Workers—and society as a whole—bear the cost of shifting work to contractors.
When I served in the U.S. Department of Labor during the Obama administration, we had serious concerns about growing employer use of independent contractors. Responding to similar concerns, Gov. Gavin Newsom recently signed legislation passed by the California Legislature requiring more companies, including Uber and Lyft, to classify contract workers as employees. The new law, scheduled to go into effect Jan. 1, could prompt other states to follow.
One problem is that, in many cases, independent contractors should be considered employees under our workplace laws. Numerous studies document the prevalence of misclassification. And the number of privately litigated cases involving misclassification appears to be on the rise.
Misclassifying workers as independent contractors when they are, in fact, employees has serious repercussions for workers, responsible employers and the public.
Employees who are misclassified lose a wide variety of protections, including those involving federal minimum wage and overtime pay, workplace safety standards, and sexual harassment. They also lose important social safety net coverage under workers’ compensation and unemployment insurance policies.
Employers that must compete against businesses that misclassify are also hurt, since the costs of complying with workplace protections can add more than 25 percent onto labor costs. I remember many responsible employers expressing frustration with companies that broke the law but won contracts or gained market share at their expense.
The public loses, too, in the form of lost tax revenues at the federal and state level. When I served in the Labor Department, we were able to sign cooperative agreements with 36 states (including red states such as Texas, Oklahoma and Alabama) that understood their common interest in combating misclassification.
But the misclassification problem is not the only reason to be concerned. The use of independent contracting is part of a broader restructuring of employment—what I have called the “fissured workplace.” In more and more industries, companies have shifted activities to other enterprises, although they continue to closely oversee, monitor and in many ways control those activities. Through that shift, responsibility for compliance has become murky for workers and businesses (including HR professionals).
There are certainly instances when companies need to draw on the expertise of an independent contractor to get specialized or episodic work done. This has always been an important niche filled by legitimate contractors.
But the ethos of shedding tasks to other companies or individuals means that people once employed directly in a variety of occupations are now going it alone or operating in markets where they face heavy competition.
Moving work outside of the employment relationship means that more people face greater volatility in their income and lower access to benefits, such as health care and pensions, and have limited recourse against many forms of discrimination. For those who are legitimate independent contractors, policymakers should still consider providing a core set of rights and protections when those contractors work—regardless of their employment status. Contractors should also gain easier access to other benefits such as pensions and training opportunities. But these initiatives must be accompanied by policies that follow California’s lead, clarify the boundaries of employment, and crack down on misclassification that harms both workers and responsible employers.
David Weil is dean of the Heller School for Social Policy and Management at Brandeis University and author of The Fissured Workplace (Harvard University Press, 2014). He served as administrator of the U.S. Department of Labor’s Wage and Hour Division during the Barack Obama administration.
Independent workers enable businesses to meet their goals.
The modern independent workforce has become an engine of economic growth, providing increased benefits not only to the companies utilizing independent contractors, but also to the workers themselves. Attempts to restrain the use of independent contractors is a 20th century approach that conflicts with the 21st century workplace and economy.
Independent work is becoming more desirable as the economy and the nature of work, along with workforce demographics, continue to change. As a result, the independent workforce now includes more than 41 million U.S. adults of various ages, skills and income levels. This diverse workforce is a key driver of our economy, generating $1.28 trillion of revenue for U.S. businesses in 2018 and representing 6.2 percent of the U.S. gross domestic product.
In today’s economy, independent workers play a key role in enabling businesses to meet their goals. While cost savings is an important benefit of using an independent workforce, businesses also view independent contractors as crucial to accomplishing other goals, including developing or improving products and services, increasing speed to market, meeting market demands, increasing organizational agility, and achieving sustainability goals and decreasing carbon footprints. In addition, many executives believe that independent contractors improve their company’s overall performance and culture by bringing in individuals with different backgrounds and experiences who can challenge longtime employees.
The benefits to businesses are clear. However, a misconception persists that the so-called fissured workplace is a one-sided relationship in which businesses take advantage of workers by classifying them as independent contractors, and the contractors have no choice but to accept these circumstances. This stereotype does not reflect the reality of today’s workplace.
Employers today are well-versed in the legal risks of misclassifying workers. Federal and state agencies and class-action lawyers aggressively challenge misclassification and bring significant claims under wage and hour, pension, and labor laws. As a result, prudent employers carefully navigate the complex legal requirements in determining whether workers should be considered independent contractors or employees.
Another significant consideration is that the majority of the independent workforce want to work as contractors. A recent study shows that 81 percent of full-time independent workers deliberately choose to remain contractors in lieu of traditional employment. Why? Because these workers find that the benefits of independent work outweigh those provided by traditional employment. For many independent contractors, this includes better pay. In 2019, the average income for full-time independent contractors is $68,300, exceeding the median U.S. family household income of $59,039. About 20 percent of full-time independent contractors report earning more than $100,000. Moreover, independent workers report greater satisfaction with their work than traditional job holders and value the added flexibility afforded by their independent status.
Companies’ reliance on independent contractors has developed into a mutually beneficial relationship. The robust independent contractor doctrine allows businesses to better address their workplace needs while providing a market for workers who prefer not to labor as traditional employees. Curtailing the freedom to utilize independent contractors by imposing 20th century employment restrictions (as some states are doing) is detrimental to the millions who are working independently and to the successful U.S. economy.
David S. Fortney is a co-founder of Fortney & Scott LLC, a law firm based in Washington, D.C., where he represents employers in employment and labor matters. He served as deputy and acting solicitor of labor for the U.S. Department of Labor during the George H.W. Bush administration.