The Benefits — or Lack Thereof — of the ‘Gig’
As more employees shift their focus to contract work, it’s time for benefit rules to evolve.
There’s a reason the on-demand economy — also known as the “gig,” “sharing” or “freelance” economy — is flourishing.
The gig economy is a near-frictionless system that enables both workers and businesses to be more flexible, and therefore allows capital and time to be allocated more efficiently. It also allows workers to create their own schedules and work, charge what they want, and create their own work-life balance. In other words, it creates a nation of entrepreneurs.
As with every shift in the labor market throughout history, from industrialization to assembly-line production, the on-demand revolution raises many points of contention between labor and the owners of capital. Worker protections and benefits have long been the central point of disagreement in workforce management, and today’s change in the labor force is no different. In the on-demand economy, the incentives for — and protection of — workers has to find the right balance for both sides to benefit.
This challenge is being addressed in an on-demand economy that is booming. Nearly 50 million Americans now self-identify as independent professionals in some form or another. A recent report from the nonprofit Freelancers Union reported that 34 percent of the U.S. workforce is freelancing. Work Market’s own “2016 Corporate On-Demand Talent Report” found that 27 million people are engaged with enterprises in nontraditional work engagements. (Editor’s note: The author is president of Work Market, which is a platform that connects freelancers and employers.)
Additionally, the freelance trend is only accelerating. Market analysis indicates that the number of Americans freelancing will continue to rise in the coming years. Research firm Gartner Inc. expects 50 percent of the U.S. workforce to be freelancing in some way within the next two years.
Given this approaching societal shift, the issue of protecting workers has become magnified. As more and more people enter the on-demand economy and take it upon themselves to manage their careers, the lack of a fair and sensible safety net is becoming increasingly problematic.
A Brief History of Benefits
Current U.S. labor laws were written in an age when there was a clear imbalance of power between companies and workers. The call to regulate the labor markets and offer protection for workers was delivered through an aggressive legislation process, centered around the Federal Insurance Contribution Act of 1935 and the Fair Labor Standard Act of 1938. This legislation set into law a so-called “social safety net” that encompassed protections such as minimum wage, overtime payment, unemployment insurance and workers’ compensation.
Under the FLSA, workers are guaranteed certain protections. It established the 40-hour workweek and ensured reasonable work hours, especially for minors. The right to reasonable pay certified that workers would be compensated fairly. The FLSA would also manage employer compliance with laws affecting wages and fair work conditions.
However revolutionary these reforms were then, they now fall short of addressing the needs of the modern workforce. In fact, in the original acts for the National Labor Relations Board and the FLSA, there’s no definition of what constitutes an employee. According to employment and labor lawyer William Hays Weissman who is a shareholder at the law firm Littler Mendelson, “It was just assumed at the time everybody knew who was who.”
Lawsuits ensued asking basic questions such as: Is this person working for me actually my employee or not? And by the 1940s, policymakers had to look anew at the definitions and began to consider the concept of “economic reality.” The economic reality test tries to determine who is an employee based on whether someone’s economically dependent upon someone else. Unfortunately, that is a rather nebulous statutory definition.
Weissman added: “ ‘To employ to suffer or permit to work,’ that’s a meaningless phrase, but that’s what the FLSA says. For the IRS though, an employee ‘is someone who under the usual common law rules is an employee.’ So regulators define the words with the word they’re defining, which doesn’t make a lot of sense, and we have this situation where you have a variety of tests, definitions that are very unclear, and you have the same problem of trying to figure out who is an employee and who is not.”
The bottom line is that federal, state and local laws are out of alignment with one another. And in the case of the on-demand economy, these laws are out of alignment with the new realities of the evolving employer-worker relationship. This creates confusion for companies and gaps in protections for workers. We don’t believe the law’s intent was to expose workers to risks simply because of how they are classified.
Barriers to Entrepreneurship Explosion
The biggest disadvantage for those seeking to join the freelance workforce is the combination of benefits with an employment model based on IRS Form W-2. The social safety net is almost entirely delivered through the W-2 full-time employment model. However, with up to 50 million working Americans spending time outside this W-2 model (and using IRS Form 1099-MISC) some are being shut out of the social safety net. As a freelancer, an individual has no access to such protections as:
- Overtime pay rules
- Unemployment insurance
- Workers’ compensation insurance
- Paid vacation time
- Sick days
- Family medical leave
- Right of assembly
- Minimum wage
- Americans with Disability Act protections
In addition, as an entrepreneur, a person in the on-demand economy is responsible for their own development, training, health care, marketing and monetization of their skills, and planning for their retirement. These are new crafts these independent professionals will need to master to be effective working in an on-demand capacity. Combined with the above lack of protections, these new skills represent a significant barrier to workers entering and thriving in the on-demand economy.
Another barrier to growth in the on-demand economy is the uncertainty companies face. Because entrepreneurs can file their taxes differently (writing off their home office and business expenses), the government believes there is several billion dollars in lost revenue from workers being classified as freelancers instead of as employees. This “tax gap” has led to a series of highly public crackdowns that, when combined with the opaque regulatory environment described above, leaves companies unsure of when and how they can engage on-demand labor.
With companies unsure how to proceed and workers left with a limited safety net, both sides are clamoring for new policies to unleash the on-demand economy.
A Path Forward
“This next generation, where they are in the ‘sharing economy,’ the millennials, 80 million strong, they have no safety net at all: no unemployment, no workman’s comp, no disability,” Sen. Mark Warner, D-Virginia, told USA Today last year. “Somebody may be doing very, very well as an Etsy seller and Airbnb user and Uber driver and part-time consultant … but if they hit a rough patch, they have nothing to stop them until they fall, frankly, back upon government assistance programs.”
In an effort to empower workers currently engaged in the on-demand economy, while also protecting those seeking to take charge of their own work and earning potential, it will be necessary for all parties involved — including the government, employers and workers themselves — to be a part of the solution.
There is much talk of a new classification of labor somewhere between a 1099 contractor and a W-2 employee. While many of these policy proposals have merit (the dependent contractor and the independent worker are both well-reasoned), we believe they are too far-reaching and complex to have any chance of becoming actual law. What is needed are a series of actionable changes to amend existing laws.
We have some suggestions on how members of each party in the on-demand economy can take certain steps to unleash the entrepreneur in every worker.
Extend basic labor protections to independent workers. Legislation should be amended to extend provisions that today only cover full-time employees. Thus, independent contractors will be eligible for minimum wage protection, overtime payment, freedom to organize and collectively bargain, and civil rights and ADA protections in the same way as full-time employees.
Enable portability of benefits. Freelancers should have the option to purchase annual social services, such as unemployment insurance, which are not tied to a specific workplace. These services could be subsidized for certain income levels, but also allow workers to buy into national and state safety nets to protect them when there is no work. The Affordable Care Act is a step in this direction, as it removes the bond between your job and your health care. However, the on-demand economy needs this bond broken in other areas as well. New legislation should enable freelancers to purchase unemployment insurance, disability insurance and workers’ compensation as individuals during the same open-enrollment construct as health care.
Encourage personal responsibility. Any new legislation should be focused on encouraging freelancers to take responsibility for their own personal and professional future. The greater the percentage of freelance labor in the U.S. economy, the less employers are responsible for workers’ personal development and retirement savings. Therefore, freelancers should be encouraged by legislation to continue their professional development throughout their career and to save for retirement. A program of tax deductions should be crafted to maximize the benefit of education spending and retirement savings by entrepreneurs.
Provide clarity. Both freelancers and companies should have a clear understanding of the distinction between full-time employees and freelancers. Such clarity is required for companies to avoid unnecessary risks, and for workers to know when they are misclassified. The current structure is contradictory from state to state and between different federal agencies — to say nothing of the tangle of case law. By providing specific quantitative guidelines, such as number of hours per month/year or percentage of income from one company, every company and worker would at least understand the rules of the road.
A Secure Future of Work
The new on-demand economy allows countless skilled professionals new opportunities for additional income and nontraditional career growth. As this model of work and professional engagement becomes a system on which workers and employers increasingly depend, it is up to every party involved to ensure that protections are in place. Only then can this new economy flourish into an institution that is a vital and viable part of our daily lives.
Jeff Wald is the co-founder and president of Work Market, an on-demand labor platform that helps enterprises compliantly manage their freelance and contract workers. Comment below or email email@example.com. Follow Workforce on Twitter at @workforcenews.