Almost every first world country has them: A legion of newly minted companies with just one person active in the company. They’re called 1099’ers, ZZPers, Freie Dienstnehmer and so on depending on the location but other than that the situations are quite comparable.

For many of these newly minted independent contractors their decision to go that route was born out of necessity rather than a choice made freely. One day they showed up at work, decided what to have for lunch that day and before they could consume their lunch they were out on the kerb with their box of personal belongings under their arm and the local equivalent of a pink slip in their pocket.

Too proud to go on the dole, too old or local economy too lousy to get another job these people decided that if they had no other options left independence would be better than starvation. It’s the new flexibility brothers and sisters, better roll with the tide. In a lot of these cases their first contract is - surprise - with their former employer to continue to do just what they were doing the other day.

Quite a few companies have caught on to the fact that they can lay off their expensive full timers and re-hire them as ‘flex’ workers that are independent enough that they don’t need to have all the trimmings that they had as regular employees. Huge cost savings for the companies and a much more streamlined business.

In my view this is all a huge step backward. Companies and their employees are engaged in a social contract where the companies make bank by assuming some of the risks and the employees hold up their end of the bargain by providing value for their wage. As soon as either the one or the other no longer wishes to hold up their end of that deal something will have to give.

And here is where it will go wrong: as an independent contractor you will likely (especially initially) not be able to afford any kind of insurance that will compensate you for lost income in case you are unable to work for whatever reason. You will likely not be able to pay towards your eventual retirement fund, you will likely not be able to cover the extra cost that your fledgling company has to make in order to comply with all the administrative rules and so on. In short, you are now assuming all the risk, and that carries a price tag.

But because of the Army of New Independents as a rule not being savvy about this little detail you’ll be caught in a race to the bottom where Joe from around the corner (who has no idea about any of this) can and will undercut you in price if you charge what you have to in order to make ends meet and be more or less as secure as you were when you were an employee. That Joe will eventually go bankrupt is currently not on his radar and his customers obviously do not care at all. And when and if Joe hits the wall there will be a whole legion of newly minted Joes to take his place.

This royally sucks because in the longer term that translates into a very large shift of burden from companies to the rest of society, or, alternatively (depends very much on the location) a much larger number of people that will end up in serious trouble.

Another option is for a number of independents in a locality to join forces and to present themselves as a single unified front.

So, to all you newly minted independents: try very very hard not to get caught in the race to the bottom, in the end it is your own neck that you’re cutting off, if you’re going to be working as an independent as a rule your hourly rate should be a pretty high multiple of the money that you were making as an employee in order to offset your down-time, insurances and increased cost. If you can’t manage that you’re doing it wrong and you should re-think your strategy. Ballpark figure: Anything below 70 ‘credits’ ($/#/E) / hour for IT work in the developed world even if you do not have a reputation yet is almost certainly too low.

If your customers are not complaining about your rates you are doing it wrong. (They’re still hiring you, right? Ever met a CFO that loved paying bills?) I aim for roughly 50% rejections based on the rate I’m charging, if it is less than that I’m too cheap, if it is more than that I end up with too much ‘down’ time.

Update, interesting twitter conversation in response to this post, what is my formula for calculating a baseline hourly rate when starting from a salary: I came up with 4.5:1 at a minimum. The reason why (and this is still wrong because we’re calculating from ‘need’ rather than from ‘value’ but that’s another topic entirely) is that you’re going to have to assume ~35-40% taxes, savings for downtime (assuming 50% downtime) and administrative overhead + insurances. The person asking the question figured that going from 60K to 140 / hour would be a ‘hard sell’, but that’s actually not all that big a jump from a customers perspective, they’re not required to keep you on a minute past the time where you are working on a specific job for them, you take care of all the paperwork, you assume some risk in invoicing after a chunk of the work is done, you take care of your own pension and healthcare and so on. Where I live it probably costs 140/hour or more to hire a half decent plumber!