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I have been told that I am going to be laid off at the end of the year but the company would like to make me a contractor for a few months. The company has only asked for my rate and my decision.

I was wondering what do I need to do to set up this contract? Do I need to makeup a formal contract or not?

EDIT: I'm located in the United States.

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  • I am located in the United States. – JKRockStomper Dec 5 '13 at 21:50
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YES

You need a formal contract. The contract needs to include when and how you'll get paid, recourse for disagreements, and other things I haven't thought of.

There are plenty of resources online that will tell you what needs to be in that contract. You may also want to talk to a lawyer. The best way to save money with a lawyer is to use one before you have problems.

As for the rate, that's something you'll need to figure out. A starting point might be to multiply your existing salary times by 1.25 (see edit below) or so, then break that down into an hourly rate. (You'll need to pay your own health insurance and assume you'll be off contract / looking for work a certain fraction of the year).

Another starting point is to find out what other contractors with roughly your experience are charging in your neighborhood.

[edit]

Per comments from thursdaysgeek and mhoran_psrep, my 1.25 factor is terribly low - you'll want higher. 2.0 was mentioned as a better figure.

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  • 4
    Multiply your existing salary by 1.25?! I suppose it depends on location, but in the US, considering the taxes and benefits you'll now be paying yourself, I'm pretty sure that will result in a significant drop in pay. I'd recommend more research than this one question before setting your rate. – thursdaysgeek Dec 5 '13 at 21:13
  • The goal for many companies is to charge a customer twice the employees pay rate to cover holidays, sick, vacation, taxes, benefits, overhead. Rule of thumb: make 50K a year plan on charging $50 per hour. – mhoran_psprep Dec 5 '13 at 21:22
  • Should I draw up the contract or should I let the company draw it up? – JKRockStomper Dec 5 '13 at 22:00
  • @JKRockStomper: Let them draw it up (easier and cheaper to get started), but have your lawyer review it. Submit any changes to them. – NotMe Dec 5 '13 at 22:13
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Ask your company if they usually contract through an agency; if so, all you'll have to do is go meet with the agency and sign the contract and the usual hiring paperwork (such as direct deposit and whatnot). You will then be a W-2 Employee of the agency, on contract with your old employer.

If not, they're expecting you to be a 1099 Contractor, or an Independent Contractor. In this case, you'll want to draft up a contract with the company as the others have suggested.

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YES you need a contract.

It should include, at minimum:

  1. What your deliverables are.
  2. Where you are expected to work / who provides equipment and software.
  3. Who to invoice / when you will get paid.
  4. Assignment of legal costs to the prevailing party if legal action has to be taken to collect.
  5. Interest rate / fees for late payments.
  6. Start / End date of contract.
  7. Notice period for early termination for both parties.
  8. Who you report to.

Also, you should figure your rate at about DOUBLE your salary (my opinion). In the U.S., you will now have to pay your own insurance (wait until you see what COBRA costs), additional taxes, and "savings" for the down time expected at the end of your contract. If the contract is 6 months to a year, maybe a little lower.

See if you can find someone in your field who is contracting in your market, and ask them for advice. They may even have a contract you can use as a starting point.

You may not need a lawyer, but make sure that everybody's expectations are in writing. Nothing is just "understood" when it comes to contracting.

Thoroughly document your deliverables as you complete them, and do it on your systems, not theirs, or at least BCC your personal email with them.

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