Entrepreneur or Self-Unemployed?

According to the Ewing Marion Kauffman Foundation, last year was a golden one for entrepreneurs; more new businesses were created than in any year since 1995. It’s a matter of historical fact that many of today’s highly successful businesses, including Microsoft, Hyatt, Burger King, FedEx, General Electric, and Hewlett Packard, were started during recessions.

But was last year’s boom in start-ups really good news?

A hint at what really happened may be found in the age of these budding small-business leaders. The largest group was in the 35-to-44 age bracket, followed by people 55 to 64. As Robert Reich pointed out in a recent op ed piece in The New York Times, most of these entrepreneurs are not young Internet tech whizzes starting up the next great app factory. Instead, they are people who have lost their jobs and have become self-employed.

I was in this same position at the beginning of 1999, having been downsized from a job in which I managed the development of career information for a computer-based system. I set up a limited liability company, Verbal Media, LLC, and continued to do the exact same managerial work as before, for the same employer, except that now I was an independent contractor.

Because so many workers are now in this entrepreneurial situation, let’s look at its advantages and disadvantages.

The main advantage of self-employment is that you gain a lot of flexibility. You set your own hours and choose which kinds of projects you want to work on--provided, of course that you can find enough business to have a choice! In some ways, you and your clients are on a more equal footing than you would be if you were an employee. For example, while I was on staff at that former employer, I was required to sign a noncompetition agreement that tied my hands for a full year after leaving. But when I negotiated the terms of my work as an independent contractor, I was able to get them to strike any such noncompetition terms from my contract. (With another client, I was able to obtain highly limited terms.)

In the late 1990s, some futurists were arguing that this work arrangement would become increasingly common and was a positive step. It was called the Hollywood model, the idea being that much work in the future would be done as movies are made: as discrete projects, bringing together a team of highly skilled, independent workers who would stay together only for the life of the project.

This work arrangement is a bit easier than it was in the late 1990s. Thanks to health-insurance reform, lack of a company plan is not as scary as it used to be. At least in New Jersey, unemployment insurance is no longer rigidly based on the model that any paid work is equivalent to full-time employment and triggers an end to unemployment benefits.

But now let’s consider the downside of this model. Besides health insurance, workers who are contractors miss out on several other fringe benefits. They pay their own Social Security taxes, pay their own vacation and sick time, and don’t get matching payments into their retirement funds.

They also have to spend a large amount of energy marketing their services (unless they are willing to pay a consulting service a large chunk of their earnings in return for finding clients). Even while they are busy with one project, they must be engaged in finding clients for future projects. These efforts can drain a lot of psychic energy. Self-employed workers often find that the division between work time and leisure time disintegrates. Any time that they are not working at boosting the business costs them future earnings.

Finally, the same bad economic times that caused these workers to lose their full-time employment may create a bad climate for finding clients. They may find themselves self-unemployed. (I first heard this splendid term from Tom and Ray Magliozzi of NPR’s “Car Talk.”)

I’m no longer an independent contractor, but I can understand that this arrangement may suit some workers--including someone in my family who just returned to work that way. And my experience of a decade of working that way has taught me some useful work habits that I apply to my present job as a full-time employee of JIST Publishing. I’m especially glad that I learned the importance of creating a brand and achieving professional visibility. That’s a habit that all workers should cultivate for the sake of job security, with or without their present employer.