What's happened to the freelancer premium?

Why are freelancers being paid the same as employees when they offer complete working flexibility? Industry experts explain how the once-sizeable 'premium gulf' reward for risk-taking has been filled in...

Nick Wells, founder of the IT market statistics site, Jobstats, explained his view.

He said: "Freelancers have always been paid more than permanent employees. This premium is partly a compensation for the extra risk the freelancer takes on and partly a reward for any extra skills that the freelancer has.

"In the past I've assumed this premium was equivalent to a factor of around two to one. That is - you could expect to get twice as much as a freelancer as you could in an equivalent permanent role. I've used this as a personal rule of thumb for years and that was the premium I got on the two occasions I went from a permanent job into a contract."

Mr Wells said there had been some spectacular changes in this area over the past few years.

The extent of the change is demonstrable by a simple calculation, Mr Wells said.

"By taking a freelancer's 2,000 billable hour year (on the basis of four weeks' holiday, two weeks of bank holidays, a five-day week and an 8.5 hour day); take the median hourly rate and multiply it by 2,000 to get an annual rate. The resulting figure can then be used to compare a freelancer's annual earnings to a permanent worker's salary."

He continued: "In 1999 the freelancer premium was about 1.9 times the permanent rate. At the peak of the boom (Autumn 2000), the premium was about 2.1 times the permanent rate. Six months ago after the worst couple of years any of us had ever seen there was no premium at all. The annualised rate offered for the average contract position was the same as the annual rate offered for the average permanent position! Things have improved a bit since then and the premium now stands at about 1.5."

Mr Wells said the shift in premiums broadly reflects the changes in demand for freelancers, which is proportionate to the number of contract advertisements in the trade press and on the Internet.

"The shift is magnified by the higher volatility of the contract rate, which tends to grow more quickly with increased demand and shrink more quickly as demand reduces. Permanent salaries change much more slowly."

Mr Wells conceded that whilst bonuses are used to fine-tune permanent packages, Jobstats does not capture changes in the area in the adverts it analyses.

Barry Roback, Managing Director of the JSA Group, said there was another more important factor to address when explaining why contract rates are higher than permanent employee rates.

"In addition to the advertised headline permanent rate there are often extras such as pension contributions and private health schemes," he said.

"Employers must also factor in paid sick leave, paid holiday pay and paid bank holidays. In addition, we must not forget the critical extra cost of Employers' National Insurance. In most methods of costing, organisations must also uplift their permanent gross salary costs by a given factor to account for establishment costs and overheads."

Mr Roback provided the following example to illustrate his point:

Gross Salary: 100% Employers National Insurance: 13% Paid Sick Leave: 7% Holiday & Bank Holidays: 12% Medical Insurance: 2% Pension Contribution: 5% Overhead Contribution: 50% Real cost of a permanent employee: 189%

Mr Roback continued: "Anything paid over and above this rate will represent the premium clients are willing to pay to have greater flexibility, a more scalable workforce and a lower perm head count - plus, of course, the premium for skills that may not present within the organisation.

"I believe that this shows a clearer representation of the margin differential between perm and contract labour.

"As to why this margin varies, the answer is purely market forces coping with the rules of demand and supply. And in direct contrast to how the market was in 1998, there is now a surplus of contractors over the current demand for them, and hence their price is driven down," he added.

In other freelancer news, Nick Wells commented he had seen increasing evidence of falling annual rates at all levels.

"This reflects the continuing growth in the demand for contractors and the decline in the demand for permanent staff," he said. This comment also crops up frequently in the Recruitment and Employment Confederation's monthly report on jobs, attributed to recruitment agencies.

According to Jobstats, the average rates advertised for IT freelancers are £21 per hour, and £35,400 per annum for permanent workers.

The five most popular skills sets are:

Management 32.4 per cent - £24 per hour, £39,700 per annum

Support 25.6 per cent - £17 per hour, £31,500 per annum

Analyst 19.1 per cent - £19 per hour, £35,100 per annum

Design 16.8 per cent - £30 per hour, £37,700 per annum

SQL 15.7 per cent - £29 per hour, £33,600 per annum

The five most popular locations are:

London 27.4 per cent - £25 per hour, £40,500 per annum

City 6 per cent - £30 per hour, £46,900 per annum

Berkshire 4.5 per cent - £25 per hour, £37,200 per annum

Surrey 4.2 per cent - £17 per hour, £35,700 per annum

South East 3.7 per cent - £31 per hour, £39,600 per annum