Determinants of Employment Externalization: The Case of Temporary Workers and Independent Contractors

This paper examines what determines the use of temporary workers and independent contractors in a variety of organizations. We hypothesize that four factors affect the use of externalized workers: employment costs, the external environment, organizational size and bureaucratization, and skill requirements. Data from a large sample of employers surveyed by the U.S. Department of Labor were used to test the hypotheses. Analyses showed that each factor affected the use of both temporary workers and independent contractors; however, the effects differed across the two types of workers. Firm-specific training, government oversight, bureaucratized employment practices, establishment size, and requirements for high levels of informational or technical skill had negative effects on organizations' use of temporary workers; variation in employment needs positively affected the use of temporary workers. Variation in employment needs, bureaucratized employment practices, establishment size, and being part of a multiple-site firm had positive effects on the use of independent contractors. We discuss the implications of these findings for the study of the employment relationship.