Stories | February 5, 2019

Why freedom in the gig economy costs you more

Many people dream of working for themselves. Yet moving from one short-term “gig” to another has a price.

The last word of Scottish folk hero William Wallace in the 1995 film Braveheart starring Mel Gibson is, famously, a massive shout: “Freedom!” But Wallace’s fight for independence, in truth as well as fiction, cost him his life.

Almost nothing comes free; there are always sacrifices. This is as true for decisions about work and income as anything else. Take the gig economy, for example.

Consider the pay-off
As an independent contractor, you’re technically free to work for yourself, when you want and how you want. And some freelancers are better paid than permanently-hired peers.

The McKinsey Global Institute says people who choose to go freelance are typically happier than full-time permanent employees – as long as they weren’t pushed into it because they were short of cash. This is probably because they chose their situation.

It’s not just the Scots who rail against their leaders and like to feel they’re in control of their lives.

“The result holds across income and age groups, suggesting that freedom itself has real value for free agents,” according to McKinsey.

But the same 2016 McKinsey report skewers a US Freelancers Union claim that three in four freelancers earn more than they did as salaried employees within a year of joining the gig economy.

“However, it is less clear whether these studies are examining gross income or net income that excludes the costs of doing business and benefits,” McKinsey points out.

Clearly, there can be unexpected costs, whether you’re a traditional freelance professional or joining the swelling ranks of Uber drivers, Upworkers and eBay retailers.

No one is suggesting you’ll be hung, drawn and quartered, like William Wallace in 1305, for daring to strike out on your own. But it pays to be prepared.

Earning, more or less
Some gig economy jobs, especially those that are easy to get, use a technology platform to manage the workload. This often goes with the platform company taking a cut of earnings.

Read this for an experience with one popular platform.

But if you don’t sign up on a platform, you’ll still need to market your services – whether by printing and distributing leaflets, setting up a website as a shopfront, or simply buying an advert.

You’ll need to negotiate effectively; it can be hard to work out how to value your efforts, particularly on administrative tasks that don’t seem as important. It may all take more time than if you were doing the same job for an employer that handled the admin.

You’ll want to invest the right amount of time and resources to keep your customers coming back, while still managing your costs and making a profit.

Revenue less expenses
If you work from home, you might save on the commute, but you’ll likely still have some travel expenses. Sometimes you might visit clients. How much will that cost?

If you drive, you’ll typically need to cover fuel, repairs, insurance and regular maintenance as well as depreciation up front. Other items include heating, lighting and internet. You might need to buy additional technology – such as a better computer or printer.

Sometimes you can claim expenses back against your taxes, but rules on this vary and you might have to wait a year or more to be reimbursed by the tax office.

In many countries, employers deduct social security or national insurance contributions from people’s salaries. If so, you’ll have to cover that yourself as well as professional indemnity or liability insurance in case things go wrong with a customer.

In the USA, there’s the full cost of healthcare insurance on top. This is also typically true for those who dream of becoming a digital nomad, working worldwide anywhere they can plug in their laptop.

Future-proofing you
Consider whether you need to update any certifications or belong to a trade organisation so you can reassure customers of your abilities. The danger of stagnating in a role can loom larger for freelancers – even though you’re doing different jobs.

Employees are often offered a range of training opportunities over time, which of course can lead to promotion, new challenges and higher salaries.

You won’t be able to rely on the backing of a trusted company name, as you might have when employed in the conventional way. You may need to invest in developing your own “brand”, which may not appeal to everyone.

What about your retirement fund? Will you make enough to contribute to it, or will you be living contract to contract, unable to predict your income levels with certainty?

McKinsey outlines a 2014 survey that found that half of freelancers had problems getting paid for work done in the previous calendar year. They were owed $6000 each on average, for which some had to wait more than 90 days.

Irregular cash flows can make it harder to borrow money – a service more likely to be needed if clients haven’t been paying on time. Some customers may flat-out refuse to pay, requiring you to pursue them through small-claims tribunals or even the courts.

Running to stand still?
You’ll want to invest the right amount of time and resources to keep your customers coming back, while still managing your costs and making a profit. It’s easy to focus on some parts of a budget for your new initiative – and forget about the rest.

Read more about mental accounting here.

In life, often we don’t look far enough ahead. And we don’t always think about sunk costs – resources that cannot easily be recouped even if it all turns out to be a poor investment. The choice is yours: is independence really worth the price?

eZonomics team
.(JavaScript must be enabled to view this email address)

JobsIncomeMental accountingPresent bias