Being made redundant, but asked to do contract work after finishing -- how should I negotiate my contracting rate?

Question

I was recently given notice that I am being made redundant- basically because my employer is losing one of their main clients- and am set to finish working at the end of this week.

I don't have another job lined up as yet, and am thinking that I will probably take a bit of a break at this point, and do some travelling for a couple of months, as I have managed to save enough to make this possible.

However, my boss has previously mentioned that he might have some more work coming in soon, though clearly not enough to keep me on permanently, and asked whether I would consider coming back after I finish to do this work on a contract basis.

In theory, I would consider this- I have enjoyed my time at the company, and get on well with everyone there, and it would be a bit of extra cash while I finalise my travel plans...

How should I go about negotiating my rate to come back as a contractor?

Given that I have been working there on a salaried basis, I would think that they will probably offer me my salary on a pro-rata basis... Would it be sensible for me to try and negotiate a higher rate, given that I am being made redundant, so am losing the 'security' of permanent employment (guess it's actually not all that secure!).

Does anyone have any tips/suggestions for how to negotiate this?

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I work in software development- currently for a company whose clients are all within the energy industry.

I don't know about the legalities of this (making someone redundant & then hiring them back), but one of my colleagues who was at the company when I started decided to leave a year or so after I joined, and they paid for him to come back and do some consulting work for a short time after he left. Although it was his decision to leave, and given he'd been there over 8 years (the next longest serving employee had been there about 2 years at this point), there was quite a knowledge gap when he left, particularly as he'd been one of the people responsible for the design and initial implementation of the software we're working on.

I am in the UK.

Edit

Many thanks for all the responses- some really helpful information there. I will take some time to digest it all before I mark an answer as accepted.

Some further developments regarding how my boss seems to intend this 'contract' work to be done- he mentioned earlier today that he wants me to come in next week- also asked about the following week, but I now have other commitments that week. He seemed to think he could 'extend' my current (permanent) contract by a week, even though my formal end date is now this Friday. He indicated that he would expect to continue to pay me at the same rate as I have been payed while an employee here, as I would in effect continue to be an employee for that week... He also mentioned that this was convenient for the person he brings in to do the accounts every month, as it would tie in with the payments made to all other employees.

I understand that I am under no obligation to come in next week, as my contract ends on Friday... Is it worth trying to negotiate a 'contract rate' for this week, or just come in at my salaried rate, in order to not jeopardize the relationship?

Answer 1

It's more than perfectly reasonable, it's crucial, to ask for a much higher rate than you were receiving when you were employed because your previous employer will no longer have to pay costs and fees associated with having you as an employee. That cost will now go onto you.

There are numerous articles and strategic videos out there on how to target your exact number, but the basis idea is to calculate how much you want to earn per hour after all costs have been deducted and then you add up the expected cost of fees, insurance, taxes, VAT, vacation, operation cost, pension, accounting, etc. This results in at least 2-3 times your old salary and in most cases 3x is on the lower end, a lower multiplier than that is usually from inexperienced people.

How much you want to earn after all costs and taxes is something that you must decide. It's perfectly normal to ask for a higher base rate than you normally would in a regular job or on a new project if that's how you value your work for the specific project you're working on, especially if you don't need it and could be spending your time elsewhere. How much is your time essentially worth?

You are not obligated to continue working for them as a contractor unless you want to and you must understand that your service can be terminated without notice, depending on the contract that you sign. Make sure that you're simply taking the route that you think will be the most beneficial to you.

Edit, concerning your followup question:

Is it worth trying to negotiate a 'contract rate' for this week, or just come in at my salaried rate, in order to not jeopardize the relationship?

Yes, it's worth it. You get to make the demands here. They were the one who let you go. Refusing to work for them after the notice period is over is perfectly fine if you don't feel like working for them and should not jeopardise the relationship. You can be polite and thank them for the offer, but it's okay to simply say no if you don't want to do it.

Why? They know the rules. If they've got issues with you leaving after your notice period is over then they're going to have issues with you leaving them a week or two later when they try to extend the extension so don't think too much about it.

Stay if you want, but don't do it for them. Don't mind a low pay? Take a low pay. Want more value for your time? Tell them how much your price is. If they say yes you get a well payed project and if they say no nothing changes for you anyway. Stay for a week or two if you don't mind it, it doesn't affect you financially and isn't of inconvenience to you. Determine the pros and cons of each decision and compare which route has more weigh.

If you're ready to stay but only for the right price you could say that you've made plans so you can't justify staying for your normal pricing but you can re-schedule those plans for the right price if they're interested. Make your demands if you feel like doing the work and if they say no then nothing has really changed for you. It's okay to make offers.

If you do more work for them make sure you've got a written contract before putting in any hours and that the contract extension is legitimate if you choose that route. If you decide you don't mind staying for the regular salary then make sure you're actually on their payroll and that it does not result in then owning you for an additional notice period and if you do the work as a contractor then make sure you've got everything nailed down in a contract on beforehand.

Please be careful about the employer attempting to guilt trip you into staying. That accounting inconvenience should not be a factor in your decision. It really sounds like a guilt tripping bait to get you to stay. It's not like they didn't know how their accounting works before they decided to let you go. If it were a real issue they likely would have delayed the time for when you were let go.

Regardless of the case or question you have, fulfil your contract, make favors when its not inconvenient to you and you're certain you're not being manipulated, but other than that just do whatever it is that you want to do.

Answer 2

For all of the reasons stated, ask a minimum of twice your current salary, maybe as much as three times. If you are unsure of your market value as a contractor, look at JobServe.

One thing work discussing with a financial planner/accountant is that contractors normally work through a limited company in the UK. That will cost about £99 of the shelf, and you are highly recommended to pay an accountant.

Of particular interest to you, if you are near to retirement, are the UK tax bands; from memory

• 0 - £12k = 0%
• £12k to 45(ish)k = 20%
• about £45k = 40%

Another expense is that you will have to pay employer's social security, so it helps to keep salary low & pay your self dividends, which is more tax effective.

A limited company would allow you to take $45k form the company each year, if that is enough to live on, pay approx. £45-12k @ 20% tax) and leave the rest in the company. Then, when you retire, you can continue to pay yourself, and never pay more than 20% of gross, which is much better situation than being permanent staff & paying 40%.

Personally, I always use professionals - and there is a lot of new stuff here that you do not want to get wrong.

You might want to use an agent for the contract work (most companies will insist on it), in which case, they can help you with the financial side.

Answer 3

So, they let you go, presumably because that project ended, although they have another big project lined up. Tsk tsk tsk.

The most important thing would be that you, at the end of the week, when you're being let go, forget that you worked there.

Then, proceed like you would with any potential client: work out a rate that's good for you. That means covering any costs incured by you working there - maybe you have to get a new laptop or smartphone because you cannot use the company device anymore, etc.; maybe you have to create a working space at home because you'll not be in their office regularly, etc.. Also, being non-salaried, you have to account even more for "project" risk; which means that you have to expect being without income after each and every project; or even immediately, if you are doing a T&M contract.

I don't know about UK, but there likely are insurances, pension payments or whatever - being salaried, this might have been payed by your ex-employer; but if you're a freelancer, you will have to take care of this for yourself.

And so on, and so forth; all of this will mean a much higher hourly price.

Also, you will have to negotiate your contract toughly from the get-go. They will expect you to just be an employee who's not on the payroll, whom they can do with whatever they want, as quickly as they want. You have to dispell that notion right away.

Finally, you have to check up on the IR35 regulations in the UK. Which means that what you would be doing could be illegal - freelancing for a single "customer", especially one who employed you immediately before, is clearly not "true" freelancing. Find out what you would have to do to be in the clear, here. These can be measures like making sure you have at least two equally important customers, or not work for one particular company more than X months, or similar. These are just examples, you have to make sure they are valid for your particular country.

It can surely be a great chance to start into independence right away. I would probably not hesitate, provided you got the legalities (ask a lawyer, if in doubt...) and the cost/price issues right. Being not forced to work, as you have put a good amount of money away, is a great boost for your negations.

Answer 4

My question is, how should I go about negotiating my rate to come back as a contractor? Given that I have been working there on a salaried basis, I would think that they will probably offer me my salary on a pro-rata basis... Would it be sensible for me to try and negotiate a higher rate, given that I am being made redundant, so am losing the 'security' of permanent employment (guess it's actually not all that secure!)

Does anyone have any tips/ suggestions for how to negotiate this?

First decide if you actually want to contract or not.

Then determine if you will be contracting on your own on a 1099 basis (where you are responsible to pay your own taxes directly to the government) or a W2 basis through some contracting agency (where taxes are withheld from your paycheck).

Then you need to take a guess as to the kind of leverage you hold. If the company really needs you, then you can hold them up for a higher fee. If not, then you may not be able to go so high. If you are the only person who could possibly do this consulting, and the company really needs the help, then your leverage is higher. On the other hand if the work could be done by a temp, and/or perhaps the company could struggle through without anyone, then your leverage is lower.

Finally, you must decide what rate would make this work worth your while. You have already considered alternate uses of your time. Consider how much money it would take for you to give up those alternatives.

When I retired, I was asked to come back and work (in a far less stressful role and for far fewer hours) on a consulting basis. I decided that I would only ask for what other consultants would get for that role - which was less than I was getting for a salary before retiring. I did the work because I enjoyed it and enjoyed my coworkers, not because I was trying to maximize my compensation.

Many decide that they only need to preserve the purchasing power of their previous compensation. If that is the case, then you need to ask for a rate that would cover your previous salary, plus your previous benefits (assuming that you must pay for benefits out of your own pocket now) along with anything else that the company provided, that you still need, but that you must pay for by yourself.

Many decide that they hold a lot of leverage and should attempt to maximize their rate by requiring twice or even three times their prior salary and benefits or they will refuse the work. Of course this is bounded by what the company is capable of paying and is willing to pay. If you learn the rates of other contractors, you'll have more insight into this number.

Ultimately, this is a personal decision on your part along with a business decision on their part. If you are on good terms with your former boss you could talk it over with him and perhaps even ask for advice.

Answer 5

The other answers do a good job of covering how you should calculate your potential rate as well as pose good reasons as to why you should increase your rate. However, I think you should also consider the fact that you have the negotiating power right now.

If the situation were reversed and you had quit and attempted to come back to the company, they might consider rehiring you but at an undoubtedly lower rate.

They do this because they are in the position of negotiating power. In this instance, you have the power. You are well within your rights and reasons to ask for more money.

Answer 6

Speak to a couple of recruitment agents, about the average rates in your area, check the job boards for contracts requiring similar skill sets and check those daily rates. This will give you a good idea for what your skills are worth, and would give you a good starting point for any negotiation.

IR35 Is a big issue in cases like this.

It was a big thing years ago, to resign or be made redundant and then be hired back as a consultant / contractor doing the same job. The company saved on costs, and the new consultant saved on tax and took home a more money. HMRC lost on a lot of tax revenue. Being hired back to a company you were employed at as a contractor is a big red flag to HMRC. Make sure you take some good legal advice on the contract.

In short, if you are caught by IR35, you will be taxed as an employee, but will not receive the same benefits or protections of standard employment. You will take home A LOT less than you thought if you fall inside IR35.

Also, you need to consider if the company are going to pay your bills on time? As a contractor, you’ll be responsible for chasing payment and stand to lose out if the company fails to pay or goes bust.

Make sure you understand all the costs, risk and implications of being a contractor before signing on the dotted line. There are a number of big accountancies who specialise with IT Contractors and they all have good guides on becoming a contractor.

Answer 7

IMO, I am not be quite so sure whether I would postpone well deserved holidays after leaving a place of work. (hint: I did not).

However, I would advise defining well the scope of work and the duration. If a very short term work, I would charge by project, if medium term work I would charge per day (or do a mix of both). Do not work even a single day without having negotiated rates previously. Define your going price and stick for it.

As a ballpark figure, I have seen adverts for independent consulting work in my area of IT in the range of 300-500 pounds per day.

Do not lose sight that usually consulting work is much better paid than salaried work.

Also be careful about dealing with per day accounting when in a long term arrangement. At the end of the day subtracting weekends, your holidays, the employer holidays/slow months, and bank holidays it translates at around the maximum of 180-220 days of work per year.

In my legislation, putting taxes on top, supposing I am working those 200 days, to make up to the difference, my hourly rate has to be 5x what I currently earn to get the same net amount at the end of year. So if would not be a stretch of imagination charging 10x the hourly rate and on top of that, if not working for several customers.

PS When I was unemployed I refused a false (in the point of view it was a full-time position) subcontracting consulting contract for a big organization here, as 250 euros per day after deducting the yearly non-working days, taxes, and splitting the yearly rate per 14 months (salaried we earn 14 months), was too low for working. My advice is aiming for 100 per hour, for not so regular work. In a distant past, I charge 90/hour to a former boss. If you take less than 10x per hour, they are saving a lot of money and still milking the cow.

PS2 The general consensus that I have of people also doing consulting is that unless you are charging at least 300-400 euros/pounds per day at least, it is not worth it. I personally have met consultants in the Telecom industry charging 20k euros per month due to the "short-term" profile of the projects.