you have moved up to management layer but the jump from individual contributor to manager will require you to build up trust from the senior level to give you the chance.

The above mentioned book “The Five Patterns of Extraordinary Careers” will give you good insight about striving towards executive level roles.

Summary

The choice between contractor and permanent job is not straightforward but you can minimize your biases by being more meticulous in comparing the compensation packages and consciously self-assessing your risk appetite.

If you have done well in acquiring your hard skills, developing your soft skills and picking the right job type in an uprising industry, whether a contractor or permanent position makes little difference.

As a matter of fact, if you possess excellent skills (both hard and soft) in your profession, you can get preferential compensation (e.g. bonus, paid training and vacation) even as a contractor. Employers treasure great resources independent of their employment type and will go all the way to keep them for as long as they are needed.

If you have just entered the job market or in your first 5 years, it is indeed a good idea for you to try both.

Your decision will become more critical after 10–15 years or when you have major life event changes (or plans, such as getting married, having children). That’s because your risk appetite may change, you will likely be committing to longer term arrangements and you will need to get serious with retirement savings

That will also be the point in your career to settle in a management path before it’s too late.

One very important element that is often overlooked is the emotional resilience needed for contractors and their other halves. The emotional stress they need to bear between contracts should not be underestimated — the uncertainty during the process of seeking, waiting and dealing with recruiters can be emotionally draining.

To help you with a better understanding about the “management path”, please refer to my article “What you need to know about management: is management path right for you?”