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Labor Law and the Gig Economy: Why Stick with an Antiquated System?

gig

The rapid growth of the gig economy—workers using Internet platforms to deliver personal services such as rides, legal services, and plumbing to consumers—has sparked a discussion on their impact and relationship to current law. A major topic in this debate has been whether gig workers should be classified as employees or as independent workers. On March 15, Ross Eisenbrey and Lawrence Mishel of the Economic Policy Institute criticized an earlier paper that Seth Harris and Alan Krueger had written for the Hamilton Project at the Brookings Institution. The Harris and Krueger paper recommended establishing a third legal category for gig workers. But Eisenbrey and Mishel’s assertion that current law can handle gig marketplaces misses the central point. The real question is not whether a centuries-old distinction can be contrived to apply to the gig economy. It is whether doing so is in the best interest of society.

Eisenbrey and Mishel primarily focus on the case of Uber. This is unfortunate because Uber probably represents the closest case to an employer-employee relationship. But even in this case the authors acknowledge that courts have given different opinions. The waters are muddied even further by the fact that a large number of traditional cab drivers operate as independent contractors. Looking at the gig economy as a whole, the issue is even more complicated. Although they still represent a very small portion of the total labor market, companies like Thumbtack, Hello Alfred, and TaskRabbit use different business models. In arguing that the current employee-independent contractor distinction should be applied to all of these, the authors overlook three important points.

The first is that even though the law could be extended to new situations, doing so would not be optimal. The employee-independent contractor distinction is a relic from common law torts. It remains because Congress has not provided more precise instructions for when the nation’s labor laws apply. The common law classification is based on a case-by-case examination of several factors, many of which, such as whether a job requires specialized skills or is central to the purpose of the company, are highly subjective. It gives very little guidance to firms and workers who need to know how it applies to their situation. Moreover, the optimal decision of whether a labor law should apply to a specific worker seldom matches the common law distinction.

Second, gig platforms can easily alter their business models to separate themselves from their workers, making them more like independent contractors. For example, Uber could eliminate many of the traits that bother Eisenbrey and Mishel so much. It could turn over payment processing to PayPal, allow its drivers to refuse more rides, and not set the fare. All of these changes would strengthen the argument that its workers are independent contractors. But each would also reduce the value Uber provides to both its riders and its drivers. Is that what we want to encourage?

Third, a central argument of Internet platforms is that current law actively discourages them from helping their workers. Because every benefit or service provided to a worker can be used to argue that the worker is an employee, companies have an incentive to do as little as possible consistent with their business model. A few gig platforms, such as Hello Alfred, have chosen to make their workers employees. But others believe that independent contractor status is fundamental to their profitability and to the freedom they give workers. Since these firms face a great deal of uncertainty regarding how various judges and agencies will apply labor law, they face real risks anytime they try to form a closer relationship to their workers. Indeed, Eisenbrey and Mishel use Uber’s voluntary decision to provide a minimum wage to some of its drivers against it, citing it as another indicator of Uber’s ability to control the relationship.

The evidence is pretty clear that Internet platforms improve the lives of their workers. The best evidence of this is their rapid growth. Workers have many choices in how to spend their time. Presumably few of them would decide to use a gig platform if they thought there were better alternatives. This is especially true for professionals such as plumbers and accountants, who can do their own advertising to find clients. Eisenbrey and Mishel admit that Uber drivers have a wide variety of views. They fail to acknowledge that their solution would probably make some of these drivers unprofitable to Uber. It is not clear why the voice of any driver should be silenced to pursue any judge or policymaker’s idea of workers’ rights.

There are alternatives. Ideally Congress would amend each of the labor laws to make them more relevant to the growing and constantly shifting labor markets. Short of that, Harris and Krueger propose creating a third category of “independent worker,” which would be subject to some, but not all of the labor laws. A more practical alternative would be to provide gig platforms that serve the general public and give their workers flexibility to decide when to work with a temporary exemption from the labor laws. This would give us a chance to see whether the companies actually help their workers with services such as training, career advice, tax withholding, insurance, and retirement planning. If they do, we may have even less reason to rely on the antiquated employee-independent contractor distinction.

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About the author

Joe Kennedy is a senior fellow at ITIF. For almost 30 years he has worked as an attorney and economist on a wide variety of public policy issues. His previous positions include chief economist with the U.S. Department of Commerce and general counsel for the U.S. Senate Permanent Subcommittee on Investigations. He is president of Kennedy Research, LLC, and the author of Ending Poverty: Changing Behavior, Guaranteeing Income, and Transforming Government (Rowman & Littlefield, 2008). Kennedy has a law degree and a master’s degree in agricultural and applied economics from the University of Minnesota and a Ph.D. in economics from George Washington University.