Risk Shift and the Gig Economy

Recently, everyone from Hillary Clinton to the American Enterprise Institute  (AEI) has been focused on the “gig” economy—businesses like Uber and Taskrabbit that let consumers call up services on demand with their computers or phones. Despite all the attention these businesses have received, both AEI and the Wall Street Journal have pointed out that the gig economy supposedly has not shown up in Bureau of Labor Statistics job data. But while the on-demand economy has not appeared in government labor statistics—yet—that does not mean that it is not having an impact on people’s livelihoods. The rise of the gig economy is part of a wider trend that Yale political scientist Jacob Hacker has noted of risk being shifted from employers onto the backs of workers. New technologies have only accelerated this shift.

Drivers for Uber and Lyft, as well as most workers in the gig economy, are classified as independent contractors, despite the fact that their employers direct much of their work activities. Uber, for example, tells drivers where to pick up passengers and also deactivates drivers’ accounts if they consistently receive poor ratings from passengers. But because they are independent contractors, drivers are responsible for insuring their own vehicles, and the company does not provide them with health insurance, paid vacation, or retirement benefits. Independent contractors are also unable to file for unemployment compensation, must bear all of the cost of Social Security payroll taxes, and cannot file for workers’ compensation.

Ride-sharing is not the only part of the economy where workers are frequently misclassified as independent contractors, however. Misclassification happens throughout the economy, everywhere from construction to housecleaning to home health care. Across the board, this practice leads to lower wages and tax revenues, among other social costs.

The regulatory state and the law have not kept up with shifts in the economy, but that is starting to change. A California judge recently argued that drivers are actually employees, writing that “the Court first concludes that Plaintiffs are Uber’s presumptive employees because they ‘perform services’ for the benefit of Uber.” And David Weil, Administrator of the Wage and Hour Division at the U.S. Department of Labor (DOL), deserves credit for his proactive enforcement approach. DOL recently issued guidelines on misclassification, clarifying that an important question is “whether the worker is really in business for him or herself (and thus is an independent contractor) or is economically dependent on the employer (and thus is its employee).”

Sen. Mark Warner (D-VA), a former technology executive, has also been outspoken on the issue. Warner has called for a new social contract to address the fundamental changes occurring due to the gig economy. While he has yet to propose any legislation on the matter, one concrete idea Warner has backed is an “hour bank.” Such a system would allow workers at multiple firms to accrue retirement and healthcare benefits, much as construction workers do when they work for various firms over the course of a year. Some of the discussion focuses on a new category of worker status, somewhere between independent contractor and being an employee: it is far from clear that any such designation is needed to accommodate new technologies, especially if it erodes worker protections.

Uber and others businesses in the gig economy undoubtedly benefit consumers, but these benefits can come at a cost to workers. While conservatives frequently raise the specter of stifled innovation to oppose any sort of regulation, without any regulation, a race to the bottom will ensue. The relationship between employers and employee will become ever more tenuous, and wages will continue to stagnate or decline for the vast majority of workers. Policymakers and the courts must find a way to ensure a greater degree of stability for workers in the gig economy, and there is no reason to posit any conflict between innovation and worker protections.