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Debating Employment Flexibility in the Gig Economy

Renowned labor expert and Harvard professor Benjamin Sachs argues over at OnLabor.org that he’s had enough with what he calls the “flexibility trope” of worker classification and job flexibility. 

Sachs calls out comments made by Jianming Zhou, CEO of SherpaShare, on the California Supreme Court’s decision in the Dynamex case and how it would impact sharing economy companies and workers. The court decision adopted a new test to determine a worker’s status as an employee or independent contractor, for the purposes of “wage orders” issued by the state’s Industrial Welfare Commission. Wage orders regulate minimum wage, maximum hours, and working conditions in certain industries and occupations in California. In short, the “ABC” test adopted by the court makes it much more likely that an individual worker in California will be classified as an employee rather than an independent contractor (see the Coalition to Promote Independent Entrepreneurs excellent analysis of the case).

To paraphrase Zhou’s comments that Sachs took issue with, rideshare drivers prefer independent contractor status because they enjoy the flexibility it offers. Sharing economy workers do not want to be classified as employees because their employer would exert more control over when and how they work.

Here are Sachs’ thoughts:

This is a trope in gig-economy debates. But it is a myth (putting it politely). If gig workers – Uber drivers, Lyft drivers, and Caviar delivery people – get reclassified as employees, that status will not require the firms to take away all the workers’ flexibility. In fact, the trope gets the relationship between control and employee status exactly backwards. The way the law works is this: if a firm exercises sufficient control over a worker, then the worker may be an employee. The law does not work the way Zhou would suggest: if the worker is an employee, then then the firm must exercise control over the worker. If Caviar or Uber workers are reclassified as employees, the firms could ensure a high degree of continued flexibility, including by allowing the employees to work when and for as long as they want.

Sachs’ analysis of the law is accurate. Yet, it completely ignores the many costs, liabilities, and regulatory burdens associated with an employer-employee relationship. Simply, government mandates have made it much more expensive for employers to employ employees than outsource work to independent contractors.

Any time an employer hires an employee it must pay Social Security and Medicare taxes at a 6.2% and 1.45% rate, respectively. Then there is unemployment and workmen’s compensation taxes employers must pay, rates which vary from state to state. Further, certain cities and states are always looking to implement some new tax, as seen in Seattle where the city council recently passed a tax on large employers based on hours worked by employees.

Beyond government placing direct costs on employment, federal regulatory burdens on employers that classify their workers as employees are massive. For example, a combination of the Department of Labor, National Labor Relations Board, and Equal Employment Opportunity Commission’s regulations will impose an estimated $80 billion in economic costs over the next ten years, according to the National Association of Manufacturers. State and local governments also impose costs and burdens on employing traditional employees, like scheduling laws, which interfere with worker flexibility, and paid-leave requirements.

But back to Sachs’ argument. Yes, legally it is possible to reclassify independent contractors as employees and continue offering flexible work schedules and allow drivers to work whenever they like. However, this is not realistic. Sharing economy companies couldn’t allow drivers to work as many hours as they’d like because as employees they would be entitled to overtime pay. No company can afford to pay for unlimited overtime.

Liability for sharing economy companies would increase with a shift to employment status. With greater responsibility for the actions of drivers, ridesharing companies would screen potential drivers closely. Many drivers who earn money on the side today may be let go in the future due to stricter hiring practices. Being out of a paying gig is not the kind of flexibility that individuals who currently drive for Uber and Lyft are looking for.

These added costs and liabilities would likely force employers to take control over other aspects of work—what routes drivers take, how they interact with customers, and what they wear.

If government did not impose so many added costs and liabilities on the employer-employee relationship, Sachs’ argument would be more convincing. As long as employee status saddles employers with massive burdens, companies will be reluctant to offer the kind of flexibility rideshare drivers enjoy today as independent contractors.

For more on the future on employment, see my colleague Iain Murray’s study “Punching the Clock on a Smartphone App? The Changing Nature of Work in America and Regulatory Barriers to Success.”