By John C. Goodman
Originally posted on Forbes, April 2016
In business after business and industry after industry, buyers and sellers of labor services are increasingly facing a difficult problem: should workers be treated as “employees” or as “independent contractors”?
This is no small matter. Even though there may be no essential difference in the work performed, thousands of pages of laws and regulations, large sections of the tax code, virtually all of employee benefits law and eligibility for numerous social insurance programs are dependent on whether or not a worker is legally determined to be an “employee.”
Under ObamaCare, for example, the difference in subsidies available from the federal government can total $10,000 or more – depending on how a worker is classified. For lower income workers, not being an employee is better. The subsidies are much greater in the health insurance exchange and a contract worker can have ready access to them. But if the individual is an employee, his employer is generally obliged to offer affordable insurance or pay a fine. If employees turn these offers down (because they really aren’t affordable), they are not eligible for subsidized insurance in the exchange and they are potentially subject to fines.
For higher income workers being employed is much better. Since they get no subsidy in the exchange, these workers are better off if they have access to an employer’s plan.
My own informal survey of Uber drivers reveals that most do not want to be employees. In fact, of 50 or 60 drivers queried, only one told me he would like to be “employed.” Yet some would like to take advantage of some of the rights of employees. For example, the City of Seattle has given Uber drivers the right to unionize – an action that is being challenged in court.
Employers – especially new companies in the gig economy – are groping their way along. Take Munchery, an on-demand food preparation and delivery service. Initially the company made all its drivers independent contractors. But worker turnover and inconsistent service led the company to turn them into employees instead.
A middle way has been selected by Instacart, the on-demand grocery delivery service that has become known as “Uber for groceries.” Initially, contract workers would accept an order, drive to the desired supermarket, buy the goods and then drop them off at a customer’s home. But these days, the company has made its shoppers bona fide employees, while keeping the drivers as independent contractors.
The problem is that new businesses using internet apps are cropping up every day, dealing with new and uncharted uses for the available technology. Apps in some cities will put you in touch with services that will park your car, provide you with access to a nanny and link people seeking work to jobs that are available day to day. There are doctors who make Uber-type house calls. The City of Dallas is using Uber to link potential workers with bus and rail transportation in order to make it easier for people to get to a job site.
Along the way, all these people are trying to deal with labor law that was written decades before the Internet was created. Neither “employee” nor “independent contractor” is a category that works very well. As 20th century law comes face to face with 21st century technology, expect the legal issues to get increasingly murky. A judge in one lawsuit is reported to have said, “The jury in this case will be handed a square peg and asked to choose between two round holes.”
Economists Alan B. Krueger and Seth D. Harris have written a paper suggesting we should have a third category of worker – one with rights and benefits somewhere in between employees and contract workers. Noam Scheiber, writes in The New York Times that both Britain and Italy have experimented with the idea. But this approach runs the risk of imposing one more set of regulations on top of a market that is already over regulated.
What l suggest instead is a concept I call “labor market neutrality.” As the term implies, everyone would be treated the same.
For example, any tax break the federal government gives to employees should also be available to non-employee workers. We have already seen how that would work with Obamacare. Instead of vastly different tax subsidies for health insurance, depending on the worker’s labor classification, the federal government would give everyone the same subsidy.
That practice should be extended to pensions and other employee benefits. For example there is no reason to have one limit for IRA contributions and a different one for 401(k) plans. Everybody should get the same opportunity to save for retirement, regardless of employment status.
Similarly, opportunities to get a tax break for day care should be the same for everyone. We shouldn’t have limited tax credits for some, flexible spending accounts for others and unlimited employer-provided, tax free day care for the privileged few – as we do today.
Ditto for life insurance and disability insurance. Why should employees and their employers get to pay premiums with pre-tax dollars, while everyone else has to pay after tax?
What about wage and hour regulations, occupational health and safety regulations and such social insurance programs as unemployment insurance and workers compensation. Can we have labor market neutrality in these areas as well?
I will address those issues in Part III.