Welcome to the 1099 Economy

Last week Jim Brennan wrote about the recent FedEx legal ruling where a driver was misclassified as an independent contractor.

Almost simultaneously the California Labor Commissioner’s Office declared the same thing with an Uber driver.  Uber is planning to appeal.  In a statement, the company said the decision was “nonbinding and applies to a single driver.” They said individual cases about worker classification in at least five other states, including Georgia, Pennsylvania and Texas, have resulted in rulings that categorize their drivers as contractors.

So where does “contractor” end and “employee” begin? A refresher: The IRS has a 20-factor test to determine this.  Most of the factors have to do with the degree of control the company exerts over a worker.   Telling workers how to do their jobs--via training or active management--is typically one of the identifiers of an employee relationship. This is something a manager can't do with an independent contractor, at least not without worrying about the legal fallout.

The Uber case could start a domino effect that could potentially threaten the business models of the dozens of popular online labor exchanges that make up the so-called “on-demand” economy.  With Uber valued at $18 billion, Airbnb valued at $10 billion, and new imitators popping up daily,  the business world is clearly infatuated with the middleman model.  Venture capitalists have invested $9.4 billion into these businesses since 2010.

Here are some of the new labor exchange delivery and service-work suppliers that have popped up in the past few years. There’s Drizly and Klink, which deliver booze. There’s Washio, for laundry and dry cleaning. There’s Homejoy for house cleaners; Swifto for dog walkers; Soothe for masseuses and Airbnb which allows people to list and book unique accommodations around the world.

So much for freelance work at the lower end of the spectrum.  Work required here is mostly unskilled, requires management and workers should probably be classified as employees.

Let’s look at the other end of the spectrum. Here we find highly skilled workers doing software development, computer programming, marketing studies, writing, editing, photography, digital content, etc.  Elance, Freelancer, Guru, Odesk and other labor exchanges are where you find these workers.  Their work is not managed and their hours are not dictated.  They even negotiate their own rates.  They are truly independent contractors.

Our legal system is set up so that a worker is either an employee or an independent contractor --- one or the other.  

In the real world, workers actually fit into three buckets.   At one end of the spectrum there’s the truly independent contractors.  At the other end are undisputed employees. But then there’s the group in the middle —  a gray area where the line blurs between employee and contractor.

The fact is our labor laws haven’t caught up with the “on demand” economy.  Even a judge underscored this when he described our current employment categories as “woefully outdated”. 

The solution may have to be a compromise: a new class of workers, protected by laws that take into account emerging business models. Some advocate a new category of worker — the “dependent contractor” --- that extends some protections to those who take on project-based work but have little leverage or power in their work arrangements. Germany and Canada have special protections in place for such workers.  And in the UK, Prime Minister David Cameron appointed a “freelance czar” in 2014 to help the country determine how best to support workers in nontraditional work arrangements.

This issue is not going to go away.  Although the percentage of independent contractors has remained fairly constant for decades at about 10%, according to Intuit by 2020, more than 40% of the American workforce, or 60 million people, will be freelancers, contractors and temp workers.  

Does anyone have any ideas on how to fix this?

Jacque Vilet, President of Vilet International, has over 25 years’ experience in Human Resources.  In her current role she works with start-ups and multinationals on both domestic and international HR issues including compensation, learning/development, talent acquisition, workforce planning and mergers and acquisitions.  Jacque has an M.S. in Psychology and an MBA from Southern Methodist University.  She has been a speaker at conferences in the U.S., Asia and Europe.  She is also a regular contributor to various HR and talent management publications and conducts frequent webinars. 

Comments

[E. James (Jim) Brennan]

Excellent overview plus a clear summary of problems and implications, Jacque!

We can't fix what isn't broken, and that is the first issue. At this point in time, the American economy has enthusiastically embraced the contingent worker concept. Of course, as soon as legislators and courts get involved with the situation, it will soon be broken. Maybe then a sensible middle ground can be properly defined so employers and employees will have mutual clarity about the situation.

Please excuse me, though, for feeling skeptical. Lawmakers and judges tend to be some of the least informed people about human resources and employment realities, preferring to issue sound bites that appeal to voters while trading for favors to their key constituents; so I remain doubtful about any sensible outcome. But this is a great starting place to kick around some desirable options.

[Tony Bergmann-Porter]

More or less what Jim said. Get the dead hand of government out of this, and let the market sort it out.

Of course, to quote Prof. Glenn Reynolds,this offers insufficient opportunities for graft.

[Jacque Vilet]

Thank you Jim and Tony. It will be interesting to watch and see how this issue is resolved.

[Karen Kervick]

The key is who has control, correct? Who dictates the schedule, hours, and delivery time? Whose equipment is being used?
In some cases those definitions are clear but the lines are blurry when you work in our office, using our computer, during the times we are open. Yet you make your own schedule and you report only on a dotted line to a manager, taking direction from a project lead. I had an IT VP debate this fact with me...along with the "contractor" who preferred to be an independent contractor but seemed to me to clearly be an employee. What starts off as a true independent contractor can become quite blurry over time as the projects continue on and on.

I think the answer is to define another level where a company provides the framework within which a contractor operates. Like buying a franchise - I own it but I follow the franchise rules. The contractors must follow the protocol set and use the processes in place but they are clearly their own individual operator and "manager". If they schedule themselves and submit their bill vs their hours, they are this "dependent" contractor status. With education, the filing of all appropriate taxes would be the responsibility of the contractor similar to a franchise owner. That's the main issue isn't it? Not that employees are shorted of benefits but that the government is not getting all the tax money. Most people who take these situations want to be independent and don't care about benefits, they want the higher pay. But they need to be responsible and pay their fair share and cover themselves for the required workers comp and unemployment taxes.

The government should look in their own house too. They go after others but allow situations with their own government contracts. I know of one agency that utilized third party companies who hired "independent contractors" for what started off as 6 week short term assignments on a rotation and morphed into 3-6 months assignments straight on. The contractors were told when and where to report, how far they could travel on the weekends and who could visit them in their hotel accommodations. They were put up in government contract paid accommodations off site and were given a per diem for food. It was only a matter of time before someone caught on and reported it resulting in law suits or the threat thereof and changes to the employment status and benefits. Needless to say it is no longer the sweet deal it was initially. Pay went down with the benefits increase. But the contractors were clearly short term or temporary employees hired like a staffing agency would hire temp workers.

And then today we have USDOL Administrators Interpretation 2015-1. "The misclassification of employees as independent contractors presents one of the most serious problems facing affected workers, employers, and the entire economy. Misclassified employees often are denied access to critical benefits and protections to which they are entitled, such as minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces." There are some employers who take advantage of course, but I'd say the bigger issue to the government is the failure of people to pay the taxes they owe.

I think I may be over my word count.

[E. James (Jim) Brennan]

Glad that Karen added another supplemental article! ;-) Good info.

[Jacque Vilet]

Thanks Karen for your comment and there is no word limit for comments!
Here is an interesting read for all --- assuming we can get past politics. Here's the link: http://www.washingtonpost.com/blogs/wonkblog/wp/2015/07/15/clinton-says-shed-crack-down-on-independent-contractor-abuse-obama-just-did/?wpisrc=nl_wnkpm&wpmm=1

The tax avoidance issue is very real and costs the gov billions of dollars. Making the contractors responsible for paying them is probably a futile effort.

I better and more realistic might be finding a compromise with big business about misclassification so that the "fuzzy line" can be cleared up and companies pay rightful taxes.

The link above was printed today ---- things change even as we "speak".

[Karen Kervick]

I actually read thru the DOL release on misclassification yesterday. It does a good job of clarifying the differences in what the DOL considers to be employment vs what is not. I think I even learned a thing or two.

http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.htm

Bottom line, there are probably very few true independent contractors in business related fields as opposed to professional services like individual accountants, therapists or landscapers who work for several clients - on their own. And then those individuals get busy and hire people to help them, consequently becoming the employer with employees!

If you aren't employed by the company you are servicing because you work for several different clients, it could be you should be employed by the agency who sent you there. Staffing agencies have had to go that direction to offer benefits and consider those temp workers who consistently have assignments as their employees. Then they just need to make sure they are working enough hours to cover the cost of benefits.

I have also personally worked under an employee leasing scenario where the PEO hires the employee and leases them back to the organization, for a fee of course. This can work for small companies. So there are options if you really don't want to deal with the business of having employees but you need staff. Rent them thru another employer.

Really, if it weren't so complicated to have employees (can you say regulations and paperwork, paperwork, paperwork?), more businesses would be happy to do so, I'm sure. Then you just have to get the individual to agree to be an employee vs so- called independent contractor.

[Jacque Vilet]

Hi Karen ---- the freelancers I'm talking about here very rarely come through agencies. They get their "gigs" via the online platforms where jobs are posted by companies and the independent contractor contacts them. The IC negotiate their own pay, set their own hours and decide how the work is to be done. These are truly IC's and are in professional fields. Example: lawyers now do independent contract work. The other end of the spectrum is the low skilled workers and they usually come thru agencies that actually employees them. PEO's the same way. So the gray area is really those workers who meet some of the "employee" definition and some of the "IC" definition. That's the tough nut and it will have to be resolved. Just one of many issues we will likely continue to see in this "new normal" economy/world of work.

[Karen Kervick]

Jacque,
We may hire those contractors as well. Some of our IT contractors would come thru a 3rd party, while others might be "independent" at least initially. The gray area moves in like fog over time (Microsoft comes to mind). I do think each case would have to be reviewed independently based on the unique criteria. Even a lower skilled worker can truly be independent - a bookkeeper for example or a dog walker.

As I have heard often, "If it walks like a duck and quacks like a duck, it's a duck!" Question today is, what kind of duck?

Perhaps we do need to discover a new species to define our "new normal" so businesses like Uber can thrive.

[Jacque Vilet]

Agree with you 100%. I think we need to keep open minds on this.