Is outdated legislation holding back the gig economy?

With this new gig economy, the government needs to better understand contingent workers and adjust labor laws to meet their needs

Is outdated legislation holding back the gig economy?
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We are in the midst of a dramatic shift in the way we work. In the new gig economy, some 40 percent of the American workforce consists of contingent workers: contract workers, part-time workers, independent contractors and those who freelance.

The U.S. government doesn’t currently collect much data on the many American contingent workers, which means it can’t keep up with their needs. Recognizing this, the Department of Labor is introducing the Contingent Worker Supplement in its next population survey in 2017.

This is an encouraging step. It will lead to more accurate worker classification, better program evaluation and more opportunities for freelancers.

But there is still further we can go. Many of our labor laws were written well before the rapid developments in the labor market. It is our hope that as the government gets a better handle on the number of contingent workers and the way they get work done, lawmakers will better understand the legislation that is needed to suit our new ways of working.

The current landscape of labor legislation

Labor laws govern the duties of workers and those that hire them, establishing standards for how employers can treat workers. Many current laws and regulations assume employers have the upper hand when it comes to the control and power in their relationship with workers. Most regulations assume individual workers are unable to champion their own interests and therefore rely on their employers to champion their interests for them.

Today, workers are typically classified in one of two ways: either as W-2 employees or 1099 independent contractors. The rules on how a worker is classified are based on the relationship between the employer and the worker—how much control the business or the worker has in the relationship and in the way the work gets done.

Increasingly, it is difficult to classify contingent workers. As the professional freelance and blended workforce grow, more and more contingent workers fall somewhere along the spectrum rather than at either end.

New working relationships outpace old classifications

Some people say the solution is to find a new classification lying somewhere on the spectrum between employee and independent contractor. This would allow workers and employers to keep some of the freedoms associated with freelance and independent work, while giving freelancers some business-backed benefits typically enjoyed by traditional full-time employees.

Seth Harris and Alan Krueger of the Brookings Institution propose workers who fall on the spectrum between W-2 and 1099 should qualify for many, though not all, of the benefits and protections that employees receive. Specifically, they suggest independent workers have the freedom to organize and collectively bargain, have civil rights protections, and receive employer contributions for payroll taxes.

Their proposal is controversial because Harris and Krueger do not believe freelancers should be entitled to unemployment insurance, workers’ compensation or minimum wage, which many traditional workers’ advocates believe is essential to their livelihood.

The different opinions on how to best revise the worker-classification system shows it is a complex undertaking. Gene Sperling, the former director of the National Economic Council, called reforming the system a once-in-a-generation endeavor. Changing this system would require an incredible effort, and it would have huge implications for all labor legislation.

Because of the effort required, some are skeptical such major reforms will ever happen; instead, they advocate for smaller legislative changes.

Changes to make life better for freelancers

Empowering independent workers to obtain benefits that follow them rather than their workplace is an idea that makes sense. Without creating an entirely new worker-classification system, it is still possible to extend traditional workplace benefits to independent workers through marketplaces.

The Field Nation 2016 Freelancer Study of professional field service freelancers showed that independent workers overwhelming chose to freelance because they value the freedom it provides. Three-fourths indicated that the freedom, flexibility and control over their future motivated them to choose freelancing as a career. This freedom drives an overwhelming engagement and commitment to success that is lacking in the traditional W2 employee workforce. By allowing freelancers to purchase benefits, services and insurances that are not tied to a workplace, professional freelancers are empowered to run their own businesses on their own terms.

Legislators should enable benefits portability for professional freelancers by allowing them to purchase unemployment insurance, disability insurance, liability insurance, and workers’ compensation as individuals or groups. Much like the Affordable Care Act created the framework for healthcare marketplaces where individuals and businesses can select the benefit packages that best suit them, local, state and federal legislators can apply such marketplace thinking to the full suite of worker benefits. While the ACA is far from perfect, the fundamental thinking of open marketplaces where benefits can be selected by the people they most impact is legitimate. Marketplace efficiencies translate into geographic efficiencies, increased productivity, greater freedom and flexibility.

The Affordable Care Act has been a step in this direction. According to the CBO in 2014, “… the ACA could influence labor productivity indirectly by making it easier for some employees to obtain health insurance outside the workplace and thereby prompting those workers to take jobs that better match their skills, regardless of whether those jobs offered employment-based insurance.”

Independent analysis agrees: “… workers who aren’t in their chosen field may leave their current jobs. That’s because, the CBO projects, these workers will have an easier time obtaining health insurance outside their workplaces, freeing them to pursue the jobs that they’re passionate about and skilled for.”

The ACA is a start, however, and is the first steps towards applying marketplace thinking to freelancer healthcare. One obvious next step is to encourage retirement savings. Just as corporate pensions shifted to 401ks, 403bs and IRAs, freelancers need to be proactive in saving for retirement. Legislators might consider tax deductions that encourage such retirement savings.

A new approach is needed to catch up with the needs of the new economy. Current labor legislation was designed for another era, when one-employer-for-life jobs were the norm. Legislation that was written for another time unintentionally holds back workers in today’s fast-growing gig economy, and in order to be successful, any approach must promote freedom of choice and freedom of opportunity rather than top-down governance. Freelancers overwhelming choose their occupational lifestyles because of the freedom it gives. Lawmakers would do well to encourage and amplify these characteristics.

Next year, we will have the opportunity to examine the results of the 2017 Contingent Worker Supplement to the population survey. Legislators, regulators and the rest of us will be wise to consider all the tools at our disposal to make better labor laws for the rapidly growing number of Americans who freelance.

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