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An Uber user in Beijing. Photo: Julian GONG Min
The ride-sharing company Uber, besides being a rapidly growing global phenomenon, has also become the poster child for the independent contractor loophole. In a few short years, the company claims that it has spread to some 300 cities and 58 countries, striking fear into the hearts of taxi companies everywhere. Its market valuation is jaw-dropping—at $41 billion and growing, it’s higher than Facebook’s valuation at a similar point in its growth, has surpassed Elon Musk’s Tesla Motors ($34 billion), and is fast approaching the auto kings themselves, such as Ford Motor (valued at $58 billion). Not bad for a company that doesn’t actually make anything or own any cars, or directly employ any drivers—since the drivers are all treated as independent contractors.
The employment status of its drivers has become the most prominent of the many controversies dogging Uber. (The most recent controversy pits Uber vs. New York City Mayor Bill DeBlasio, who has proposed capping the number of ridesharing cars while New York figures out how to deal with worsening traffic congestion.) CEO Travis Kalanick insists that his company is merely a technology platform facilitating rides between passengers and drivers, not an employer of drivers. “Are we American Airlines or are we Expedia?” asked Kalanick, in an interview with the Wall Street Journal. He maintains they are more like Expedia, merely a go-between connecting buyers and sellers.
Complicating matters, the legal standard for what makes an individual an employee rather than a contractor is vague. It has to do with how much the worker is actually “independent,” and how much the employer dictates. The lack of clarity has led to complex situations, some of them tragic, in which the employer shirks responsibility. When an Uber driver hit and killed six-year-old Sofia Liu, and badly injured her mother and brother as they were traversing a crosswalk on New Year’s Eve 2013 in San Francisco, Uber washed its hands of any responsibility. Why? The driver was an independent contractor, according to Uber. Never mind the fact that the driver was once arrested and charged with reckless driving for speeding 100 mph into oncoming traffic while trying to pass another car––something Uber’s faulty method used for .
But Goliath may have met his David in June 2015, with a claim by driver Barbara Berwick. The California Labor Commissioner’s Office ruled that Berwick should be classified as a direct employee, because “[Uber is] involved in every aspect of the operation” and that Uber owes her $4,000 in employee expenses. The ruling only applies to this single driver, and Uber is appealing the decision. But it is not the only case. In Florida, the Department of Economic Opportunity also ruled that Uber driver Darrin McGillis is an employee of the company. And two groups of Uber and Lyft drivers have brought class-action lawsuits against the ride-sharing companies over the same issue. The controversy over Uber drivers’ job classification status is not likely to be settled any time soon.
The 1099 economy
Yet Uber’s labor battle is just the tip of theiceberg; the ride-sharing company is not the only employer looking to benefit from the independent contractor loophole. Businesses, whether or not they are identified with the so-called sharing economy, are increasingly relying on "non-regular" employees: freelancers, contractors, temp workers and part-timers. This practice has given rise to the term "1099 economy," referring to the 1099-MISC tax form for the IRS classification for independent contractor with Miscellaneous Income.
The advantage for a business such as Uber of using 1099 wage-earners over W-2 workers is obvious: an employer can lower its labor costs dramatically—by 30 percent or more—since it is no longer responsible for a 1099 worker’s health benefits; Social Security; unemployment or injured workers compensation; lunch or rest breaks; overtime; disability; or paid sick, holiday or vacation leave. Corporate America is increasingly relying on these non-regular type of workers as a core part of its new business model to cut costs and maximize profits. One new economy booster clarified employers’ new strategy: "Companies need a workforce they can switch on and off as needed"—like a faucet or a radio.
Under the current system, employers have an incentive to fire their entire workforce and use all 1099 workers.
A 2014 study commissioned by the Freelancers Union found that more than one in three workers—53 million Americans—are now freelancing. Other estimates predict that within 10 years nearly a majority of the 145 million employed Americans—65–70 million workers—will be so-called independent workers. Sharing economy companies like Uber, Airbnb, TaskRabbit, Postmates and Homejoy claim they are liberating workers to become independent—"their own CEOs"—in reality, workers are forced to take ever-smaller jobs (gigs and micro-gigs) and wages while the companies profit handsomely. Indeed, some workers have multiple employers in a single day. Even many full-time, professional jobs and occupations are experiencing this shift toward precarity. Business consultancy MBO Partners has estimated that the number of freelance workers is projected to outpace full-time workers by 2020.
The accelerated use by employers of the independent contractor loophole is causing a rapid erosion of the safety net for workers and families, one that was forged over many decades. Because of their worker classification, more and more American workers are no longer covered by the laws and regulations that underlie the safety net. Under the current system, employers actually have an incentive to fire their entire workforce if they can get away with it, and use all 1099 workers. This sounds extreme, but it actually happens. The pharmaceutical company Merck reportedly sold its factory in Philadelphia and the new owner fired all 400 Merck employees and rehired them as independent contractors—Merck then contracted with the company to continue making the same antibiotics for them.
These perverse incentives are threatening to destroy the U.S. labor force and turn tens of millions of workers into little more than day laborers. The sharing economy’s app- and web-based technologies make it so much easier to hire and fire 1099 workers. BuzzFeed’s Charlie Warzel has rightly observed that "any tech reporter who spends their time covering the sharing economy is now, essentially, a labor reporter.” This is only the beginning; we have yet to see how these trends will affect the labor force over the next several decades, and the economy more broadly.
A lot is at stake in these labor market tensions. The problem created by the new digital economy is not merely one of income inequality. The challenge is how to stabilize the economy and re-establish economic security for the broad swath of American workers. One important way would be to figure out how to provide the support structures workers and families need, regardless of their employment situation or their job classification.
Individual Security Accounts
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 "multiemployer plans" have been used for many years in industries like construction, infrastructure maintenance, and mining. Most construction workers, for example, are independent contractors and temp workers. Via 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 at various jobs and projects. Despite the fact that these construction workers are hired on a contingency basis, the types of benefits offered by a multiemployer 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 each 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). Via payroll deductions, that amount is set aside in a fund for each worker’s own safety net, and the fund is governed by a joint labor-management board of trustees.
In the Silicon Valley a similar model is emerging. Agencies like MBO Partners act as the employer of record for contingent tech workers, providing a bridge between contracted employees (such as programmers, data experts, and software engineers) and their multiple 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, 401(k); as well as payroll administration, tax deductions, wage and hour/overtime regulations, and more.
Multiemployer plans show potential for creating an effective safety net for 1099 workers and part-timers. Here’s the basic idea: when Uber, TaskRabbit, Elance-Upwork, Manpower, or Merck hires contractors, they would pay a few dollars more per hour in addition to wages, to be invested in an Individual Security Account for each worker’s safety net. The amount any business pays 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 an Uber driver, the company would chip in a percentage of the gross wages for that job into the worker’s ISA. These accounts would be structured to pay, 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, much like regularly-employed W-2 workers do now, for Social Security and Medicare. The Individual Security Accounts 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.
Implementing a safety net for contracted workers would cost less than $2/hour for employers.
In short, the Individual Security Account would assume the joint labor-management trust’s role for the individual worker, and form the foundation for this multiemployer safety net. This is an elegant way to address the increase in 1099 workers, because it renders unnecessary the endless debate over whether the worker is an employee or an independent contractor. That point becomes largely irrelevant (in terms of the safety net, though not for other issues such as job security).
For example, suppose Donna is employed twenty hours a week by a hairdresser, contracts for 10 hours a week with TaskRabbit, and drives 10 shifts for Uber. She would earn 50 percent of her benefits from the hairdresser, 25 percent from TaskRabbit, and another percentage based on her wages driving for Uber. That would amount to earning over three-fourths of her full benefits (based on a forty-hour work week). Or suppose George contracts for 14 hours a week with Upwork, drives 10 shift for Lyft, makes 15 deliveries for Postmates and does seven gigs cleaning houses for Handy. He would earn a percentage of his benefits from each company, prorated to the number of hours worked or a percentage of his wages.
How much would all of this cost? Surprisingly, implementing such a multiemployer safety net based on Individual Security Accounts would not be that expensive. 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 services, sales, and office workers in the private sector) could be implemented if employers chipped in less than $2 per hour into each employee’s Individual Security Account. That minimum basket would be composed of worker supports that are already legally required for regular W-2 employees—in other words, Social Security, Medicare, federal and state unemployment insurance, and injured workers compensation.
If we wanted to make the safety net a bit more generous—to also include health insurance, long- and short-term disability 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 pay for the entire safety net package. More expensive plans could be offered, depending on one’s ability to pay i.e. 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 the years (that model reflects the history of Social Security, which initially in the 1930s had modest benefits. Over time, as it proved itself to be economically useful as well as popular, it was expanded). That’s a small amount of money for employers to pay into their employees’ ISAs to provide a safety net for millions of 1099 workers who currently have no benefits or job security.
What it comes down to is this: there’s absolutely no reason why a business should be able to evade paying a couple dollars more per hour per worker to provide a safety net, just because that business hired a freelancer, temp, contractor or franchise. And regardless of how many employers a person works for, a worker should not be denied the civilized and modern-day necessity of having access to a support system she needs for herself and her family. The principle of this system is simple: the 1099/independent contractor loophole must be closed.
In short, what we are talking about is extending legal parity to 1099 workers and part-timers so that they are on the same safety-net footing as 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 the basic working and employment conditions, including the duration of working time, overtime, breaks, rest periods, night work, vacations and holidays. Other nations 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 national/federal level, so that all businesses and employers are subjected to the same rules. But it’s not essential. These changes can be implemented at the local or state level as well. Four states (California, Connecticut, Massachusetts, and Oregon) and 18 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 must 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 them.
A similar strategy could be used by cities and states to establish Individual Security Accounts for each 1099 or part-time worker, and require that employers (and employees) pay into the ISAs, depending on how many hours that worker was employed or, for those paid by the job, the percentage of gross wages (the businesses should be allowed to pass the cost of the ISA contributions on to their customers, but since many of those customers benefit from these changes, a rising tide would float all boats). Passing the right laws and regulations at the local and state levels could start the transition toward the right kind of new economy.
• • •
This proposal would do even more than create legal parity—it would 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 farm workers) 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 this structure of universal Individual Security Accounts would bring everyone into the fold to a much greater degree than now exists.
An important consequence of this proposal is that, by putting nearly all employees on 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 ramping up their workforce to respond 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 multiemployer plans and legal parity between different categories of workers, we will remove the corrosive incentives for employers to abuse the individual contractor loophole.
Every worker should have access to a safety net. Basing a new social contract on such a system holds great potential, and the idea is gaining currency. U.S. Senator Mark Warner recently wrote an op-ed for the Washington Post calling for an hour-bank system, like the kind “used by the building trades for sixty years, to administer benefits for members who work for a series of contractors.” And labor leader David Rolf and co-author Nick Hanauer, a Seattle-based entrepreneur, have called for an idea similar to my proposed Individual Security Accounts to form the basis for a multi-employer safety net in articles they wrote for The Daily Beast and Democracy Journal.
This new kind of deal would form the foundation for keeping the U.S. economy plowing forward into the twenty-first century, enriched by technology and innovation instead of being disrupted and impoverished by it. Rebecca Smith, deputy director for the National Employment Law Project, summed it up nicely when she asked “Why shouldn't Uber, Lyft, and their kin be required, just like other labor brokers are . . . [to] pay the payroll taxes that ensure workers have access to basic benefits like workers' compensation when they are injured and Social Security when they retire?”
Given the huge earnings that many of these sharing economy companies are generating, it's about time they begin sharing some of it with their workers. But it’s not likely they will do so unless the laws and regulations nudge them along.
This article is partially excerpted from Steven Hill's book, Raw Deal: How the "Uber Economy" and Runaway Capitalism Are Screwing American Workers, to be published by St. Martin’s Press in October 2015. Find Steven Hill on Twitter and Facebook.
Editor's Note: This article updated on August 6, 2015 to reflect the possibility that contracted workers are paid by the job, not by the hour.
Steven Hill is a Senior Fellow with the New America Foundation and author of the forthcoming Raw Deal: How the "Uber Economy" and Runaway Capitalism Are Screwing American Workers from St. Martin’s Press. You can reach him on Twitter @StevenHill1776 and on Facebook.
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