Silicon Valley’s dirty secret: Using a shadow workforce of contract employees to drive profits

  • This year at Google, contract workers outnumbered direct employees for the first time in the company’s 20-year history.
  • This trend is on the rise as public companies look for ways to trim HR costs or hire in-demand skills in a tight labor market.
  • Some 57.3 million Americans, or 36% of the workforce, are now freelancing, reveals a 2017 report by Upwork.
  • Workers with jobs in higher wages are more likely to have their services contracted out than jobs associated with lower wages, according to a recent study.

As the gig economy grows, the ratio of contract workers to regular employees in corporate America is shifting. Google, Facebook, Amazon, Uber and other Silicon Valley tech titans now employ thousands of contract workers to do a host of functions — anything from sales and writing code to managing teams and testing products. This year at Google, contract workers outnumbered direct employees for the first time in the company’s 20-year history.

It’s not only in Silicon Valley. The trend is on the rise as public companies look for ways to trim HR costs or hire in-demand skills in a tight labor market. The U.S. jobless rate dropped to 3.7 percent in September, the lowest since 1969, down from 3.9 percent in August, according to the Bureau of Labor Statistics.

Some 57.3 million Americans, or 36 percent of the workforce, are now freelancing, according to a 2017 report by Upwork. In San Mateo and Santa Clara counties alone, there are an estimated 39,000 workers who are contracted to tech companies, according to one estimate by University of California Santa Cruz researchers.

Spokespersons at Facebook and Alphabet declined to disclose the number of contract workers they employ. A spokesperson at Alphabet cited two main reasons for hiring contract or temporary workers. One reason is when the company doesn’t have or want to build out expertise in a particular area such as doctors, food service, customer support or shuttle bus drivers. Another reason is a need for temporary workers when there is a sudden spike in workload or to cover for an employee who is on leave.

“At the end of the day, TVC (temporary, vendor and contractual workers) are an important part of the workforce, but they are not Google employees and not privy to the same confidential company information that full-time Googlers are,” the spokesperson said.

“Our vendor workers are valued members of our Facebook community, and we are committed to providing a safe, fair work environment to everyone who helps Facebook bring the world together,” said Anthony Harrison, director of media relations at Facebook. Spokespersons at Amazon and Netflix did not respond to requests for comment.

Higher earners are in higher demand

Contractors can help to keep the official headcount low and, because contract workers don’t get the same benefits such as health-care benefits or 401(k) matching, can help companies free up millions to hire and retain talent in areas such as artificial intelligence. On a larger level, the trend toward more contract workers can be seen as another sign of widening inequality as it creates an underclass of workers who are, by all appearances, working full-time but getting none of the benefits of full-time employment.

According to a 2016 study by researchers Chris Benner and Kyle Neering at the University of California Santa Cruz, the information sector in Santa Clara county has quadrupled in size in 2001, and the tech industry has added surprisingly few jobs since 1990. Over the last 24 years, direct employment in tech products or services companies has grown by 31 percent, which comes out to an average growth rate of 1.1 percent. Part of that reason can be tied to the rise of subcontracting.

It’s not just administrative or “blue-collar-type” jobs that are being affected. Whereas 10 years ago, most contractors were in administrative-type roles, today the fastest growth in contract work is in highly skilled “white collar” roles, recruiters say. Economists Lawrence Katz and Alan Krueger in a 2016 study found that workers with jobs in higher wages are more likely to have their services contracted out than jobs associated with lower wages. Such “alternative” work arrangements are becoming more common among older and more educated workers.

“The hiring market is crazy competitive. I’m not sure it’s been like this before. You can send 100 emails, and maybe 10 respond. There is far more demand than supply. Because there is such a shortage, companies are more willing to hire on a short-term basis,” said Cheryl Liew, a Bay Area-based independent recruitment consultant who works with start-ups such as Instacart.

In Silicon Valley the competition to hire in-demand talent is particularly fierce. Large tech giants, such as Google, Facebook and Amazon, tend to pay better and suck up a lot of the talent, leaving start-ups and smaller companies in a bind.

“With a record-high hiring boom, staggering real estate prices and so many high-profile technology companies headquartered in the Silicon Valley, the intense competition for talent leaves many small and midsize companies in a very tough spot when it comes to scaling their efforts,” said Rich Pearson, senior vice president of marketing at Upwork.

Growth drivers of the gig economy

There are several factors driving growth in the gig economy ,and lower cost is one. The growing service economy has created a whole workforce of part-time, flexible workers. Platforms such as Uber, Instacart, Upwork, Task Rabbit, Fivrr and others have made it easy for Americans to earn some supplemental income or work full-time as a contractor.

For these types of roles, the payoff for companies is namely financial. Contract workers aren’t entitled to health insurance, 401(k), disability insurance or other benefits. They can also be easily scaled up or down based on demand. Companies dealing with a temporary surge in demand or need a niche skill to build a new product like this flexibility.

“A lot of times, we might not have budget for a full-time employee but we can bring in a contract worker,” said one manager at a large Silicon Valley tech firm, who did not want to be identified. Contract workers tend to fill more “grind it out type roles” that need manpower or less senior roles that have less impact on the company’s core business, the manager said.

Because of the perceived risk, contract workers are sometimes held at arm’s length. They have different colored badges for security reasons, are not invited to sensitive company meetings with projection figures, and can also be excluded from fringe benefits such as company outings or free food at the cafeteria or local transport.

That said, companies across the valley do tend to “upgrade” high-performing contract workers to full-time status. “No matter if they’re full-time or contract workers, companies are spending time and money to train them” so it makes sense to make them full-time, the manager said.

For in-demand contractors the ‘sky is the limit’

For just as there are many who are used by the system, there are just as many who are using it to their advantage. There are a growing number of workers who remain independent because they choose to. For the most in-demand skills, such as data scientists, there can even be bidding wars. Contract workers in these in-demand areas can take their pick of projects, command high rates and then take time off or move on to another project.

“There are six-month CFOs or two-year CEOs who do what they need to do. Then the person goes on and starts new projects,” said Chris Dwyer, vice president of research at Ardent Partners, a research and consulting firm.

Ten years ago contractors were often used to fill in for employees on leave. Now it’s more likely that companies are hiring temporary workers in very sought-after fields, such as certain “hot” computer-programming languages or data scientists to develop artificial intelligence or machine-learning programs because they have no other choice. “That means for companies to gain access to them, they have to use contractors,” said Brian Hoffmeyer, senior vice president at Beeline, a tech company that helps companies manage their contingent workforce.

Anton Anismov, a freelance software developer based out of Redwood City, California, said it’s quite possible to make more as a freelancer than an employee. He also said that working as a contractor has given him the opportunity to build his network of contacts and learn other skills, such as sales, marketing and product design.

“As a freelancer, I can choose to work hourly, so that means of course a higher hourly rate. I would say you can earn two times more,” Anismov said. “I enjoy learning new stuff. For me it is much better than playing Ping-Pong or spending hours at lunch. It really depends on what you want to achieve as a freelancer. For me the sky is the limit.”

Changing attitudes about a flexible workforce

With the number of contractors growing — the ratio of contract workers to full-time employees can be at or over 50 percent at some companies or in certain departments in Silicon Valley — companies are having to change the way they treat their contract labor force.

“Some companies have fairly outdated views about how they treat contractors,” said Hoffmeyer, “It’s an old-fashioned viewpoint, and we’re seeing that start to change on a company level, and legislation will start to change this as well.”

“The different-colored badges and all that — that’s a vestige of an old mentality. It shows that companies don’t have the correct mentality about using flexible talent,” said Rob Biederman, co-CEO of Catalant, a software company formerly called that helps companies hire freelancers in areas such as business strategy, financial modeling and research.

Some workers are pushing back, and companies are acquiescing. Earlier this year, SurveyMonkey started providing full benefits, including medical, dental and vision plans and paid time off, for all contractors at its San Mateo headquarters after finding that employees felt the company wasn’t doing enough for its contract workforce.

Although companies are unlikely to offer benefits such as health care, stock options or 401(k) to contractors anytime soon, those with growing contractor workforces are starting to blur the lines a little. Companies might not enforce rules that don’t allow contract workers to eat for free in the cafeteria, for instance, or enforce rules that officially don’t allow contract workers in extracurricular employee-only events, like a baseball game. Much is also up to the discretion of the manager and how they want to treat contractors versus employees.

As the number of contract workers increases, the average tenure of full-time employees is also declining. In Silicon Valley, gone are the days when steady employment at one company was seen as a good thing. Some managers may see a four-year tenure as a red flag that an employee couldn’t get a job anywhere else.

“Permanent employment — there’s no such thing anymore. The line will get blurrier and blurrier,” said Beeline’s Hoffmeyer.