Using novel indirect employment data and a Supreme Court ruling against subcontracted employment, I show that the contingent employment of skilled labor reduces innovation. Following the ruling, establishments with a higher reliance on subcontracted workers innovate more compared to those with a lesser reliance. This ?nding is conditional on compensation schemes rewarding employees for their investment in ?rm-speci?c skills and long-term performance, stems from collaborations with existing inventor employees, and does not coincide with increases in operating leverage, R&D, or capital intensity.