When it comes to jobs, there?s a somewhat standardized version of how they should work. It?s something like full-time hours (35 to 40 hours per week), a guaranteed salary and a full line of benefits. When it comes to job hunting, this is the typical arrangement people look for. Unfortunately ? an increasingly ? the job market seems to be taking a very different direction. Sure everyone wants a salaried job, but contingent income arrangements are fast becoming the new normal.
What is contingent income? At the most basic level, it?s a variable income. Unlike a salary, where you earn the same amount week-in, week-out, contingent income arrangements involve either unstable income, unstable hours, or unpredictable production levels on which your income is based.
As employers continue to move full-tilt with relentless cost-cutting measures, the biggest single target is usually payroll. That makes sense, since in the service economy we?re now in, payroll is usually the biggest expense most businesses have.
The problem for employers is that they continue to need certain minimum staffing levels. But they can no longer afford high fixed payroll costs. Contingent income arrangements become a means of more closely tying payroll costs to day-by-day staffing needs and income flows.
Put another way, contingent income arrangements are here to stay. And if the trend of the past few years is any indication, they?ll only become more common. That?s what we need to be prepared for.
Below are examples of common contingent income arrangements:
In recent years, gig working has become the most obvious example of contingent income arrangements. In a typical scenario, you work as an independent contractor, work variable hours, and income dependent on your production. It?s been growing so fast that most of us come in contact with gig workers on a weekly basis. We most commonly think of people who drive for Uber and Lyft, but it shows up in many capacities.
It?s estimated there are 57 million gig workers in the US, representing 36% of the total workforce. This includes 24% of all full-time workers and nearly half of all part-time workers.
My guess is that the number of 57 million probably somewhat overstates the case. It?s likely that many of those gig workers do it on the side, while holding full-time jobs. The gig is just for additional income.
But there are people who do gig work as a primary occupation, often juggling two or more gig situations at a time. We should expect this to grow, as more companies look to sub-out specific jobs and capacities.
It?s now estimated that 20% of the workforce is employed on a contract basis, compared to just over 10% in 2005. That?s a stunning growth level, and we should expect more of the same in the future.
The advantages of contract work squarely favors employers. They can hire people to do what are essentially full-time jobs, but absent the fixed salaries and benefit packages enjoyed by full-time, permanent workers.
Millions of people take contract work because it?s either common in specific fields (like IT as an example), or the alternative will be unemployment.
But even though income levels can be relatively constant on long-term assignments, the income is ultimately contingent. It?s usually based on a certain number of hours worked, so an employer can reduce hours to save payroll. And when an assignment is over, the employer can release the contract worker without notice or a severance package.
It?s probably the most dangerous form of contingent income, since it gives the illusion of a full-time job with none of the security.
According to the Bureau of Labor Statistics, more than 27 million Americans work part-time, representing about 17% of the total workforce. A large percentage of them are working part-time because they?ve been unable to secure full-time employment. These workers are included as part of the under-employment rate, which is consistently much higher than the official unemployment rate.
Though many people do part-time work by choice, the obvious problem ? for those relying on the income ? is a lack of consistency in hours. Since part-time work is often seasonal, the worker may find herself working something close to full time hours ?in season?, and very part-time out-of-season. That?s a very contingent income arrangement, and one that completely favors employers.
“Full-time” Job, Part-time Hours
My observation here is mostly anecdotal. I have people in my family, and know many others, who are scheduled to work a fixed number of hours. That may be full-time at 40 hours, but the hours are frequently reduced, either due to a lack of work or a reduction of income to the employer.
The complication for the employee is that such jobs are almost always hourly. The reduction in hours translates into reduced pay. By contrast, if the employee is on a flat salary, the employer is more likely to keep him on the job even if there?s little work to do. The alternative is to pay the employee to stay home, which no employer wants to do.
The same Bureau of Labor Statistics report cited above also listed more than 9.3 million workers who are classified as full-time, but work between ?one and 34 hours per week?. For the person who is relying on a 40-hour workweek to be able to pay their bills, a reduction to 30 or 32 hours for one or more weeks can cause budget problems.
It?s a frequent problem of part-time jobs as well. In fact, with most part-time jobs, variable hours seem to be built into the arrangement. Though you may be scheduled to work 25 hours, you may work 38 hours one week, and 12 the next. It?s a budgeting nightmare.
Jobs Where Much of the Income is Bonuses or Overtime
None of these employment arrangements are new, but the contingent income factor has always been part and parcel of jobs that involve either bonuses or overtime.
I?m not talking about situations where those contingent income sources are typically a small part of total compensation. In many jobs, overtime and bonuses represent a significant percentage of total income. They?re often paid to compensate for a low base salary – or to mask it.
This is another backdoor way employers control payroll costs. By keeping base salaries low, they reduce fixed costs. But bonuses and overtime enable employers to provide the income and incentives for employees to work harder at peak times.
The Usual Suspects ? Commissioned Workers, Tips and the Self-Employed
There have always been a significant number of contingent workers in the economy. This certainly includes the self-employed and those who are mostly or entirely compensated by commission income. But it also includes those who earn much or most of their income from tips, and that includes a large number of occupations. Restaurant servers, bartenders, pizza delivery drivers, baggage porters, golf caddies and parking valets are the most common examples.
There?s no indication that any of these capacities are on the rise in recent years. Contingent income has always been part of occupations with those income structures. But workers who earn substantial income from commissions, tips, and self-employment swell the ranks of those earning contingent incomes.
Why You Should be Prepared for Contingent Income Arrangements
So why should you be at all concerned about the rise of contingent income arrangements if you?re currently in a full-time salaried position with benefits? Because contingent income arrangements are the new normal. It?s one of the major reasons so many people feel so insecure, despite record low unemployment. Sure, unemployment may be hovering around 4%, a near historic low. But with tens of millions of people in contingent income arrangements, insecurity is the order of the day.
The point is, no matter what your current employment situation is, there?s more than a slight chance it?ll convert to some sort of contingent income arrangement. Or you may lose your traditional job, and find mostly contingent income arrangements as possible replacements. It completely benefits employers, which is why it?s become so popular. But as is so often the case, what benefits one party costs another. In most cases, contingent income means the employee loses.
Apart from the absence of a steady paycheck and employeef benefits, the main issue is the lack of consistent income. Sure, you might earn $1,000 in a good week, but that might drop to $500 in a bad week. Since contingent income arrangements are becoming so common, you should prepare for one even if you?re not in one now.
Strategies for Contingent Income Workers
How do you prepare? The prospect of a variable income highlights several important strategies:
- Keep your basic living expenses low, particularly fixed expenses like housing and car expenses.
- Avoid debt like the plague, particularly long-term debt. A short term, variable income doesn?t match up well with long-term, fixed debt. Not to mention, debt itself represents an additional monthly obligation.
- Stay liquid. Have solid cash reserves. The typical recommendation by financial planners is to have between three- and six-months living expenses in an emergency fund. If your income is contingent, it should be six months.
- Make sure you have a well-funded retirement plan. Very few contingent income workers have one provided by an employer. But it will become more important as you get older, and need an income supplement.
If Your Contingent Income is a Side Job Consider a Side Business Instead
One of the biggest dilemmas with contingent income is that you?re usually sitting somewhere halfway between traditional employment and self-employment. In fact, you have all the risks of self-employment, with few of the benefits of traditional employment.
That being the case, it may be worth making the full transition over to self-employment, at least if you?re using the contingent income arrangement as a second income source.
There multiple advantages to this:
- You?re halfway to self-employment anyway, so you may as well complete the transition.
- Contingent income arrangements are set to benefit the employer. You?re usually being paid a fraction of the revenue being generated by the work you?re doing. By becoming self-employed, you?ll get 100% of the revenue from your work.
- Self-employment can enable you to develop the contacts that will lead to semi-permanent and even permanent income streams.
- You?ll have more control of your time in over your workflow.
- As a self-employed person, you?ll be able to write off business-related expenses. For example, beginning with the 2018 tax year, you can no longer deduct unreimbursed employee business expenses. If you?re self-employed, you can deduct business-related expenses on Schedule C.
- A business can be expanded to any income level your time and talents will allow. Most contingent income arrangements put a limit on how much you can earn, often at a very low level.
The point is, if you have extra time on your hands and you need extra income, you may as well invest in yourself by becoming self-employed. In that way, you?ll be building a permanent future cash flow. By contrast, contingent income arrangements are just that ? contingent. They?ll come to an end either when the employer pulls the plug, or you get burned out and give up.
Final Thoughts on Contingent Income Arrangements
Since contingent income arrangements have become the new normal in the job market, and are not traditional jobs in any real way, we all need to be prepared for a future ? or a present ? where contingent income becomes our reality.
Are you in a contingent income arrangement now, or have you been in the past? What can you recommend to others in the same situation, or to those who may be contemplating it?