Embracing the 21st Century Employee

The rise of the sharing economy has shown that America’s labor laws—such as the 77-year-old Fair Labor Standards Act and 80-year-old National Labor Relations Act—are outdated and do not adequately reflect the realities faced by today’s workers. To try and correct this problem, Princeton University economist Alan Krueger and Cornell University economist Seth Harris recently proposed a new path to embracing a 21st century labor force. 

The popularity of the sharing economy has propelled this issue into the forefront of policy. Right now, workers are either categorized as employees or independent contractors. Employees are given many protections and benefits that are not available to contractors. In exchange, employers set the conditions of workers’ terms of employment. On the other hand, the independent contractor model provides workers with more control and flexibility.

Service providers in the sharing economy, such as Uber drivers, do not neatly fit into either existing category. They resemble independent contractors, but their work depends on the systems that particular platforms provide. This creates uncertainty and costly legal battles for businesses and workers. Moving all of these workers into an employer-employee relationship from their current—but threatened—independent contractor status would substantially hinder the growth of sharing economy, not to mention the work opportunities and consumer benefits that it provides.

Uber and Airbnb offer the technical platform and support to allow these transactions to easily take place. For this reason, Krueger and Harris refer to these types of companies as “intermediaries.” 

The newly-proposed category of “independent workers” would apply to those who work with intermediaries. As Krueger and Harris write:

What should this new class of independent workers look like? Below are some of the points from the Krueger-Harris proposal.

The ability to offer potable benefits without being determined to be an employer is something that many sharing economy firms are interested in. Intermediaries could benefit from pooling their independent workers to secure better rates for benefits such as auto, health, and disability insurance and savings and retirement programs. Unfortunately, intermediaries that offer such benefits are in danger of being classified as employers. Krueger and Harris recommend that a legal carve-out is created to allow intermediaries to offer these benefits and still retain their non-employer status. 

Since intermediaries do not control workers’ hours, and determining how much someone is actually working solely for the intermediary is difficult (if not impossible), Krueger and Harris argue that minimum wage and overtime pay requirements are inapplicable to independent workers. 

Work for intermediaries is often transient, or done in addition to other work, so there is little reason to compel employers to fund unemployment insurance benefits. Independent workers also usually work off-site and use their own materials to complete jobs. For these reasons, workers’ compensation systems should be optional—not mandatory—for intermediaries. 

This means that, under the Krueger-Harris model, independent workers would retain the same treatment as independent contractors when it comes to wages, hours, unemployment insurance, and workers’ compensation. But in other important aspects, independent workers’ treatment would differ from that of independent contractors. 

Krueger and Harris argue that employee civil rights protections should be extended to independent workers. Independent contractors cannot be intentionally discriminated against, but they do not have the extensive level of legal protection that employees enjoy. In the interest of keeping the decision between hiring employees or independent workers neutral—meaning it is determined by a company’s need, not the legal effects of worker classification—Krueger and Harris propose giving independent workers full civil rights protections. This would enable them to bring lawsuits more easily, a boon to trial lawyers. 

Employees face tax withholding from their paychecks, whereas independent contracts have to make quarterly payments to the Treasury to satisfy their tax obligations. On this point, Krueger and Harris recommend that independent workers face withholding. This would create a burden on employers because participants in ths sharing economy often have highly variable incomes, so their estimated tax obligations are unclear. However, since workers’ taxes are required to be paid one way or another, this seems to be a change that would not threaten the sharing economy’s growth.

The most troubling part of the Krueger-Harris proposal is their call to amend federal antitrust laws to allow independent workers to collectively bargain. This would give independent workers the same treatment as employees, who are able to unionize if a majority of an identified group of workers wants to be represented by a union. 

Successful collective bargaining efforts would likely take away many of the benefits of flexible, entrepreneurial work arrangements that independent contractors and independent workers enjoy. Independent contractors are allowed to unionize, but under federal labor law they cannot collectively bargain (though Seattle recently voted to extend collective bargaining to ridesharing and taxi drivers). This makes sense because independent contractors are all their own businesses, a characteristic that in major ways also applies to independent workers under the Krueger-Harris model. 

Why should independent workers who do not want union representation be forced to follow and fund a labor agreement that they do not support? Of course these workers should be allowed to join a union, but it makes little sense to force them to adhere to collectively bargained agreements when they often work with more than one company and/or have another full-time job. Additionally, independent workers have diverse priorities and work arrangements, even when they work with the same intermediary. 

For example, Uber supplies the only source of income for 20 percent of Uber drivers. But Uber earnings only provide supplemental, non-significant income for 48 percent of drivers. Half of Uber drivers work with the company for fewer than 10 hours in an average week, whereas only about 5 percent work for over 50 hours a week. Those who use Uber for supplemental income and part-time work have vastly different concerns than those who use the service for full-time employment. If collective bargaining is allowed, which group’s interests will the union represent? Majority rule could take away one of the cornerstones of the sharing economy—the diverse benefits that flexible work opportunities provide.

What is clear is that the current ambiguous, antiquated system has to change. Krueger and Harris rightly argue that the current worker misclassification needs to be sorted out by federal and state legislators, not courts or executive agencies. Ian Adams of the R Street Institute agrees, as forcing courts to classify the growing category of independent workers as either employees or independent contractors simply does not work. Courts are currently facing the impossible task of fitting a square peg into two circular holes. 

While the sharing economy still accounts for a small percentage of overall U.S. employment, the individualized work arrangements that it embraces make up a much larger, and growing, percent of the labor force. This is why the Krueger-Harris proposal does not make work facilitated through an app or website a criterion for classification as an independent worker. Because of this, some “old economy” jobs would now fall under the category of independent work, rather than employees or independent contractors. Taxi drivers (who are often categorized as independent contractors) and temporary workers (whose staffing agencies are usually determined to be joint employers) are but two examples. 

The main concern over creating a “third way” of employment classification is that policymakers would incorrectly move workers into a higher worker-employer category. For example, if the new independent worker framework is not carefully designed, many current independent contractors could be misclassified as independent workers, and workers who are supposed to fall under the new independent worker classification could find themselves labeled employees. 

This concern is understandable. The Department of Labor Wage and Hour Division’s six-part test to determine employment status has been muddled thanks to a recent administrator’s interpretation that downplays companies’ lack of control over workers’ hours and tasks as a factor in deciding employment cases. This move—which did not have to go before the public for comments—was specifically designed to make it more difficult to attain independent contractor status. 

As well as stacking the deck against independent contractors, workers and businesses also have to navigate the different definition of employment given by the National Labor Relations Board, even though it is another part of the Department of Labor. The Internal Revenue Service and Treasure Department also use different measures to determine the status of work relationships. This ambiguity again shows the need for a single legislative action.

It is significant that economists and policymakers are realizing that today’s workforce requires different rules than those of the past. Krueger and Harris make a strong case that legislative action is necessary to accommodate the expansion of independent work. The alternative is the crippling of the sharing economy by executive agencies set on incorrectly classifying the vast majority of new economy workers as employees. 

Jared Meyer is a Fellow at the Manhattan Institute. Follow him on Twitter here.