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Make The Gig Economy More Resilient


10 Aug 2020

The “gig economy” has unlocked a wave of economic value in recent years. The direct impact of independent workers on the economy is almost $1 trillion, or 5% of GDP.

Now, this extremely flexible segment of the economy is more important than ever in the midst of the COVID-19 pandemic. Surprisingly, even the healthcare industry has been laying off workers, as patients defer elective surgeries and postpone non-urgent care.

The gig economy has been a rare bright spot during a dark time for the U.S. economy. Since the shutdowns began in mid-March, more than 44 million Americans have filed for state unemployment benefits.

Fortunately, platforms for independent workers have been able to pick up some of the slack. Instacart has hired 300,000 new workers and plans to hire 250,000 more. Target’s Shipt added 100,000 workers. Doordash and Amazon Flex are also seeing a surge in signups by workers. Part of the reason for this uptick is that gig workers often perform tasks that enable social distancing for others such as food or package delivery. Platforms that facilitate these transactions are also one of the only ways newly laid off workers can earn income during the crisis, bypassing strenuous hiring processes or the need to learn new skills. These flexible work arrangements can benefit society by swiftly shifting labor out of dormant sectors and into in-demand sectors.

For many workers, these new gig economy jobs will be temporary, serving as a lifeline during a difficult time. For others — and for the millions who were already independent workers — these new jobs might become permanent. While these jobs are certainly much needed during these times, a key inequity from before the pandemic remains: independent workers don’t receive the same benefits as employees. This is due to two factors. First, businesses generally prefer working with independent contractors as opposed to hiring employees because there are fewer rules and regulations associated with independent workers and therefore lower costs. Second, the tax code is biased against independent workers. Employee benefits tend to be untaxed, while independent workers must purchase benefits on their own using post-tax income.

So the critical question becomes: How can we help workers in these jobs get the benefits they need and deserve while maintaining the flexibility that traditional employment arrangements can’t offer and that independent workers value so dearly — and that have helped make our labor markets more supple and resilient during the present crisis?

As part of its disaster relief, Congress augmented regular unemployment benefits under the Pandemic Unemployment Assistance (PUA) program, including self-employed workers who had previously been excluded from receiving UI benefits. Including independent workers in this stimulus measure makes sense even from the logic of the unemployment system: Across the business cycle, the unemployment system already pays out more in benefits to workers than it receives in UI taxes. The system is designed to be an automatic stabilizer and Congress regularly increases outlays as a first line of defense in a recession.

Traditionally, workers have been sorted into two categories: employees and independent contractors. Gig workers are most often classified as independent contractors. Some progressives are calling for a change to the laws so that gig workers become employees.

This shift could undermine many of the benefits involved in freelancing by imposing costs, rules, and regulations associated with employment that undermine the autonomy independent workers currently enjoy. It’s no surprise that in surveys gig workers overwhelmingly say they don’t want to be reclassified as employees.

Nonetheless, that doesn’t mean they don’t want and deserve basic protections and benefits employees have. The current distinction between employees and independent workers is outdated and ill-suited to the 21st century digital economy. However, that didn’t stop California’s legislature from doubling down on the old model, passing AB-5 last September which effectively reclassified most independent workers as employees. The predictable result: independent workers in California have been laid off en masse.

In its news coverage of the passage of AB-5, Vox published an article with the headline “Gig workers’ win in California is a victory for workers everywhere.” Its reaction as a business, however, was quite different. A couple months later, its parent company, Vox Media, laid off 200 freelance writers right before the holidays (and right before the law went into effect on January 1).

It is time to update the U.S. tax code, which is biased toward employees and against independent contractors. According to the Bureau of Labor Statistics, total benefits are more than 30% of hourly compensation for private sector employees. If businesses try to give independent workers benefits, that’s taken as prima facie evidence that those workers are actually employees and the associated regulations apply to them. And most of these benefits are tax-advantaged: retirement and savings, insurance (life, health, short-term, and long-term disability), paid leave, workers compensation, and unemployment benefits.

But it’s important to note: all else equal, that this plan to extend tax-preferred benefits to independent workers wouldn’t cost taxpayers any more in lost tax revenue than converting all independent workers into employees because the benefits would be untaxed in both cases. In other words, if a federal version of AB-5 were to be implemented, independent workers that become employees in that scenario would also receive tax-advantaged benefits.

A new tax and regulatory regime that solves this inequity would have several important features:

• It should equalize the tax treatment of benefits so that independent workers are on a level playing field with employees.

• It should require a baseline level of benefits and protections for independent workers, including a cafeteria-style plan with a menu of options for workers to choose what makes the most sense for them.

• It should have a uniform national standard for determining who is an independent worker. For example, one possibility is that companies would have minimal control over hours of work, and no non-compete agreements

Here’s how it would work. Companies would pay a certain share of the worker’s earnings into a dedicated account for pre-tax benefits. There would be no required match from the beneficiary. The independent contractor would accrue benefits in proportion to the amount of money he or she earned on the platform. A separate and important question is whether the new regulatory regime would be opt-in or mandatory. We lean towards opt-in given the wide variety of independent contractor arrangements that exist (e.g., doctors, realtors, etc.). If companies do not opt in, they would remain subject to existing legal tests for determining worker classification.

If a company opts-in to this alternative classification — which we call “gig workers with benefits” — then once a worker reached a certain number of hours contracting with them, that worker would be entitled to a required set of tax-advantaged benefits — for example, portable benefits including paid leave, retirement savings accounts and contributions towards an individual’s health insurance premiums. All workers also should be covered by occupational accident insurance for on-the-job injuries.

On the other hand, companies that opt-in to this new regulatory framework would be required to give workers the freedom to choose their hours as well as work for other companies in the same industry. In effect, this would give employers minimal control over hours or non-compete agreements.

Companies would be required to choose, on a year by year basis, whether they apply this new category of worker to their independent contractors. Companies are incentivized to opt-in because the benefits independent workers receive under this model are tax-advantaged. On the margin, independent workers will choose to work with companies that offer these benefits because they are worth more than pure cash compensation (which is subject to payroll and income taxes).

This new category for independent workers would come with some of the costs of regular employment, but many companies would likely still choose this option over hiring employees because their business model depends on flexible, on-demand workers. For example, a ride-hailing company would likely not be able to comply with minimum wage and overtime laws if workers set their own hours, as there would be no way to ensure that workers don’t “clock-in” during off-peak demand to sit idly and collect the minimum wage and overtime. The “gig workers with benefits” category, on the other hand, enables companies to maintain their flexible approach to engaging gig workers, without compromising the independence that the workers themselves value highly. If this flexibility went away, workers would demand more cash compensation to compensate for needing to work a rigid schedule.

This choice would allow companies to offer benefits to independent contractors without worrying that they would be reclassified as employees at either the state or federal level, while preserving the flexibility and independence that are synonymous with independent contractor status. And independent contractors would be on equal footing with the tax-advantaged employee benefits.

America’s gig workers deserve greater economic security but eliminating their jobs or undermining the autonomy of workers who need flexibility in their employment isn’t the right way to achieve that goal. Leveling the playing field to ensure independent workers and employees receive the same tax treatment on their benefits is the better path forward.

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