Gambling With a Worker's Job
While the Department of Labor's new independent contracting rule diffuses pressure from activists who have taken issue with the gig economy, this is not a simple “labor wins” story
I recently had the opportunity to testify before the House Committee on Education and the Workforce (testimony available here). While the topic addressed how to legalize benefits for independent contractors, some of the discussion moved toward reclassification policies that aim to make it more difficult to work as an independent contractor—such as the Department of Labor’s (DOL) recent independent contracting rule or California’s Assembly Bill 5 (AB5).
I’ve noticed that those who support rules that make it much more difficult to work as an independent contractor tend to presume that these rules will automatically turn existing independent contractors into employees.
But the reality of the situation is that it’s more of a gamble. I wrote about this in the context of the DOL rule in my recent Hill column:
The [DOL] rule intends to combat misclassification problems and make more independent contractors become employees with access to proper benefits and protections. But while it may diffuse pressure from activists who have taken issue with the gig economy, this is not a simple “labor wins” story.
That’s because it’s impossible for every independent work opportunity affected by this rule to turn into a traditional, full-time job. Instead, it would leave many workers with fewer job opportunities altogether.
Take, for example, an organization that works with a freelance graphic designer on a sporadic basis. If the contracting relationship is now illegal, will the organization hire this part-timer and provide full-time benefits, or simply end the relationship? It depends on whether there is enough work to justify the additional costs. To fill the gap, the organization may ask other employees to take on the graphic designing tasks or jump on the AI bandwagon and have Dall-E3 fulfill their requests.
This is not an entirely hypothetical example. It was the reality for thousands of California freelancers after the passage of their state’s AB5 — the nation’s strictest independent contracting regulation — and it may now be the reality for millions of other workers nationwide.
After AB5 went into effect, news outlets like the New York Times and the Los Angeles Times highlighted similar job losses, especially among freelance musicians, classical performers, truck drivers, translators, editors and writers. Following this backlash, California exempted these professions and many others.
But the job losses go beyond anecdotal evidence. In our recent analysis of California’s AB5, which is the first empirical investigation of the law, my co-authors and I find that it is associated with a significant decline in overall employment and self-employment for affected occupations. Self-employment fell by 10.5 percent for non-exempt occupations. Overall employment fell by 4.4 percent in the same professions.
Not only that, but AB5 didn’t appear to make up for these job losses by putting more employees on traditional payrolls with better stability, benefits or protections. Our study found no consistent evidence of more workers becoming W-2 employees.
In other words, on average, 1 in 10 affected Californians lost self-employment opportunities, and we see no reason to believe they replaced them with better jobs.
It’s worth noting that some California jobs were saved when more than 100 professions and industries were exempted from AB5. But the DOL’s rule cannot exempt any professions or industries, which means it will have far more significant and wide-reaching consequences across the U.S. economy.
Like in California, small businesses and nonprofit organizations nationwide will face harsher consequences than larger companies. That’s partly because the costs of hiring payroll employees are higher than working with a contractor, and partly because the new complexity of the rule may deter organizations that cannot afford extensive legal counsel from working with contractors altogether, even if they’re properly classified under the new rule.
Another government agency, the Small Business Administration, submitted a public comment raising concerns like these. Moreover, according to IRS tax records, the growth of independent contractors has been fastest for small and low-wage businesses (fewer than 20 employees), followed by medium firms (20-100) and lastly by large firms (more than 100).
Far from delivering its intended gains, the Department of Labor’s new rule on independent contractors will likely harm this growing segment of the labor force without the added benefits of helping more workers become employees.
Instead of limiting work opportunities, policymakers should provide independent contractors with more desirable options through flexible benefits that allow them to maintain their nontraditional arrangements while accessing work-related benefits. Flexible and independent forms of work aren’t going anywhere, and such a system is the only sustainable solution in the long term.
For this reason, a rule that makes it very difficult to be an independent contractor is not a simple “labor wins” story because it’s unlikely that most workers will win from these type of policies. That doesn’t mean rules should make it very easy to be an independent contractor, but there needs to be a balance. When rules are too restrictive—like what happened with AB5—properly classified independent contractors will lose their jobs.
For an in-depth analysis of the DOL rule, you can read my post on “Everything You Need to Know About the Department of Labor Independent Contractor Rule.”