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Contractor Hiring Surges During the Pandemic. What Does It Mean for the Business Workforce?

Liz Wilke Principal Economist, Gusto 

The COVID-19 pandemic has changed the way both employers and employees at small-and-medium businesses think about work flexibility. It’s been reported that 55 million Americans work in the gig economy today–consisting of both contractors and freelancers. The pandemic has accelerated this trend of temporary, flexible jobs that began in the early 2000s and picked up pace during the 2008 Great Recession. However, very little is known about the impacts of contractor hiring since the start of the pandemic and the business implications during this period and into the future.

New data from Gusto, the people platform serving over 200,000+ small and medium-sized businesses, offers insights into the use of contractors since the start of the pandemic, which was spurred for a variety of reasons: by elevated economic uncertainty, the need for many businesses to rapidly pivot to new business models or systems, and the historically large surge in self-employed workers as a result of pandemic layoffs and disruptions. 

In this post, we analyze both Gusto platform and survey data on surges in contractor hiring during the pandemic. Gusto data shows that larger companies (25+ employees) saw 24.5% year-on-year growth in contractor use last year, meanwhile smaller companies (< 25 employees) saw 10.7% growth. Across industries, we see that the ratio of contractors per employee has increased by 48% since 2017, with almost one contractor hired for every five employees across all industries. Businesses now see contractors as an essential component of their workforces, which has both benefits and costs to society, businesses and workers. Women in particular are at risk of falling behind in this segment, as we observe a substantial earnings gap between male and female contractors. Contract workers offer businesses agility and flexibility to respond to changes in demand for their products or services, develop and execute strategic adjustments to their business model or strategy in response to changing economic and business environments. 

Key Findings

  • Contractor usage accelerated during the pandemic across industries and company sizes. Overall, the ratio of contractors per employee has increased by 48% since 2017, with now almost one contractor hired for every five employees across all industries. Large companies (25+ employees) saw 24.5% year-on-year growth in contractor use last year, while small companies (< 25 employees) saw 10.7% year-on-year growth in contractor use last year. 
  • Contracting isn’t necessarily good for women. A wide and stable gap exists between male and female contractor earnings. The share of women as contractors has increased from 36.9% to 39.2% in five years, and although women have similar contract lengths compared to men, men on average receive over 70% more in earnings than women. In 2021, female contractors have so far earned $0.32 for every $1.00 earned by male contractors.
  • Businesses view contractors as essential to their success. Over 62% of businesses surveyed said either that their company’s success was dependent on contractors or “it would be much harder to have a profitable business without contractors.” And businesses have no plans to slow down – an overwhelming majority of businesses, 90%, indicating they intend to maintain or increase their use of contractors from current levels.

Implications

  • Small businesses rely on contractors as part of their total workforce to remain agile, and gain needed skills and workforce talent. Businesses should have a comprehensive workforce and talent strategy that accounts for both full-time employees and contractors, who add much-needed support during times of surging demand and changing business conditions. They can bring expertise that supports a transition into a new market, or developing a new business process. 
  • Governments should consider how to support this growing segment of workers through policy changes such as improving the portability of benefits (health insurance and retirement accounts), and easing the burden of tax compliance between the two kinds of work. This will provide important stability for contract workers, but also increase their benefits and availability to businesses that see them as essential to their workforce. 
  • Both employers and governments should consider tactics to extend anti-discrimination and fair pay practices into their processes and policies to ensure that women are being paid equally for equal work as contractors. 

Methodology

In this post, we use Gusto’s platform data – the people platform offering full-service payroll, benefits, compliance, and expert HR services for 200,000+ small and medium-sized businesses nationwide – to examine contractor hiring between January 2017 and November 2021 by analyzing pay, industry, gender, and location data for both contractors and employees. 

We also surveyed more than 1,200 business owners who had hired and paid a contractor through Gusto in the last year to learn more about their attitudes and views of contractors as part of their workforce. 

Contractor use is on the rise since the pandemic

The proportion of companies paying contractors increased substantially during the pandemic as companies scrambled to respond to the changing business, economic, health and safety environment, build out new capabilities, and maintain agility in a time of high uncertainty. 

According to our platform data, contractor utilization has been on an upward trend over the last five years, despite volatile growth trends. Figure 1 looks over the last five years and the ratio of contractors per employee across the Gusto platform, which shows an increase by almost half (48%) since 2017. While this number overstates the day-to-day concentration of contractors in the workplace, it clearly shows an increasing trend towards the use of contractors and their increasing importance as a core segment of businesses workforce.

Figure 1: Contractor-to-Employee Ratio Increase

Source: Gusto platform data.

Prior to the pandemic, however, contractor use was decelerating, a result of the tightening labor markets leading up to the pandemic. Between April 2019 and April 2020, Gusto platform data shows the rate of contractor onboarding fell from a series high of 16.3% to 13.3%, an 18% year-on-year decline. Since then, it has rebounded to a series high of 17% across the platform. In October 2021, 17.7% of smaller businesses (< 25 employees) and more than half (52.7%) of larger businesses (25+ employees) paid a contractor in the last 30 days. 

Businesses of all sizes intensified and expanded their use of contractors during the pandemic, but the smallest employers, those with fewer than 9 employees, made the largest relative increases in contractor utilization. In January 2020, our platform data shows 12.5% of businesses with fewer than 9 employees were paying contractors. By August 2021, 16.5% of them were paying contractors, an increase of 32% over the last 20 months, and a 10.7% increase over the last year. Of companies with more than 25 employees, the annual growth rate was even higher at 24.5%. 

Companies are not only engaging more contractors, but are making more frequent use of contractor services. In addition to having more registered contractors on payroll, the number of payments to contractors increased year-on-year between 2020 and 2021. Figure 2 shows that contractor payments are highly variable over the course of the year, but the overall number of payments is up considerably from 2020, as well as 2019. The rise of digital platforms that easily connect businesses to contractors, and the surge in independent employment over the past year will likely drive the continued increase in contractor use as a part of business operations.

Figure 2: Contractor payments between 2019 and 2021

Source: Gusto platform data.

In our survey of over 1,200 businesses, we sought to understand how employers view contractors as part of their workforce. Our survey findings reflect what Gusto’s platform data shows – an increased use of contractors over the last year. We find that over 43% of businesses responded that their use of contractors increased over the last year, compared with less than 10% who said their use of contractors had declined. Thirty-five percent of respondents said that they increased their use of contractors because the company needed the flexibility that contractors can provide, and 30% said that their company needed to expand and contractors helped staff roles quickly, suggesting particular importance of contractors for businesses that are expanding in times of uncertainty.

The COVID-19 pandemic has brought on seismic changes in our society and economy, and businesses and workers need to react quickly to massive layoffs, business closures, and a fundamentally altered operating environment. Of those that had increased their use of contractors, the primary reasons were for flexibility, a trend that is likely going to continue. The overwhelming majority of businesses, 90%, indicated they intend to maintain or increase their use of contractors from current levels.

Businesses view contractors as an essential component of their workforce

Employers view contractors as essential to their business. The surge in contractor use since the pandemic demonstrates the value of the contractor segment of the workforce to the smallest businesses. Small companies’ use of contractors grew fastest during the pandemic, reflecting the large benefit to small companies of having access to agile, flexible labor. 

In our survey of more than 1,200 business owners, 33% of respondents indicated that “the company’s success is dependent on having access to contractors” and another 29% indicated that “it would be harder to have a profitable business without contractors.” Over 38% of respondents indicated that they intend to use contractors more in the future than they have in the past, with 13% indicating they intend to use contractors for new tasks they hadn’t previously used contractors for.

The smallest companies are the most intensive users of contractors. Of the 17% of small businesses (0-9 employees) using contractors on Gusto’s platform, there was more than one contractor per employee in 2021. If 2021’s growth rate continues, this ratio could more than double by 2025 – 31.5% of employers with 0-9 employees could be using an average of 1.7 contractors per regular employee.

Figure 3: The smallest employers (0-9 employees) saw the largest gains in contractors-per-employee during the pandemic

Source: Gusto platform data.

Figure 4: The smallest employers (0-9 employees) also saw the largest expansion in contractor utilization to historic highs

Source: Gusto platform data.

Women need the flexibility of contracting, but it comes with a cost

Over 5 million women left the workforce during the pandemic, and many remain outside of the labor force. Some of them have reentered the workforce as contractors, accelerating a trend since 2000. On Gusto’s platform, women made up 36.9% of contractors in 2017, and increased 6.8% to 39.2% in 2021, corresponding to a 5.1% decline in the share of male.

Some of the features of contracting work appeal to female workers, given the flexibility, autonomy and control contractors have over their work schedules and pay relative to employed work. Gusto’s platform data also shows that since 2019, on average 47.2% of hourly contractors are female, but only 34.2% of fixed fee contractors are female. Indeed, women are more likely to be hourly contractors than males and this reflects the general trend for women seeking more flexible work that allows them to balance multiple priorities. 

However, this flexibility could come with a cost. Female hourly contractors have rates that are significantly lower than male contractors. The wage ratio between female and male hourly contractors has hovered between $0.66 to $0.68 for every $1.00 earned by male hourly contractors since 2018. Comparing all money earned by males and female contractors, female contractors have so far earned $0.32 for every $1.00 earned by male contractors in 2021. This is a slight improvement when female contractors earned $0.27 for every $1.00 earned by male contractors in 2017, an increase of 16.4%.

Not only are women earning less than men, they’re also likely to have shorter contract engagements, which impacts their overall earnings. Although women and men work roughly the same number of days per contract, men’s earnings are between 70% to 93% higher per contract compared to women. This varies across industries, but most male contractors had higher earnings across the majority of industries in 2021, as seen in Figure 5. Controlling for the duration of the engagement, the median total amount paid to males was more than 25% more than that paid to females in 14 of 23 industries. Figure 5 also shows that female contractors earned more in the following industries: Tourism and Accommodations and Personal Services.

Figure 5: Male and Female Contractor Earnings Across Industries in 2021

Source: Gusto’s platform data.

Contracting offers workers flexibility and agility in setting their own hours and taking on work that fits their schedules and obligations–a feature that often benefits women more than men. Women have been disproportionately impacted by the pandemic, a trend we have been tracking, due to outside-of-work responsibilities (e.g. caregiving and household management tasks), and contracting provides much-needed flexibility for managing day-to-day tasks. Yet, wage equality issues appear to be more significant in the contractor segment of the workforce. There are many possible reasons for this, one being that women in the contractor workforce are more likely to be engaged in different work than men, or because women are more likely to underprice their labor as a contractor than men. This is an area for future research, but an important finding, given that we expect contractors to increase in importance as a segment of the workforce.

Key benefits of contractors: skills and agility, not cost

We also investigated whether in addition to bringing special skills and business agility to companies, contractors bring cost savings to companies as well. The answer is that it depends a lot on the type of business and the type of contractor. Table 1 below shows the relative hourly wage between employees and contractors across industries at specific points in the wage distribution. 

The median contractor has the same hourly wage as the median employee across all industries. At lower ends of the wage spectrum, contractors tend to be less costly than employees across many, but not all industries (after accounting for social security and medicare taxes that are required by federal law). And, at higher ends of the wage spectrum, it is common for contractors to cost significantly more than employees, reflecting the specialized skills that contractors tend to bring for highly-skilled work which are hard to hire for. 

Table 1: Contractor Hourly Rate Compared to Full-Time Employee Rate 

Percentile10th25th50th (Median)75th90th
Agriculture0.940.940.931.011.51
Communications0.940.850.821.091.36
Construction0.930.840.780.710.78
Education1.281.261.121.141.21
Entertainment & Recreation1.271.161.261.311.47
Facilities0.900.850.830.820.72
Finance & Insurance1.050.850.780.771.09
Food & Beverage0.971.020.940.810.68
Government1.180.950.830.891.09
Healthcare & Social Assistance0.941.001.121.331.27
Manufacturing0.870.880.860.921.22
Mining & Oil0.830.750.681.111.44
Non-Profits & Associations1.791.181.051.181.36
Other1.011.220.980.770.68
Personal Services0.991.010.940.860.98
Professional Services0.930.940.861.081.35
Real Estate0.940.880.790.680.70
Retail0.901.000.940.941.16
Technology0.760.670.871.051.30
Tourism & Accommodations1.041.130.980.951.18
Transportation & Warehousing0.890.860.770.660.66
Utilities0.820.770.641.181.42
Wholesale1.010.880.840.781.06
All1.051.041.001.181.26

Adding to this nuance is the fact that contractor rates do not appear to be highly responsive to inflation. There was virtually no increase in hourly contractor rates between 2020 and 2021 despite year-over-year inflation of over 6.2%. US payroll workers saw their wages increase 4.6% across the board, but this increase does not appear to be accruing to payroll contractors based on the data from our sample. Contractors may have difficulty incorporating price increases into their services for a variety of reasons. 

One of the large benefits of contractors is also related to the issue of cost and the length of the contract. Contractor engagements tend to be short-lived, and cost less overall than employees for this reason. Thirty-nine percent of contractors received two or fewer payments and were hired for a median of 21 days. Almost half of contractors received three or fewer payments and were engaged for less than 90 days on average. Contractors who were paid between 4-12 times made up 32% of the sample and were engaged for only 293 days on average, about 80% of a full year. The short engagement time means that contractors are highly cost-effective for specific tasks even when their hourly rates exceed the cost of an employee. 

Figure 6: The length of contractor engagements is declining over time in all industries

Source: Gusto’s platform data.

Employers value the skills and abilities that contractors bring. In our survey of more than 1,200 businesses, of employers whose use of contractors increased, sixty-three percent (63%) somewhat or strongly agreed that “contractors at my company tend to have skills, experience, or knowledge that are very hard to hire for.” In addition, over 10% of employers also said that contractors were important during the pandemic to bring hard-to-find skills to their business and another 10% said they increased their use of contractors because there were more high-quality contractors available. 

Note: Some companies include a number of benefits to employees but not to contractors, such as health insurance and savings plans. We did not factor these benefits into this analysis, since they vary greatly by company, but they affect the cost-tradeoff for companies who are developing a workforce strategy that includes contractors.

Conclusion

Contractors have filled an important function in the labor market for American businesses during the pandemic. Massive layoffs increased the availability and supply of contractors in the first months of COVID-19, and workers’ continued reassessment of work-life priorities means that many workers will choose to continue as contractors. Companies intensified their use of contractors to meet the changing business environment and fill talent gaps quickly as their business models changed overnight, and we expect companies to continue to make use of contractors to provide hard-to-find skills and agility as the economy remains in flux during and after the pandemic.  

Under many guises, the main benefits of contractors to businesses are: agility and capacity. At early stages of business, contractors can expand the ability of the business to meet growing customer needs. At more mature stages, contractors are more often used to provide additional, more complex services as the business grows more sophisticated. 

In the long term, this trend will continue because employer-employee relationships are shifting as employees become major stakeholders in business decisions, businesses require more agility, and many workers are demanding more flexibility and autonomy. Businesses can take advantage of the benefits of this growing pool of workers by thinking strategically about their talent needs, and assessing all the ways they can support business growth. We don’t see the viability in contractors going away any time soon and expect contractors to grow as a core segment of businesses’ workforce and be incorporated in the overall hiring strategy. 

Updated: December 14, 2021

Liz Wilke
Liz Wilke Liz Wilke is a Principal Economist at Gusto, researching the state of work and business in the modern economy. She is a veteran of both the technology and government sectors, where she directed research programs and public spending that supports dynamic, resilient companies and workers across the globe. Liz currently lives in Washington, D.C.
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