It is so companies can lay off entire teams at a whim.

When I was at MSFT, one of the orgs I was in was infamous for having over 50% vendors. On more than one occasion entire teams would be laid off when budget cuts happened.

It is bad for FTE morale to regularly lay off 100 FTEs, less bad to lay off 100 vendors.

It's an interesting part of corporate culture. Large companies hate the process of firing employees for a number of reasons: staff moral, public perception, potential legal liability, etc. This applies whether it's individuals for performance reasons, or entire teams for economic reasons. To avoid this, there is often a lot of (bureaucratic and difficult) process to justify the hiring of a new FTE.

The corollary to this is that it's often a lot easier for a manager to hire a contractor or use an out-sourcing vendor, even if they don't see the requirements of the role being any different than that of a "permie" and even if it costs the company more money.

My suspicion is that it’s a way to dodge labor laws.

It is not defined benefit pensions or labor laws. It is cheaper to scale up and down expenses instead of firing people due to unemployment insurance premiums increasing when you lay people off due to lack of work who are then eligible for unemployment benefits. Also, benefits can get expensive if you also have to offer them to lower paid employees if they normally would not be able to get them at a different employer, due to non discrimination testing.

The benefits are a big one. This is definitely true at Microsoft where benefits are very good even by FAANG standards. Being able to skip those costs for workers that aren’t highly paid devs is definitely a factor in choosing contractors (or “vendors” in MSFT-speak) for many roles.

> the contractor/employee juggling just seems wildly inefficient

Not when HR has to tell an Executive how much money they saved by hiring contractors in order to justify their jobs. HR is one of the most despicable departments in every company. They are company designated Stasi. They provide no value but whatever it is they want in order to justify their paycheck.

It is known.