Benefits for the Rest of Us: The growing ranks of contingent workers need a new deal.
By Steven Hill, Washington Monthly, January/February 2016
The safety net for American workers and their families, which in the post-World War II era has been a cornerstone of the middle class, is under assault. Though the economy is growing, for most Americans it feels more like a recession than a boom. That’s because the U.S. workforce, which historically has been one of the most productive and wealthiest in the world, is undergoing an alarming transformation. Increasing numbers of jobs, even full-time ones, lack safety net protections or a sense of security, and increasing numbers of workers find themselves on shaky ground, turned into freelancers, temps, contractors, gig workers, and part-timers. This has been occurring alongside the development of digital, app- and web-based labor platforms that are transforming how labor markets function and have the potential to revolutionize the nature of work—in both beneficial and adverse ways.
The new ways of work are efficient at matching workers with jobs and providing a flexible way for under-employed workers to supplement their incomes. But in this still-early stage of their evolution, these platforms are turning far too many workers into little better than day laborers, with little to no safety net benefits and minimal stability. They provide scant relief from the ongoing deterioration of the traditional economy, which has seen middle-class wages fall flat for more than two decades, a decline in unionization rates, an increase in part-time employment, and a rise in disposable workers. We’ve seen messy lawsuits as courts and regulators attempt to crack down on companies that misclassify workers as contractors—an arduous, expensive, and years-long process that seems unlikely to fix the full problem anytime soon. Some have even proposed creating a new category of worker, to be called “dependent contractor,” which would require different rights and obligations than exist for independent contractors or regular employees. Simpler ways must be found to reinforce and expand existing safety net structures without getting bogged down in whether a worker is classified as a regular, full-time employee, a contractor (whether independent or dependent), a temp, or something else. The best method would be to enact a system of “portable benefits” that can cover the nearly 150 million employed Americans, regardless of how they work or for whom.
Consider Chris Young, an assembly-line worker at Nissan’s manufacturing plant in Smyrna, Tennessee. Chris works alongside dozens of other employees, with everybody doing more or less the same job. But Chris doesn’t get to wear the coveted Nissan jersey that many of his fellow workers wear—because he doesn’t work for Nissan. He works for Yates Services, a private contractor that now provides a majority of Nissan’s workers. Chris told the Washington Post, “I build the same Infiniti SUV” as the Nissan workers, but he and other Yates employees receive half the salary, less job security, and way fewer safety net benefits.
Auto manufacturers increasingly rely on a two-tiered system, using both regular and temporary employees. While Chris is covered by workers’ comp and Social Security Disability Insurance, being in the temp tier means he can’t say no to overtime, doesn’t get paid sick leave, doesn’t receive long-term disability, and sometimes has to work seven days a week, with ten-hour shifts on Saturdays and Sundays. Nationwide, the temp sector has provided nearly a fifth of the total job growth since the recession ended. With the economy continuing to drag along unevenly, temp work has galloped back ten times faster than private-sector employment. And, increasingly, the temps aren’t very temporary. Some have been employed at the same company for as long as eleven years, resulting in the term “permatemps.” (Chris Young is a permatemp.) In 2000, Microsoft had to pay $97 million to settle a lawsuit for improperly denying benefits to more than 8,000 permatemps.
It’s not just temps, either—the deployment of “independent contractors” began in a handful of occupations, such as janitors and security guards, but now it has become pervasive. Companies that can get away with classifying employees as independent contractors avoid paying Social Security and Medicare payroll taxes, overtime, unemployment, workers’ compensation, and other safety net benefits for those workers. That amounts to paying up to 30 percent less on labor, which means a lot more profit for the company. Evidence is rampant that many employers are misclassifying regular employees as independent contractors. David Weil, author of The Fissured Workplace: Why Work Became So Bad for So Many and What Can Be Done to Improve It, and who was appointed by President Barack Obama to run the Department of Labor’s Wage and Hour Division, says, “There still are violations of our standard labor laws that are almost jaw-dropping,” particularly in the area of misclassification of workers. “There are companies out there that aren’t complying because they don’t want to or don’t feel they need to.”
One federal study concluded that employers illegally “disguised” 3.4 million regular workers as contractors, while the U.S. Department of Labor estimates that up to 30 percent of companies misclassify employees. The incentive for employers to engage in this illegal activity is clear: a huge savings in labor costs. And once enough businesses engage in this kind of practice, it unleashes a race to the bottom, putting pressure on all businesses to adopt the strategy to compete. These tactics are what I call the “performance steroids” of the new economy.
While so-called sharing-economy companies like Uber, Airbnb, Instacart, Upwork, and TaskRabbit are allegedly helping workers become the “CEOs of their own businesses,” those workers are contractors, with no safety net benefits or job security. They hire themselves out for ever-smaller jobs and wages while the companies profit. The professional class is far from exempt. Meet Frederic Larson, who enjoyed a successful thirty-year career as a staff photographer with theÂ San Francisco Chronicle, during which time he won numerous awards, including being a Pulitzer Prize finalist.Â As Forbes reports, he got downsized in the aftermath of the recession, and, needing income, he “monetized his assets,” to use one of the gig economy gurus’ favorite phrases. Which means he turned his house into an Airbnb hotel and his spiffy Prius into a Lyft taxi. Now for twelve nights per month—40 percent of his life—he shutters himself in a rabbit hole inside his own home and showers at the local gym while complete strangers have the run of his place. This award-winning professional photographer has been turned into an innkeeper in his own house, and a taxi driver in his own car.
All of these workers in the gig economy are classified as independent contractors. As such, they only receive a wage from the business they contract with: they don’t receive the kinds of safety net benefits or job security that their parents or grandparents may have had. More and more have multiple employers, and their workdays are being segmented and reduced into shorter and shorter “micro gigs.” One new economy booster clarified employers’ new strategy: “Companies today want a workforce they can switch on and off as needed” —like you turn off a faucet or a television.
Things have gotten so topsy-turvy that even the most talented workers are not immune from this trend. Tina Brown, the flamboyant media mogul and former editor ofÂ Vanity Fair, the New Yorker, andÂ the Daily Beast,Â wrote in the Daily Beast that she had noticed with disbeliefÂ the impact on her own associates and friends. “Now that everyone has a project-to-project freelance career, everyone is a hustler,” she wrote. “No one I know has a job anymore. They’ve got gigs”—which she described as a “penny-ante slog of working three times as hard for the same amount of money (if you’re lucky) or a lot less (if you’re not). Minus benefits, of course.” For a while, she added, “the downsized people I know went around pretending they enjoyed the ‘freedom’ and ‘variety’ of doing ‘a whole lot of interesting things.’ Twelve months later, nobody bothers with that cover story anymore.”
What Brown is perceptively expressing is that many of the Americans who lost their good post-New Deal jobs and entered the disordered world of “Uber-ized” work now exist in a whole new universe. This new reality has given rise to the term “1099 economy.” (Unlike regular, permanent employees, who are issued W-2 income tax forms by employers, independent contractors receive 1099-MISC forms; “MISC” is short for Miscellaneous Income, the IRS classification for independent contractors. These are then filed with the IRS using a Schedule C, or self-employment, form, at tax time.) Under the pressures of the 1099 economy, even many regularly employed part-time workers are being subjected to various tactics by employers to reduce labor costs and increase flexibility. One of these is called “just-in-time scheduling,” in which part-time workers often don’t know when their next shift is from day to day or week to week. Like gig workers, such part-timers are basically on call, making it difficult to plan for time off or find child care for work hours. Like 1099 workers, they are subjected to job insecurity, low pay, and little to no safety net.
The advantage for a business of using 1099 earners and part-timers is obvious: employers often can lower their labor costs dramatically, since they are no longer responsible for many of these workers’ safety net benefits. Part-time workers usually have to work above a certain number of hours per week to qualify for benefits, and employers make darn sure those workers never reach that threshold. Outsourcing to this growing multitude of 1099 workers and part-timers has become the preferred method for America’s business leaders to cut costs and maximize profits. Corporate America, once the anchor of the “good jobs” economy that came out of the New Deal era, is increasingly relying on these kinds of workers as a core part of its new business model.
How widespread are these labor force trends? The truth is, nobody really knows. In April 2015, the U.S. Government Accountability Office issued a report saying that “the size of the contingent workforce can range from less than 5 percent to more than a third of the total employed labor force, depending on widely-varying definitions of contingent work.” The Harvard University economist Larry Katz cites two pieces of evidence that lead him to conclude that current measurements, which depend on household surveys and workers’ self-reporting of their status, are “missing a large part of the gig economy.” For starters, the share of workers receiving 1099s increased in the 2000s. Estimates of the proportion of people in several major cities who received 1099 formsÂ from their employers ranged from 10 to 20 percent. And the proportion of people filing Schedule C forms with their income tax returns had increased “substantially” in the 2000s, according to Katz, “even though survey measures of self-employment are down.” Zen Payroll, a company that provides payroll services for businesses, used its employment and payroll data and found increases in the share of workers being paid with 1099 forms across many urban areas. Cities like Los Angeles, Austin, and Orlando show a doubling of 1099 workers to 20 percent or higher of the workforce, with the percentage nearly doubling in Seattle and Dallas and joining San Francisco, New York City, Chicago, and Tampa with at least 13 percent of the workforce being 1099 contractors.
So different methodologies are teasing out different responses from the data, as well as from people’s experiences. While solid numbers documenting the shifts are hard to come by, it is nevertheless clear that the old New Deal economy and its safety net are crumbling for millions of U.S. workers, both those working in the traditional economy and those trying to make a go of it in the new sharing economy. And while much of that is a consequence of the accelerated use by employers of the “independent contractor loophole,” there’s been a rapid erosion of the safety net for workers of all classifications. The working conditions are dramatically shifting, and more and more U.S. workers are no longer covered by the laws and regulations of the New Deal social contract.
One of the best examples of how bad things have gotten is the large pharmaceutical company Merck. After Merck sold its factory in Philadelphia in 2008, the new owner fired all 400 Merck employees and rehired them as independent contractors, then contracted with the factory to continue making the same antibiotics for them. By doing that, businesses like Merck can wiggle out of paying for the safety net that for decades has supported the middle class. These perverse incentives are threatening to destroy the labor force and turn tens of millions of workers into little more than day laborers. The sharing economy’s app- and web-based technologies have made it much easier to hire and fire 1099 workers, and we are only in the first stage of knowing how this will affect the labor force over time.
Much is at stake in the resolution of these labor market tensions. So far, the Department of Labor has lacked either the resources or the political will (or both) to crack down on misclassification, and the Republican-controlled Congress has been unwilling to allocate funds even for something as basic as trying to more precisely count the number of contingent workers. (The last time the U.S. funded such a study was in 2005.) So class action lawsuits by labor attorneys have become the last-ditch means for enforcement. In June 2015, FedEx was slammed with a $288 million settlement after a federal appeals court ruled that the company had shortchanged 2,300 California delivery drivers on pay and benefits by improperly labeling them independent contractors. The next month, FedEx lost another case in a federal appeals court over misclassifying 500 delivery drivers in Kansas. Uber is being sued by thousands of drivers and ex-drivers who insist they are employees of the company, not contractors. As reported by Caroline Fredrickson for Washington Monthly, trucking firms operating in Los Angeles and Long Beach lost two major court battles with drivers claiming that they also had been robbed of wages by being misclassified as independent contractors.
Yet lawsuits are hugely expensive to mount and take years to wind their way through the courts. Other tools need to be found that can help prevent the 1099 economy from becoming a disaster for the American middle class. The problem created by the new digital economy is not merely one of inequality, which is typically thought of as income inequality. The challenge really needs to be reimagined as one over how to stabilize the economy and reestablish economic security for the broad swath of American workers. One important way would be to figure out how to provide the support structures that workers and families need in order to feel a measure of protection and reassurance, regardless of their employment situation or job classification. In a time of stagnant wages and unyielding economic inequality, how do we ensure that millions of American workers have access to a safety net?
Fortunately, we already have a working model that can be adapted. As former Treasury Secretary Larry Summers and others have said, the key is portability: the personal support infrastructure for workers and families must be designed so that the safety net follows the worker from job to job and employer to employer. Such “multi-employer plans” have been used for many years in industries like construction and mining. Most unionized construction workers, for example, are independent contractors and temp workers. Via their labor unions, they contract with an employer to do a specific job, and once that job is finished, their relationship with that employer ends. In any given year, that worker may end up working for numerous employers. Despite the fact that these construction workers are hired on a contingency basis, the types of benefits offered by a multi-employer plan are substantial and fairly comprehensive, on a par with those provided by many large businesses to their regular employees.
Who pays for it? Typically the employer pays a set amount per worker, pro-rated and based on an “hour bank” system tied to the number of hours the employee works for that employer. The specific amount paid by the employer is written into a labor contract (typically $3 to $4 per hour worked by each employee, beyond the wage earned). That amount is set aside via payroll deductions in a fund for each worker’s own safety net, and the fund is governed by a joint labor-management board of trustees.
In Silicon Valley, where thousands of contractors and freelancers (such as programmers, data experts, and software engineers) are hired every week, new companies like MBO Partners are emerging to act as the “employer of record” that handles the benefits of contingent workers who work for many employers. The services of MBO Partners and similar agencies include providing a centralized benefit administration for the worker’s access to safety net provisions such as health benefits, injured workers’ compensation, disability, and 401(k) plans, as well as payroll administration, tax deductions, wage and hour/overtime regulations, and more.
These kinds of multi-employer plans show potential for creating an effective safety net for 1099 workers who are not unionized, and even regularly employed part-time and full-time workers who do not have access to a safety net. Here’s how it could work.
When Nissan, Microsoft, Uber, TaskRabbit, Upwork, or Merck hires any kind of worker, whether regularly employed or a contractor, freelancer, or temp, they would contribute a few dollars more per hour in addition to the wage. Those funds would be placed in an individual security account (ISA) for each worker’s safety net. The amount any business contributes into the ISA would be pro-rated according to the number of hours the worker is employed by that business (if wages are not based per hour but on completion of a job, such as for certain types of freelancers, or on miles driven, like for an Uber driver, the company would chip in a percentage of the gross wages).
These accounts would be structured to pay automatically, via payroll deductions, into existing state and federal safety net programs—Social Security, Medicare, unemployment insurance, and injured workers’ compensation—as well for other safety net components, such as health care and paid sick days and vacations. Workers with multiple employers would earn contributions from each employer, pro-rated to the number of hours worked or a percentage of gross wages, which would accumulate in the ISA (the worker also would have some wages deducted for their safety net, much like regularly employed W-2 workers do now). The ISAs could be overseen by the government (much like a Social Security account) or by private entities (like insurance companies, unions, or agencies specializing in centralized benefit administration), and tracked with a personal ID number.
For example, suppose Donna is employed twenty hours a week by a hairdresser and ten hours a week driving for Uber. She would earn half of the benefits provided by a full-time forty-hour-a-week job from the hairdresser, and a quarter of her benefits from Uber. That would amount to earning three-fourths of her full benefits. Or suppose George works fourteen hours a week selling ads for a magazine, ten hours driving for Lyft, eight hours making deliveries for Postmates, and eight hours cleaning houses for Handy. He would earn 35 percent of his benefits from the magazine, 25 percent from Lyft, and 20 percent each from Postmates and Handy, for a full 100 percent of benefits for a forty-hour week.
This means that if an individual worker lost her job (which typically happens many times a year for 1099 workers), were injured on the job, or suddenly fell ill and couldn’t work a shift, she would have some unemployment compensation or paid sick leave to fall back on. The system also could be structured to provide some paid vacation days per year. In many ways, this would work in a similar fashion to the way Social Security and Obamacare work now, in which a retirement account or a health care account is established for individuals who work for multiple employers. But with the individual security account, each employer who hired that worker would pay a pro-rated amount into the ISA (with much of that directed into existing safety net programs) to cover the various components of that worker’s safety net. The safety net would become portable, staying with the individual as that individual moved from job to job.
How much would this safety net fee cost? We can make pretty decent estimates, including the amount of employers’ contributions for each worker, by looking at how much employers pay now for their regular employees, which the U.S. Bureau of Labor Statistics calculates on a regular basis. Based on those numbers, a basic safety net for most 1099 workers (who tend to be service, sales, and office workers in the private sector) could be implemented if employers paid less than $2 per hour into each employee’s ISA. That minimum basket would be composed of the four types of worker supports that are already legally required for regular W-2 employees: Social Security, Medicare, federal and state unemployment insurance, and workers’ compensation.
If we wanted to make the safety net a bit more generous—to also include health insurance and five paid sick days and five paid vacation days—employers would need to pay only about $2.27 per hour for service-sector workers and $4.19 per hour for sales and office workers to fund the entire safety net package. More expensive plans could be offered in the form of gold, silver, and bronze plans—much like the Affordable Care Act’s setup for health care. We could also phase in certain benefits over time to get a program like this up and running, and then build on it over time. (That model reflects the history of Social Security, which initially, in the 1930s, had modest benefits. As it proved itself to be economically useful as well as popular, it was expanded.)
In short, the individual security account would assume the joint labor-management trust’s role for the individual worker, and form the foundation for the multi-employer safety net. This is an elegant way to address these workers in the 1099 economy, because it renders unnecessary the endless debate over whether the worker is an employee or an independent contractor. It also provides businesses a bit of a “safe harbor” from lawsuits, so that those businesses no longer have to worry that if they provide a safety net for their workers it automatically casts them into the role of an employer, and turns the workers into regular W-2 employees instead of 1099 contractors. It might lead to less litigation, and a less adversarial relationship between businesses and their hired workers.
Indeed, an important consequence of this proposal is that, by putting nearly all employees on a similar footing, we would greatly reduce the incentives for employers to resort to 1099 employees as a way of avoiding paying for benefits and worker supports. Employers would still have the freedom to use a temp, freelancer, part-timer, or individual contractor as a way of responding to consumer demand. Flexibility is beneficial in the labor market, to some extent, and this proposal would not curb that. But by enacting laws and regulations that extend the concept of multi-employer plans and legal parity between different categories of workers, we would remove the corrosive incentives for employers to abuse the individual contractor loophole. Under this new regulatory regime, employers might decide to hire more workers as employees rather than contractors, more thoroughly implementing this goal throughout the workforce than lawsuits could ever hope to accomplish.
What it comes down to is this: a business should not be able to evade paying a safety net fee of a couple dollars more per hour per worker just because that business hires a 1099 worker or part-timer. And regardless of how many employers a person works for, a worker should not be denied access to the support system she needs for herself and her family. The principle of this system is simple: the employer contributes (as does the employee), no matter what the employee’s classification as a worker.
In short, we are talking about extending legal parity to 1099 workers and part-timers so that they are on the same safety net footing as many regular and full-time workers. This is already done all over the world. The European Union, for example, has passed legislation that makes it illegal to treat part-time or temporary employees differently than regular, full-time employees. The EU guarantees that those working through temporary employment agencies receive equal pay and conditions as regular employees. Equal treatment applies not only to pay but also to basic working and employment conditions, including the duration of working time, overtime, breaks, rest periods, night work, vacations, and holidays.Â Other nations,Â such as Japan, Korea, Israel, and Brazil, also provide greater levels of legal parity between different classifications of workers.
Ideally, these changes mandating individual security accounts and legal parity between different classifications of workers would be implemented at the federal level, so that all businesses and employers would be subject to the same rules. But given the current paralyzed state of the federal government, that’s probably not likely to happen. Fortunately, these changes can be implemented at the local and state levels as well. Four states (California, Connecticut, Massachusetts, and Oregon) and nineteen cities (including Washington, D.C., New York City, Philadelphia, and Seattle) have passed paid sick leave policies. San Francisco has a paid sick leave policy as well as a requirement that city contractors provide their covered employees with twelve paid days off per year. San Francisco also passed a law for universal health care coverage before the ACA was passed, which created health care accounts for uncovered workers and required businesses that did not supply health care to their employees to pay into each worker’s health care account. The businesses were allowed to pass that cost on to their customers (San Francisco restaurant patrons suddenly saw a new charge on their bill of 4 percent, dedicated to providing health care for these workers).
A similar strategy could be used by cities and states to establish ISAs for every 1099 or part-time worker, and require that employers (and employees) pay a safety net fee into the accounts, depending on how many hours that worker was employed or, for those paid by the job, the percentage of gross wages.
Many business leaders and lobbyists like the Chamber of Commerce are likely to complain that such a requirement will be a job killer—that it will be expensive and hurt businesses and put them at a competitive disadvantage. But especially if the policies became national and universal, like Social Security is, all employers would be affected equally and no one would be impacted more than anyone else. For many service-sector businesses, competition is usually local, so especially within a geographic area, or within a certain industry (like restaurants) or occupation (like plumbers or janitors), all local employers would be affected equally by the passage of a local law. Other businesses may complain that it will harm their ability to compete against international competitors. But most U.S. businesses compete only domestically, in the huge internal market. Those who compete internationally can rest easy knowing that many of their international competitors are from nations that already have such policies in place, and have had them for years. Are American businesses somehow less vital and competitive than those in Europe, Japan, Korea, and elsewhere?
Other critiques wonder if this proposal would lead employers to depress wages, or even to reduce hiring. Those same types of objections have been raised over whether an increase to a $15 minimum wage might lead to less employment by individual businesses, and were also raised by the business community when San Francisco passed its universal health care law. But as long as businesses are allowed to pass the cost of their ISA safety net contributions on to customers, there is little solid evidence that the feared consequences would occur at a level that would undermine the original intent. In passing a comprehensive social insurance plan like this, the financing costs should be passed on to the largest insurance pool available, which would help defray the costs to the lowest unit price possible. The largest pool would be consumers, since there are hundreds of millions of them. Businesses are the best portal for passing those costs on to customers. Even if the pass-through were inflationary and prices increased somewhat, the tens of millions of workers benefitting from a safety net would also be the customers paying for it. Overall it would create a virtuous circle in which a rising tide lifted all boats.
An employer might say that this will be expensive, but policymakers need to recognize that it’s going to be increasingly expensive for society not to do it. For example, because Walmart pays so poorly and provides such a sparse safety net for its employees, the rest of society—that is, taxpayers—have to foot the bill for benefits like food stamps, Medicaid, subsidized housing, and expensive hospital emergency room visits (instead of doctor’s office visits) for those employees. Forbes reports that Walmart costs U.S. taxpayers an estimated $6.2 billion annually in public assistance for its workers. (McDonald’s employees reportedly cost taxpayers $1.2 billion per year.) Either way, we pay.
Increasingly, the numbers are on the side of modernizing the social contract in this way. This proposal would do more than create legal parity—it would also create universality. All workers would benefit, regardless of their occupation or job classification. Even during the height of the New Deal era, certain workers (such as farmworkers) were left out of the support system and excluded from the National Labor Relations Act. The American labor force has always had insiders and outsiders. So the structure of universal individual security accounts would bring everyone into the fold to a much greater degree than now exists.
The fundamental principle behind this plan is that every worker should have access to a safety net. Basing a new social contract on a system of portable benefits holds great potential, and the idea is gaining currency. Recently a disparate group of forty business, labor, venture capital, and bipartisan think tank leaders issued a statement of principlesÂ based on my plan calling for a stable and flexible safety net. I have participated in meetings with the Federal Reserve as well as representatives from over a dozen congressional offices to discuss my plan for a portable benefits system. U.S. Senator Mark Warner of Virginia wrote an op-ed for the Washington Post calling for an hour-bank system, like the kind “used by the building trades for 60 years, to administer benefits for members who work for a series of contractors.”
Some experts say these new app- and web-based platforms show promise in their ability to match workers with jobs more efficiently than ever before. They also could help underemployed workers find paid work, and provide a flexible way for some workers to supplement their incomes. But if these new forms of work shred the safety net that has supported U.S. workers for decades, it will undermine the potential benefits. Without a better design, the increasing digitalization of the labor market will continue to damage the traditional employer-employee relationship that has been the primary channel through which worker benefits and protections have been provided. Without a modern, updated social contract, these labor platforms already are showing signs of resulting in a race to the bottom, pitting worker against worker in a truly horrific, back-to-the-future way.
A lot is at stake in how the laws and regulations governing our working lives take shape over the next ten years. My great fear is that twenty years from now we will look back at this era and realize that our policymakers did not step up and make the regulatory adjustments that were needed to transition the workforce to the new, high-tech economy relentlessly pushing its way to the forefront. Basing a new social contract on a system of portable benefits holds great potential. We can move forward confident in the knowledge that many other developed countries have already taken this road, and for the most part it has worked out well. The United States is the clear outlier here.
There is, of course, one class of Americans lucky enough to enjoy a generous level of safety net support: members of Congress, as well as many state legislators and city councilors, who spare themselves nothing and provide Cadillac-level support for themselves and their families. Don’t the rest of “we, the people” deserve the same?