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Could reclassification of gig workers result in loss of jobs?

As efforts to crack down on employers misclassifying workers as independent contractors ramp up in Washington, a new research brief from a Mercatus Center at George Mason University senior research fellow is warning of unintended consequences should the current rules change.

“By narrowing the definition of what it means to be an independent contractor, state and federal authorities, such as those at the DOL (Department of Labor), are hoping that organizations will hire workers as employees instead of as independent workers,” wrote Liya Palagashvili. “At first glance, this change portends significant gains for workers who are reclassified as employees and receive proper benefits and protections. But there are reasons to doubt that independent workers will benefit from the new restrictions.”

Mercatus is a libertarian, free-market think tank. Palagashvili argues that instead of companies, including those such as in the last-mile delivery gig economy, shifting independent contractors to employee status, they instead will simply hire fewer workers. And some of those workers may receive lower pay to compensate for the benefits they must be provided as full-time employees.

Fewer jobs as a result

“Many independent workers would not receive the additional benefits associated with becoming employees because many of them would neither become employees nor be able to maintain their jobs as independent workers. This is because companies will not extend all contracting positions into employment positions, thereby leaving workers with fewer job opportunities altogether,” she wrote.

In addition to efforts at the DOL, the Federal Trade Commission’s Bureau of Consumer Protection said it would take a more active approach to monitoring the classification of workers. In a policy statement released in September, the FTC cited instances of Amazon, Grubhub and Uber and others that have faced legal action for their treatment of drivers as independent contractors.

“No matter how gig companies choose to classify them, gig workers are consumers entitled to protection under the laws we enforce,” said Samuel Levine, director of the FTC’s Bureau of Consumer Protection. “We are fully committed to coordinating our consumer protection and competition enforcement efforts within the FTC as well as working with other agencies across the government to ensure gig workers are treated fairly.”

Gig income is critical income for many

Palagashvili noted that many gig workers rely on the income generated to provide for themselves and their families. She also said that “majority of independent workers prefer their nontraditional job arrangements over a traditional employment arrangement because independent work provides far more flexibility in terms of work schedule.”

 A pair of surveys released in 2021 have offered differing views on this, though.

The Benenson Strategy Group conducted the first post-Prop 22 survey of California drivers and delivery workers and found that 76% believe Prop 22 has benefited them personally; 63% said they had already experienced changes to benefits, compensation or protections as a result of Prop 22; and 92% said those changes have had a positive impact on their lives.

But while the Benenson survey seems to suggest drivers in California are benefiting from maintaining their independent status, a survey from McKinsey, the McKinsey American Opportunity Survey, found that 62% of contract, freelance and temporary workers (27% of all survey respondents worked in contract, freelance or temporary jobs) would prefer full-time, permanent employment. Previous McKinsey research has found that only about 30% of workers actively choose independent work as their full-time occupation.

“This finding is perhaps unsurprising given that contract, freelance or temporary workers were more likely than other respondents to say that they have suffered decreased income over the past 12 months,” McKinsey wrote. “These workers were also nearly twice as likely than others to say that they could not afford health insurance (22%, compared with 13% for all) and more likely to cite access to affordable health care and insurance as barriers to their well-being.”

Women, startups could be harmed

Palagashvili goes on to cite harm that would be caused to women by limiting flexible employment opportunities and suggests that data is showing that the gig economy is “providing an important avenue to work for those who previously had a criminal record.”

“Restricting independent work would also harm small technology startups that rely on independent workers. These technology startups are valuable because they tend to be highly innovative and have the potential to contribute substantially to job creation,” she added.

The policy brief digs deeper into each of her points, but Palagashvili concludes that more needs to be done to improve the gig economy, not dismantle it.

“Instead of restricting independent work, policymakers should create a fairer system for all workers by allowing common workplace benefits to follow independent workers,” she wrote.

Palagahvili suggested “portable benefits” as a possible solution, allowing gig workers to receive protections similar to employees while maintaining the flexible work that they and companies desire.

“Instead of limiting job opportunities and flexible work arrangements for those who desire it, policymakers should aim to provide more desirable portable benefits options for these workers,” she said. “Portable benefits are increasingly becoming the best solution for workers to maintain their nontraditional work arrangements while also being able to access work-related benefits.”

While current federal regulations restrict the use of portable benefits, there is a bipartisan bill that was introduced earlier this year to make them a part of the workforce.

Sens. Mark R. Warner, D-Va., and Todd Young, R-Ind., and Rep. Suzan DelBene, D-Wash., in February introduced legislation that would test portable benefits for independent, or gig economy, workers.

Testing portable benefits

The Portable Benefits for Independent Workers Pilot Program Act would establish a $20 million grant fund within the U.S. Department of Labor to incentivize states, localities and nonprofits to test out a portable benefits model, providing workers with access to benefits typically provided through full-time employment.

“More Americans than ever are engaging in part-time, contract or other alternative work arrangements. As the workforce changes, it is increasingly important that we provide workers with an ability to access more flexible benefits that can be carried to multiple jobs across a day, a year, and even a career,” Warner said in a statement. “This program will encourage experimentation at the state and local levels to find ways we can better support our independent, 21st century workforce.”

The legislation is co-sponsored in the Senate by Angus King, I-Maine; Ben Sasse, R-Neb.; Michael Bennet. D-Colo.; and John Hoeven, R-N.D. Warner and DelBene introduced similar legislation in 2017, but it never progressed under the Republican leadership.

The current bill will need to be reintroduced during the next legislative session, but with a split Congress, it is unclear if it would have the votes necessary to pass.

Click for more articles by Brian Straight.

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