Surviving a layoff

Carl Clay, 36 Clinical Publications Director Wilmington, Del.

Before you sign on the dotted line ...

Offered temporary work? Don't accept until you know the answers to these three questions, says James Ziegler, director of Solo W-2, which provides services to contract workers.

How will I be paid?

Contract workers can be designated either W-2 or 1099 employees for tax purposes. If you're the latter, taxes aren't taken from your paycheck, so you must budget for estimated income taxes, as well as Social Security and Medicare. W-2 workers are square with Uncle Sam but have fewer retirement options (see the main story).

Is this a fair wage?

Ask how much the temp firm is charging your would-be employer. A good staffing firm will pay you at least 65% of that rate, says Ziegler. If the firm won't share, see if you can find out via Payscale.com or Salary.com what comparable full-timers earn; you should be getting more, given the lack of benefits, Ziegler says.

What are the restrictions?

Have an employment lawyer review the contract for troubling clauses. Some staffing firms make claims to intellectual property you create on the job. Many insert language preventing you from working for a competitor within, say, 200 miles for two years following termination. Ask for that to be deleted (or at least reduced).

On the plus side, Carl's job is just 15 minutes away. So he has time to watch TV and wake the kids before leaving at 8 a.m.

Since he can't work more than 40 hours a week by contract, Carl is home by 4:30 - ready for homework duty.

Three fast fixes

Carl's layoff, and his new job uncertainty, have shaken the Clays' financial security. To regain it, they should:

1. Do a refi.

The Clays pay 6.375% on a $200,000 mortgage. Despite their debt and uncertain income, they do have a shot at refinancing, says financial planner Everette Orr. (Carl's credit score is over 700, and they have 16% equity in the house.)They wouldn't get the lowest rate, but even at 5.5% they'd save $200 a month, which they could use to feed an emergency fund.

2. Live on less.

The Clays need to cut their expenses so that they can adjust more easily to swings in income. Problem is, after debt payments, they don't know where their money goes. They should track spending and create a budget that will keep them well under their means, says Orr.

3. Expand the search.

Carl could use the safety of a job with benefits. The pharmaceutical industry has been hard-hit, so he might want to explore other jobs requiring medical or editorial expertise. Two areas to start: hospitals and medical journals, says career coach Win Sheffield.

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(Money Magazine) -- Last fall Carl and Brenda Clay thought they had their financial life under control. After years of struggling to support themselves while Carl got a Ph.D. in molecular medicine, they were finally earning enough to start paying down student loans and credit card debt and saving in earnest for retirement.

Carl, 36, made $135,000 a year, plus bonuses, as medical director for a pharmaceutical communications firm. Brenda, 37, chipped in another $14,000 as a teacher's aide. And the couple had more than they'd hoped for: three beautiful kids; a lovely split-level home in Wilmington, Del., with a recently renovated kitchen; two new cars; and three cats, a dog, and a turtle named Snickers.

But a few days after Christmas, Carl was called in by human resources: His company was downsizing. He was being laid off. "I was stunned," he says. Despite the economy, the firm had seemed to be doing well.

When he told Brenda, she tried to be optimistic. And when he gathered Eric, 11, Hannah, 9, and Mark, 8, the next morning to explain why he was still home in his slippers, Mark hugged him. "It's okay, Daddy," he said. "You'll find another job."

Two months later, however, Carl had few leads and no offers. The pharmaceutical industry was suffering - and so was he. With no emergency savings, the Clays had burned through Carl's two weeks of severance. His unemployment benefits and Brenda's salary were hardly enough to get by on; they were buying groceries on credit.

Just as Carl felt at his personal nadir, the phone rang. It was a temp firm calling about a résumé he'd sent to pharmaceutical giant Astra-Zeneca: Would Carl be interested in a 10-month contract job directing clinical trial publications for close to his old salary of $135,000 a year?

"I was thrilled," he says.

Then he read the fine print: He'd technically be an employee of a temp firm, Yoh Staffing, which offers no 401(k) plan, no bonuses, and no vacation (besides six paid holidays). He'd have to pay for his own health insurance. And, of course, if his contract wasn't renewed, he'd be back in the same boat in 10 months.

Still, Carl felt he had no other choice. He took the job.

In this economy he's probably not the only one who's been forced into temporary work: The number of un employed people who've accepted short-term assignments is up 73% over the past year, reports the Bureau of Labor Statistics.

Trading full-time staff for freelancers and contractors lets businesses cut the cost of benefits and payroll taxes. It also gives companies the flexibility to adjust headcount according to economic demands, says James Ziegler of Solo W-2, which provides services for independent professionals.

A few months into his new job, Carl likes the work he's doing. But he can't help feeling unsettled. He's full of questions: How can I get hired? How do I budget knowing my salary might again disappear? What about saving for retirement? The following answers should help him - and you, if you end up in the same predicament.

Carl has long wanted to work for AstraZeneca; now he has a golden opportunity to make an impression from the inside. He'll need to show his bosses he's not just a gun for hire focused on a single project but someone who can advance the mission of the company, says New York career coach Win Sheffield. He should offer to take on tough projects, pipe up at meetings with smart ideas, suggest solutions, and get friendly with office "influencers."

Sheffield also recommends networking in the office to find out if hiring temps is an experiment or the norm. If it's the former, full-time positions may come back when the economy does. He should ask for a quarterly review to make sure he's on track and let those in a position to hire know he's interested. If it's the norm, he should find out which jobs in which divisions are salaried, then make contacts in those areas who can notify him of open spots.

One thing Carl should be aware of as he pursues a permanent post: Per his contract, he can't come on staff at AstraZeneca for 90 days after his completion date without written consent from Yoh. (Staffing firms use such breaks to renew contracts year after year and protect themselves from losing talent to client companies.) This clause means that if Carl were lucky enough to get a real job with AstraZeneca, he could lose a paycheck for three months. That's a possibility he'll need to plan for.

On paper, the Clays' income will be roughly the same as it was before Carl was laid off. But that doesn't mean they can just resume their old lifestyle. That paycheck comes with an expiration date, after which there may not be another equally well-paying job to be found.

Also, they now have new expenses, such as Carl's health insurance. Fortunately taxes are taken out of Carl's check; some contractors, known as 1099 employees (for the tax form), need to save for Uncle Sam as well.

"Temporary employees really need to scrub their budgets to find places to save," says McLean, Va., financial planner Everette Orr. The Clays might use a free budgeting site such as Mint.com or Quicken-Online.com to see where their money is going and how they can reduce expenses.

A top priority will be finding ways to build emergency savings. Contract workers need 12 months of living expenses banked, says Orr. Even if Carl gets a job with AstraZeneca, he'd need three months' expenses by January to cover that 90-day furlough.

The Clays' $4,000-a-month debt obligations - from their mortgage, kitchen reno, school loans, cars, and credit cards - eat up half their take-home pay, so they won't be able to build that kind of safety net quickly. But refinancing (see "Three Fast Fixes") may free up a chunk of cash.

As a salaried worker, Carl had a lot of perks he'll miss out on as a contractor. Chief among them: subsidized health insurance and a 401(k) with employer match.

Brenda and the kids currently get insurance via her teaching job, but Carl can't join the plan, as he's been offered group coverage by the staffing agency. Luckily, those plans are a decent option: Though the firm doesn't help pay, the rates are good - $100 to $450 a month.

As for retirement, the options depend on how your income is reported to the IRS. W-2 workers such as Carl are technically considered employees. Thus, for tax-advantaged savings, they have merely the choice of a Roth IRA (which phases out at $166,000 in modified adjusted gross income for couples) or a traditional IRA (no income limit if neither you nor your spouse has a retirement plan at work). In either, you can save only $5,000 yearly, or $6,000 if you're 50 or older.

Because he has to focus on his emergency fund, it's unlikely that Carl will be able to save for retirement this year. But if he renews his contract next year and has sufficient emergency savings by then, he should open a Roth at that time, says Reston, Va., financial planner Frank Boucher. "He can take the payout tax-free when he retires, and since he's only 36, the money has a long time to grow."

Workers receiving 1099 income are considered self-employed and can therefore stash away a lot more. They can choose between an individual 401(k), with a $49,000 yearly contribution limit, and a SEPIRA, which allows contributions up to 18.6% of net profits, also maxing out at $49,000.

Carl has called off his job search to focus on his new gig. But since his contract allows either side to terminate for any reason, he should keep looking for a position that pays as well but includes benefits, says Sheffield.

Benefits are worth a lot in terms of compensation - plus his family may need them, since Brenda isn't guaranteed a teaching job in the fall. And since Carl isn't guaranteed work at AstraZeneca either, he needs an all-fronts attack.

In the meantime, however, Carl is starting to appreciate the advantages of contract work. No more late nights at the office, for example. For now, that means extra time with his kids, but he may begin looking for freelance medical writing to help build that emergency fund.

"I'm still ambitious - I'd like to be president of a company someday," he says. "But right now it feels pretty great to go bike riding with my daughter and play Guitar Hero with my son."

Many families are changing the way they spend money with regard to their kids in light of the financial crisis. Are you? Tell us how, at makeover@moneymail.com. For the CNNMoney.com Comment Policy, click here.