In a few short years since its founding, Uber has become an iconic company and a global phenomenon, valued at $51 billion–almost as much as old-economy stalwart General Motors, which clocks in at $52 billion. Not bad for a company that doesn’t actually build anything or own any cars.
Uber also has become the poster child for what is known as the “independent contractor loophole.” Uber claims that it does not directly employ any drivers, that all its drivers are contractors who are micro-entrepreneurs in business for themselves (though that determination is headed towards a courtroom, as the result of a class-action lawsuit). Uber has garnered a lot of media scorn over this, but in fact many businesses today, whether or not they identify with the so-called sharing economy, are increasingly relying on “non-regular” workers: freelancers, contractors, temp workers, and part-timers. This practice has given rise to the term “1099 economy,” referring to the 1099-MISC tax form that such workers file with the Internal Revenue Service, instead of the more standard W-2 form.
Meet Chris Young, an assembly-line worker at Nissan’s manufacturing plant in Smyrna, Tennessee. As reported in the Washington Post, Young works alongside dozens of other employees, but Young doesn’t get to wear the coveted Nissan jersey that many of his fellow workers wear—because he doesn’t work for Nissan. Instead, he is what is known as a “perma-temp.” He works for Yates Services, a private contractor who now provides a majority of Nissan’s workers. Young says, “I build the same Infiniti SUV” as the Nissan workers, but he and other Yates employees receive half the salary, less job security, and way fewer safety net benefits.
Nationwide, temps like Chris Young have provided nearly a fifth of the total job growth since the recession ended, according to federal data. And increasingly the temps aren’t very temporary. Some workers originally hired as “temps” have been employed at the same company for as long as 11 years without receiving a full-time position—hence the new term “perma-temp.”
Or how about Frederic Larson, who enjoyed a successful 30-year career as a staff photographer with the San Francisco Chronicle, during which time he won numerous awards, including being a Pulitzer Prize finalist. As Forbes reports, he got downsized during the recession, and so needing income he monetized–he turned his house into an Airbnb hotel and his spiffy Prius into a Lyft taxi. Now for 12 nights per month—40% of his life—he shutters himself in a rabbit hole inside his own home while complete strangers have the run of the place. This award-winning professional photographer has been turned into an innkeeper in his own home, and a taxi driver in his own car.
And there’s Leena Chitnis, another scrappy “gig-preneur” and a Fulbright scholar who completed her MBA at Syracuse University. As we wrote here at Fast Company, to keep herself afloat while she looked for a permanent job, Chitnis set up a bunch of micro-gigs on Fiverr. Fiverr is an online job brokerage that connects buyers to sellers of numerous tasks and services, which pay as little as $5 per job (hence, its name). After fulfilling a total of 27 orders, she found that she had made a grand total of $176. “I’ve seen panhandlers get more money outside of the 7-11,” she says.
The advantage for any business to use 1099 wage-earners over regularly-employed (W-2) workers is obvious: an employer can lower its labor costs dramatically—by 30% or more—since it is no longer responsible for paying for a 1099 worker’s safety net. Corporate America is increasingly relying on these types of workers as a core part of its business model to cut costs and maximize profits. As one new economy booster put it, “Companies need a workforce they can switch on and off as needed”—like a faucet or a TV.
Things have gotten so topsy-turvy that even the most talented workers are not immune from this trend. Tina Brown, the flamboyant media mogul and former editor of Vanity Fair, The New Yorker and The Daily Beast, wrote at the Daily Beast that she noticed with disbelief the impact on her own associates and friends.
“Now that everyone has a project-to-project freelance career, everyone is a hustler,” she says. “No one I know has a job anymore. They’ve got gigs,” which she described as a “penny-ante slog of working three times as hard for the same amount of money (if you’re lucky) or a lot less (if you’re not). Minus benefits, of course.” For a while, she added, “the downsized people I know went around pretending they enjoyed the ‘freedom’ and ‘variety’ of doing ‘a whole lot of interesting things.’ Twelve months later, nobody bothers with that cover story anymore.”
What Brown is perceptively realizing is that, for all those Americans who lost their good “New Deal” jobs and have entered the disordered world of “Uber-ized” work, many of them now exist in a whole new universe. They don’t get paid for the many hours it can take to search for the next job, and attending meetings or gabbing around the water cooler with co-workers while “on the clock” is history. It’s all piecework today, practically dialing back the labor clock to the 19th century. It’s as if Tom Brady only gets paid for those moments when he throws a touchdown pass, and the whole rest of the game is on his time and dime.
The accelerated use by employers of the independent contractor loophole is causing a rapid erosion of the safety net for workers and families, one that was forged over many decades. Under the current system, employers actually have an incentive to fire their entire workforce if they can get away with it and dramatically reduce labor costs by using all 1099 workers. And now the apps and websites of the “sharing” economy make it easier than ever to do. These perverse incentives are threatening to undercut the U.S. labor force and turn millions of workers into little more than day laborers.
So the problem created by the new digital economy is not merely one of income inequality. We must also re-establish a degree of economic security for the broad swath of American workers.
Fortunately, we already have a working model for how we can do this. As former Treasury Secretary Larry Summers and others have identified, the key is portability: the support infrastructure for workers must be designed so that the safety net follows the worker from job to job and employer to employer. Such “multiemployer plans” have been used for many years in industries like construction and mining, and among some Silicon Valley companies. Here’s how we can adapt this model for any occupation or industry.
When companies like Ford, Uber, or Facebook are hiring contractors, freelancers, temps, or even regularly employed part-time workers, in addition to the wages they pay they would also pay a few dollars more per hour, pro-rated according to the number of hours an individual works for that company. That money would be invested in an “Individual Security Account” for each worker’s safety net (if wages are not based per hour but on completion of a job, such as for an Uber driver, the company would chip in a percentage of the gross wages into the worker’s ISA).
These accounts would use payroll deductions to pay for existing state and federal programs–Social Security, Medicare, unemployment, and injured workers’ compensation–as well for other safety net components, such as health care and paid sick days and vacations.
What this does is create “legal parity” between all the different classifications of workers. This is a smart way to address this because it renders unnecessary the endless debate–as well as lawsuits–over whether the worker is an employee or a contractor/freelancer. Either way, the employer chips in the necessary funds for each worker’s safety net.
So for example, suppose Donna is employed 20 hours a week by a hairdresser, contracts for 10 hours a week with TaskRabbit, and drives five shifts for Uber. She would earn 50% of her benefits from the hairdresser, 25% from TaskRabbit, and another percentage based on her wages driving from Uber.
How much would all of this cost employers? Surprisingly, not that much. Based on numbers from the U.S. Bureau of Labor Statistics, a basic safety net (including Social Security, Medicare, unemployment and injured workers compensation) would cost less than $2 per hour per worker. A more generous safety net–including health insurance and five paid sick days and five vacation days–would cost about $2.25 per hour for service sector workers and $4.15 per hour for sales and office workers. The businesses could pass the cost of the ISA contributions on to customers, since that is the largest consumer pool that can absorb this cost with least impact. And since many of those customers are also workers who will directly benefit, a rising tide will float all boats.
What it comes down to is this: there’s absolutely no reason why a business should be able to evade paying a couple dollars more per hour per worker to provide a safety net, just because that business hired a part-timer, freelancer, temp or contractor. By extending legal parity to all workers, the independent contractor loophole would be closed.
This is already being done all over the world to varying degrees, and these changes can be implemented at the local or state level, we don’t have to wait for Washington, D.C. Cities and states could require that employers pay a pro-rated amount into a worker’s Individual Security Account.
This “new kind of deal” would start the transition toward the right kind of new economy, in which Americans could be enriched by technology and innovation, instead of being disrupted or impoverished by it.