“Gig workers get a break from Biden Labor Department.” That’s the title of an October 11 article by Emily Peck of Axios Markets. What break is Peck referring to? The Biden administration’s Labor Department proposed a regulation to get many “gig workers” classified as employees. Peck refers to this as a “pro-labor turn.”
Interestingly, Peck doesn’t explain why having the government classify gig workers as employees without taking account of gig workers’ wishes is good for those workers. Peck takes as given that they would want to be employees. But is that true? When economists observe people doing activity X when activity Y is an option, we tend to conclude that those people prefer X to Y. So if we observe millions of people choosing what’s variously called “gig work” or “independent contracting,” and there are millions of jobs available for those who want to be employees, the odds are high that those millions of gig workers want what they chose. Therefore, to argue for not allowing them to engage in gig work (the term I’ll use from now on), you need to show that they, by their own standards, would be better off as employees. That case has yet to be made.
These are the opening two paragraphs of my latest article for the Hoover Institution, “Give Gig Workers a Real Break,” Defining Ideas, November 17, 2022.
Another excerpt:
The Labor Department proposes six “economic reality” tests as a basis for deciding whether someone is an independent contractor or an employee: (1) “opportunity for profit or loss depending on managerial skill”; (2) “investments by the worker and the employer”; (3) “degree of permanence of the work relationship”; (4) “nature and degree of control”; (5) “extent to which the work performed is an integral part of the employer’s business”; and (6) “skill and initiative.”
The idea with (1) is that the greater the opportunity for profit or loss and the greater the managerial skill required, the more likely is it that the person is an independent contractor. With (2), the idea is that the greater the worker’s investment, the more likely he or she is an independent contractor. Interestingly on (2), the Labor Department states that buying one’s own tools is not “evidence of capital or entrepreneurial investment.” Hmmm. Tools are definitely a capital investment by any reasonable standard. Here the Biden Labor Department’s bias in favor of declaring an employment relationship is clearly on display. It’s on display in another way also. Notice the wording of (2) and also of (5). Both implicitly assume that the entity engaging a potential contractor is an employer and that the potential contractor is an employee. But isn’t that what’s supposed to be determined?
On (3), the Labor Department proposes that if the “work relationship is indefinite or continuous,” that argues in favor of the person being an employee. The department doesn’t bother to say why.
Test (5) is also interesting. It resembles the “B” part of California’s ABC test. It’s also incoherent. If the work is not integral to the employer’s business (oops—they’ve even caused me to assume that the entity wishing to engage a contractor is an employer), then why the heck does it want to engage a contractor? When a contractor delivers food to a restaurant, you can be pretty sure that that food delivery is integral to the enterprise. But how exactly would that make the food deliverer an employee? And if, by some chance, the Labor Department would exempt food deliverers from being employees, how would it justify that?
Interestingly, there is one huge gap in what the Labor Department calls a “totality of the circumstances” analysis, a gap that gives the lie to any claim that the Labor Department will consider all the circumstances. Can you guess what that gap is? I bet the Labor Department can’t but many independent contractors can. Not even mentioned is whether the contractor wants to remain a contractor.
Read the whole thing, especially if you want to comment and more especially if you want me to respond to your comment.
If you want to see my humorous remark, read my Disclosure at the end. I’m surprised, but delighted, that Hoover’s editor let me keep the last line.
READER COMMENTS
Henri Hein
Nov 17 2022 at 3:11pm
Nice piece. Yes, the last line was great.
Anecdotally, people I talk to about gig work – either workers themselves or family members – confirm what you say about them wanting to remain independent.
About the 88% vs 92% disparity on health insurance, I was missing an “other” category. There is almost always someone who falls outside the common ways to get insurance. Just throwing out ideas: some could be covered by a trust fund, or if they became a gig worker later in life, might have a substantial HSA. I could see them responding “yes” to having insurance, though they may not be covered by health insurance in a technical sense.
MarkW
Nov 17 2022 at 3:19pm
In my experience, a common pattern is an independent contractor with a spouse who’s an employee and has family health insurance coverage.
MarkW
Nov 17 2022 at 3:17pm
That case has yet to be made.
I have no quibbles with your article. You’re right on every point. But by now we’ve long known what’s going on. Backers of CA SB5 (and their fellow travelers in the Labor Dept) know very well that what they’re imposing is against the wishes of the majority of those affected (and, of course, their business partners). Naturally this is not being pushed for the benefit of gig workers, but for the benefit of the government and labor unions who greatly prefer workers to be in formal W2 employment rather than independent (which makes them much easier to organize, track, tax, etc). And as with SB 5, the furious lobbying, deal-making, and back-slapping for exceptions to the rules for politically powerful, favored industries would be a growth industry for DC insiders. The argument that these rules would be for the benefit of contractors is not expected to convince the contractors themselves, but to convince the majority of voters who are NOT contractors, NOT independent, and who have no skin in the game.
Full disclosure — I have done independent contract work for more of my career than not. I would absolutely not have wanted to have been forced into an employer/employee relationships. I didn’t need the benefits (my wife has those), and really wouldn’t have wanted to be a full-time employee of the companies I’ve done contract work for. These rules would have made my life worse and poorer. But lefty labor advocates have no reason whatsoever to take my concerns into account.
vince
Nov 17 2022 at 3:35pm
Another reason for the push for employee classification could be tax compliance. There’s no requirement for independent contractors to submit withholding taxes with each pay, and many can’t or won’t pay the balance due when they file income tax returns.
Incidentally, payroll compliance is a tremendous burden on very small businesses. We would see more small businesses if they could avoid it by choosing independent contractors.
vince
Nov 17 2022 at 3:43pm
” (5) “extent to which the work performed is an integral part of the employer’s business””
Does an employer pay for work that isn’t an integral part of its business? What a can of worms.
BC
Nov 17 2022 at 4:15pm
As far as I know, gig drivers are allowed to logon to Lyft and Uber simultaneously, at whatever times work for the drivers, and selectively find passengers using either or both apps. I don’t know too many (any?) employees that can clock in and out of work at their own discretion and work for a competitor at the same time as their employer. I have no idea how the Labor Dept’s 6-pt test applies: 1, 3, and 4? If the test does classify gig drivers using an app to find customers as employees, then that would be dispositive evidence that the test is flawed.
If activists are concerned about contractors not receiving benefits, why isn’t any contractor that has health insurance and/or a retirement account automatically exempted from being re-classified as an employee?
Agree on test (2). How can buying tools for one’s contracting business not be considered capital investment? If I bought or own a car with an intention to monetize part or all of the car by finding customers on Lyft and Uber, then at least part of the cost of that car is an investment.
Thomas Lee Hutcheson
Nov 17 2022 at 4:58pm
To give gig workers a real break, we should make ACA insurance, in which each person purchases their won insurance, as good as employer purchased health insurance. Not only would this be more transparent (some employees and even some employers see this as some kind of gift to workers and not just part of their compensation) but it would also reduce the disincentive to employ low wage workers as the cost to the employer is a greater % of the low-wage earner’s wage (assuming that minimum wages prevent the employer from offering a compensating lower wage to the low-wage employee.]
Mark Swanstrom
Nov 18 2022 at 1:49pm
Absolutely agree and the same arguments can be made for forced union membership. Collective bargaining primarily benefits the worst employees. If I were an above average employee, I would rather not be stuck under a union contract where seniority is valued over ability. Even if an employee is not forced to join the union or to pay dues, they are still forced to work under the collective bargaining agreement.
Herb
Nov 18 2022 at 7:12pm
When I retired from my last employer I started a consulting business. My previous employer hired me on an hourly basis to work on a project which I had left. Under the rules of AB5 they would have had to re-hire me at great expense to both parties. I had expenses (e.g., health insurance), but I made much more per hour than when I worked for them and what they paid me cost them much less. For us, it was a win-win situation. I expect this situation to hold true for most of the gig workers.
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