Our nation’s labor and employment laws have long rested on a distinction between employees and independent contractors. Contingent workers—including independent contractors, independent consultants, on-call workers, temporary contract workers, and others—generally have access to far fewer benefits and legal protections than employees. Employees are entitled to such legal protections as a minimum wage, paid overtime, occupational health and safety standards, civil rights, and the right to organize. Employees also are legally entitled to certain benefits, such as splitting the cost of Social Security and Medicare payroll taxes with the employer and having income taxes withheld from their paychecks. They may also have the right to unpaid family and medical leave, depending on the size of the employer. Employees may also have access to benefits like health insurance, workplace retirement plans, sick and vacation leave, educational tuition assistance, and other optional benefits many employers offer only to employees.
Many contingent workers have none of these rights or benefits. Independent contractors, for instance, are a primary type of contingent worker in business for themselves. They must manage their own income tax withholding (through quarterly estimated payments), pay both the employer and employee shares of Social Security and Medicare taxes, and provide for their own health insurance and retirement savings.
Over the past few decades, employers have increasingly changed the structure of their workforce, outsourcing work previously performed by full-time employees to independent contractors, leased workers, temporary workers, and part-time or on-call workers. The economy has undergone dramatic changes; indeed, the Government Accountability Office estimates that in 2010 over 40 percent of the workforce was made up of independent contractors, self-employed individuals, and part-time workers. Most of these contingent workers do not have legal protections; the exception is part-time employees.
In recent years, contingent work arrangements have expanded to a new arena, specifically in the sharing or “gig” economy in which workers use an online or mobile platform to provide services to consumers (see Chapter 11, Financial Services and Consumer Products—Innovation for All and Insurance in the Sharing Economy; Chapter 9, Livable Communities—Fixed-Route and Demand-Response Transportation). The Brookings Institution’s Hamilton Project estimates that there are roughly 600,000 workers in the sharing economy who deliver transportation services, provide child care, do housework, and the like.
Whether to classify sharing economy providers as employees, independent contractors, or a new type of contingent worker is the subject of debate and litigation. Some have suggested that the sharing economy warrants the creation of a new, third category to classify workers. Adding a third category, however, would not necessarily bring clarity; it could instead make classification more difficult to parse. Some have also suggested that temporary regulatory enforcement moratoria are needed to protect these new work arrangements and encourage innovation. Another proposal involves providing safe harbors from legal liabilities so that employers can experiment and perhaps offer some benefits without employer-employee status. However, proposals that provide temporary moratoria or safe harbors circumvent examination of workers’ proper classification, thereby potentially denying some workers the benefits and protections to which they may be entitled if they should be classified as employees rather than independent contractors.
Certainly, the sharing economy can provide earning opportunities for workers of all ages, especially when they are unable to secure more traditional employment, desire more flexibility, or seek to supplement retirement income or savings. And there are many workers in the economy who are genuinely independent contractors or contingent workers. However, some workers treated as independent contractors are in fact employees who have been misclassified. Many states have led the way in cracking down on misclassification, but federal tax code loopholes and gaps in labor law enforcement can mask these abuses and permit them to continue. In addition to hurting workers and decreasing funding for state and federal social insurance programs, misclassification puts employers who play by the rules at a competitive disadvantage.
Moreover, the increase in the number of independent contractors has contributed to lower job quality. It also has led to a decrease in worker financial resilience. A wide range of policymakers and experts have called for a better safety net for the contingent workforce, either by extending current protections and benefits, creating new arrangements such as portable benefits, or both.
Contingent and Part-Time Workers: Policy
Enforcement of the Fair Labor Standards Act, particularly its provisions dealing with the classification of workers should continue to be a priority for the US Department of Labor (DOL). Congress should ensure that the department has adequate resources for enforcement.
Congress should narrow the “safe harbor” loophole that permits misclassification of employees, make misclassification an express violation of the wage and hour laws, and appropriate sufficient funds to the DOL and the Internal Revenue Service to enforce the law.
More states, which have led the way in cracking down on misclassification, should adopt innovations and step-up their enforcement. States should vigorously prosecute employers that misclassify workers as contractors.
Retirement plan coverage of part-time employees, employees of small firms, the self-employed, contingent workers, and lower-paid workers needs to be increased. New retirement plan vehicles or incentives, including tax incentives or small subsidies, should be created for this purpose.
Protections and benefits
Contingent and part-time workers who are essentially indistinguishable from regular employees—in characteristics such as work location, hours worked, work performed, employer expectations, and supervision—should be protected by employment laws.
All workers, regardless of employment classification, should have access to both employment protections and some benefits such as health and retirement. Protections and benefits should be adapted appropriately for the worker’s circumstances and could build on existing public and private systems.
Policy innovation should focus on improving access to important benefits and protections, including social insurance protections, for all contingent workers. A new classification category for workers is not needed.
Employment protections and benefits should be portable and structured to pool risk where appropriate and take advantage of economies of scale.
Bans, including temporary ones, on the regulation of companies in the on-demand economy or on the application of existing employment laws to their practices are not warranted.