Rideshare service Uber is facing the possible rupture of its entire business model in a key case that could have even further reaching implications for the U.S. economy. Uber is facing accusations that it illegally misclassifies its drivers as independent contractors rather than employees, therefore ducking responsibility for a variety of schedule and wage protections afforded to employees.
The cab service’s court fight is indicative of an urgent and much broader question facing the country about what it will mean to “work” in the future –- and what the person directing that work owes to you to ensure that your labor brings you meaningful economic security.
“We, as a country, agreed in the last century around a set of labor protections,” National Employment Law Project research Rebecca Smith said in an interview. “An economy that privileges independent contractors can put all of that at risk.”
The new “gig economy” has spawned a whole industry of workers who are considered to be freelancing their services, rather than formally employed by a company. App-based endeavors like Uber, Lyft, and Postmates all bill themselves not as employers but as infrastructure through which ordinary people can hire each other’s services. And as a result, these companies get around paying a host of benefits, saving thousands per person per year by treating workers as contractors. Some estimates suggest the number of these so-called contingent workers who labor outside the traditional employer/employee model make up as little as five percent of the economy. Others put it as high as 30 percent.
As a new century’s burgeoning tech sector starts to kick at the walls of the old industrial-era compact between workers and employers, policymakers are starting to ponder how to alter workplace policies to ensure that the gig economy can be an engine of income growth and stability for workers, and not just a license to print money for a handful of investors and CEOs.
For now, it’s the role of courts and government agencies to ensure that startups don’t abuse existing “1099” independent contractor rules to exploit people who should really be classified and compensated as standard “W-2” employees. But as the “gig economy” continues to grow, the country may need to replace the employment policies it invented almost a century ago with ones more suited to the times.
The question is, how? Some tech industry leaders have floated an answer you might expect to find in socialist pamphlets rather than capitalists’ blog posts.
New York-based investors like Fred Wilson, Albert Wenger, and others have come out in support of a “universal basic income” (UBI) system by which the government would mail subsistence-level paychecks to everyone in the country regardless of their work status.
“Just imagine for a moment a world in which everyone can take care of basic needs such as housing, clothing, food, healthcare and education,” Wenger wrote recently, in a piece proposing a mix of UBI checks and transparency to ensure individual workers can make informed choices.
While a UBI is a promising component of one possible future, it isn’t necessarily a silver bullet. “The concern is that in this political climate what you’d get is a very poor UBI level, while getting rid of a lot of other protections that people really rely on,” Smith said.
Any version of the idea would be a radical departure — not just from the sink-or-swim viciousness of traditional American individualism, but from the idea that bosses owe workers support and dignity. If we rely on a UBI to replace things like unemployment insurance and paid sick leave, then we will shift responsibility for workers’ well-being from private capital to public dollars.
“That’s the tension: Do you use the traditional employer definition that carries with it a lot of responsibilities?” Center for American Progress labor expert Karla Walter said. “Or do you switch to a new system where government is even stronger in terms of provision of services? Not all gig economy companies are pursuing the same strategy. Some have decided it’s in their best interest to treat their workers as employees.”
One such company is Alfred, a service that connects busy users with paid butlers who take care of their errands. Founders Marcela Sapone and Jessica Beck decided early on to hire their “Alfreds” as full employees under the W-2 system, Sapone explained in an interview.
“We looked at the IRS rules and asked ourselves what we were trying to achieve, and the relationship that means we have with workers,” Sapone said. “You can have a lot of stakeholders [in your business], but you only have one primary customer who you make tradeoffs for. Ours is our employees, who – if equipped with the right tools and trained in the right way and empowered to make decisions – will make our end users happy.”
Existing public policy around employment makes that choice far too expensive, according to Philip Zelikow, a history professor who helped author a collection of research and policy thinking around the future of workplace law on behalf of the group Rework America.
“The additional cost burden if they make somebody full-time is at least 25 to 30 percent on top of the wage cost,” Zelikow told ThinkProgress. The shift toward part-timers and contractors “is happening not because employers are wicked, but because we have a system that strongly incentivizes them to try to solve their labor cost problem that way if they possibly can.”
The nature of Sapone’s business meant her calculus was different. Alfreds get entrusted with access to private homes. Investing the significantly higher costs of W-2 employment in exchange for the significantly greater control over the workforce makes intuitive sense. For many other gig economy startups, the savings of 1099 contracting are too enticing to pass up.
“Each business is unique. Sometimes 1099 actually is in fact better” for both workers and companies, Sapone said. But with many companies caught somewhere between, a third classification might be necessary.
Such a hybrid might not be sufficient, but it’s essential to think about as policymakers delve into the question of how to rejuvenate the link between work and economic security for this new age. “What are the essential responsibilities that we think employers should provide? How do we get employers to provide them through a new definition?” CAP’s Walter said.
Sapone thinks the answer is to set up a system that requires companies to connect workers to high-quality vendors who will perform the kinds of retirement services, pooled resources for safety nets for the unemployed, and tax planning that traditional W-2 employment requires companies to fund.
“There should be a class between W-2 and 1099 where there is some form of workers’ protections baked into a more flexible contract,” she said. “Say the firm is on the hook for providing easy access to the employment infrastructure that doesn’t come with a 1099 contract: a layer of support services that are no longer necessarily provided by the employer, but the access is provided by the contract.”
A workforce that doesn’t keep standardized schedules might seem incompatible with hours-based benefits like paid sick leave or unemployment insurance. A Lyft driver doesn’t call in sick — she just doesn’t log on and accept fares, using the flexibility and freedom that are often touted as primary strengths of the gig economy. “But if you’re sick during your best hours and you rely on that for your livelihood, that’s still a problem,” Walter said. “Sure your schedule is flexible, but what if you can’t make those hours up for another week and you have to pay the bills tomorrow?”
Tweaking paid sick leave policies to suit the gig economy shouldn’t be hard, said the NELP’s Smith. After all, this industry was born to apply big data to complex administrative problems. “I would guess almost all these companies know the hours you work,” Smith said. “It’s just a matter of requiring them to track hours and setting up a tool” to allow workers to draw down paid sick time from an allotment that’s appropriate for the schedule they typically opt to work.
Whether companies opt for traditional W-2 employment, no-frills 1099 contracting, or some as-yet-nonexistent hybrid legal class, the central battleground for worker prosperity will be largely the same. Industrial- and digital-age businesses alike make internal decisions about how to allocate their money. American employers have steadily shifted money away from paying workers and toward profits in recent decades. Workers now get roughly 63 percent of net business revenue, down from a historical average of roughly 70 percent throughout the five decades following World War II. Reversing that trend will be key to mitigating the extreme inequality that undermines economic growth and democracy itself.
“The problem is with how labor is viewed within business, and more widely within society,” said Zelikow. “In the industrial age, American business started viewing labor as a cost factor to be minimized rather than as an asset in which you invest. That runs deep, and in a lot of different ways business and government have both structured the system to encourage this point of view.” As an example, he pointed to the lack of tax deductions for investing in workers as compared to the carefully-structured writeoff options the IRS offers for purchasing equipment.
That attitude was certainly common in early fundraising meetings for Alfred, Sapone said, in part because venture capitalists hadn’t thought the problem through yet. “The overarching sense was, ‘why would you choose the less cost effective version?’” she said. But since then, “it’s become more of a mainstream issue, and people who have these 1099 arrangements are reaching out to ask, ‘how would we change, what are the pros and cons?’”
It’s a rational shift. Court cases on alleged misclassification of employees as contractors have progressed and politicians have started to take note of the cracks that contingent workers can fall through, that thinking has shifted.
“Is the government going to come in and say you’re overstepping the line, we’re collecting penalties and back taxes? Investors are seeing that and taking two views,” Sapone said. “One is the law will change because startups have enough power to lobby and change them. The other is you should start figuring out how your model works with a more expensive worker.”
Much economic policy rhetoric pretends that business owners lack the mental flexibility to adapt a business model to fit higher labor costs. Anything that would raise wages or worker benefits must be a job-killer, because companies will either refuse to dip into their profit share to cover the cost, or will do so and be so unhappy with the result that they simply close up shop.
To Zelikow, all that hidebound thinking about employer-employee relationships owes to an Industrial Age mentality that’s both deeply rooted and completely inappropriate for today’s challenges.
“There’s this cultural image of relatively mindless laborers who are blue-collar being organized by mindful white-collar managers. It’s a somewhat mythical portrait even in the 20th century, and it’s dramatically out of place now,” he said.
In the 20th century industrial model, the professional staff at the center of an organization expect to be paid very well, and the drones out at the fringe who do the actual heavy lifting expect little. But in the networked economy, as Zelikow calls it, that relationship looks radically different.
Take the health care business, for example. Nurses and home health care workers are on the front lines, dealing with a huge volume of mundane but vital tasks for relatively modest wages. Specialized knowledge and training is concentrated with highly paid doctors and specialists at the center of the model. “Now, reimagine it as a networked system in which the frontline people are empowered with the whole knowledge of the healthcare system at their fingertips: a home health aid with an iPad is the frontline of the whole healthcare team,” Zelikow said.
In such a decentralized model, investing in workers just makes good business sense. “That person becomes an asset that improves the quality of patient care and patient satisfaction. So I pay that person more, because they’re more valuable,” Zelikow said. “Everybody wins.”
Zelikow is hopeful that the same kinds of trans-partisan coalitions that defined social policy to suit the Industrial Revolution can repeat itself today.
“We’re going through an economic revolution now that’s comparable in magnitude to what we went through with industrialization 100 years ago,” he said, “and we need a comparable agenda of institutional revitalization.”
“Doesn’t mean everybody sings kumbaya and there’ll be perfect consensus,” said Zelikow. “But right now the trenchlines haven’t formed yet. So it’s possible for people from the left and right to come together in really interesting ways.”