MATTHEW FEENEY AND RACHEL CHIU, CATO INSTITUTE
This week, Joe Biden and Kamala Harris began their terms as president and vice president. Both Biden and Harris have expressed views on a range of technology policy issues that are bound to be discussed in Congress as well as state legislatures over the next few years. In the coming days, we will analyze Biden’s and Harris’ comments on three technology policy issues (the gig economy, online speech, and algorithmic bias). Below is the first entry of the series.
The “Gig Economy”
Gig economy workers have become an increasingly visible segment of the labor market. Amid the COVID-19 pandemic, gig workers have performed essential tasks, such as providing an alternative to public transportation and delivering groceries and other household goods. When unemployment skyrocketed last year, alternative work arrangements provided a source of income for many Americans without steady employment.
Since there is no universal definition for gig work, this entry uses the same definition as the United States Bureau of Labor Statistics’ Contingent Worker Supplement. Gig work, also referred to as “electronically mediated work” and “online platform work,” describes an employment structure where workers:
- Use a company’s website or mobile application to connect with customers and source short, temporary jobs (“gigs”);
- Receive compensation from the company that owns the website or mobile application; and
- Have autonomy to decide when they complete gigs.
Examples of such workers include ride-hail drivers, delivery drivers, and housekeepers who use mobile applications and websites to find customers and receive payment.
Gig work differs from the traditional employment model in both functional and legal terms. Workers are not considered employees of the company that runs the website or mobile application. Rather, they are classified as independent contractors under federal and state laws and consequently do not follow conventional employment constraints, such as a set salary, work schedule, and structured tasks.
The rise of gig work has raised questions about employment classifications, civil rights protections, and benefits. As policymakers move forward to create a safer and more secure workplace, they must equally consider the qualities that make gig work appealing to millions of Americans.
President Joe Biden and Vice President Kamala Harris have supported workers’ rights throughout their campaign and advocated for greater gig economy regulations. Their proposals are listed on the Biden-Harris campaign website. The “Biden Plan For Strengthening Worker Organizing, Collective Bargaining, and Unions” has called for labor law reform, including: legal benefits and protections for gig workers, changes to confusing legal tests enabling gig workers to receive independent contractor status, and the adoption of stricter classification schemes such as California’s ABC test.
Last year, President Biden expressed his approval for the ABC test codified by the California Supreme Court.
The ABC test presumes that a worker is an employee. The burden lies with the employer to prove that a worker is an independent contractor by demonstrating:
- Worker has full control of work performance;
- Work is completed outside of usual course of business for the company; and
- Worker has an independent business or occupation that usually performs the contracted work.
In January 2021, the California Supreme Court ruled that the ABC test applies retroactively. Consequently, app-based companies may be liable for classification violations since 2018.
Vice President Harris supported California Assembly Bill 5, which implemented the ABC test. Twenty-seven states have adopted the ABC test with minor variations. Eight states use a different version of the ABC test that does not consider where the work is conducted.
During the 2020 general election, California voters approved Proposition 22 by a fifty-eight percent majority vote. Proposition 22 provided an exemption to AB 5 for app-based transportation and delivery companies, enabling them to continue classifying their workers as independent contractors. It also promised better compensation, health benefits, and civil rights protections. The ballot measure was financially supported by the Yes on Prop 22 coalition, which spent over $200 million during the campaign and was funded by companies such as Uber, Lyft, and DoorDash.
AB 5 has been challenged in multiple lawsuits by a diverse range of affected parties, including the California Trucking Association, American Society of Journalists and Authors, National Press Photographers Association, Uber, and Postmates.
Cecilia Rouse, President Biden’s choice as chair of the Council of Economic Advisers, stated that her focus would be on the future of labor. She voiced her concerns for short-term COVID-19 issues in employment, in addition to the long-term changes in the gig economy.
Current State of Regulation
Under federal and state law, app-based companies must designate their workers as employees or independent contractors. To determine which status suitably describes the work arrangement, federal agencies, lawmakers, and courts have developed and utilized multiple employment classification tests. These tests vary from one another and can often be inaccurate when applied to gig workers.
Economic Reality Test
In September 2020, the United States Department of Labor (DOL) announced a proposed rule for determining independent contractor status under the Fair Labor Standards Act (FLSA). The Notice of Proposed Rulemaking was published in the Federal Register and comments were accepted for a thirty-day period.
The DOL proposed a new section in Title 29 of the Code of Federal Regulations that would sharpen the long-standing “economic reality” test. This test was first established in the 1947 Supreme Court case United States v. Silk, which held that “’employees’ included workers who were such as a matter of economic reality.” The Court identified five factors to determine employee versus independent contractor status: “degrees of control, opportunities for profit or loss, investment in facilities, permanency of relation[,] and skill required in the claimed independent operation.” According to the Court, no single factor was dispositive nor was the list complete. In the 1970s and 1980s, federal courts of appeals began to use the economic reality test without considerable consistency.
Currently, the economic reality test plays a pivotal role in determining worker status under the FLSA. In the Notice of Proposed Rulemaking, the DOL noted that it has used different variations of the test since 1954 and finds that its current application is “unclear and unwieldy.” Among many other flaws, the DOL and court’s emphasis on investment and permanency yielded inaccurate results. These shortcomings have become increasingly apparent as technological and social change transforms the modern economy.
In January 2021, the DOL finalized its rule for determining independent contractor status under the FLSA. Many legal experts view the new rule as employer-friendly, making it easier to classify workers as independent contractors.
The final rule reaffirmed the economic reality test to determine worker status under the FLSA. The DOL asserted that distinguishing between an independent contractor and an employee required an assessment of economic dependence. Although no single factor is dispositive, the rule identified two “core factors” that are more influential than the others:
- Nature and degree of control over the work; and
- Worker’s opportunity for profit or loss based on initiative and/or investment.
Three other factors were identified as guideposts in worker classification:
- Amount of skill required for the work;
- Degree of permanence of the working relationship between a worker and employer; and
- Whether the work is part of an integrated unit of production.
The rule was published on January 7, 2021 and was set to take effect 60 days after publication. On January 20th, President Biden paused all pending regulations until further review.
IRS Three-Pronged Test
The Internal Revenue Service’s (IRS) worker classification methodology can impose significant costs on companies. Employers are legally required to withhold federal income taxes and pay into Social Security, Medicare, and unemployment for workers designated as “employees.” Such obligations do not exist for companies that hire independent contractors.
The IRS assesses the working arrangement using a three-factor assessment, which the American Bar Association refers to as a “three-pronged” test. The factors are used to understand the degree of control and independence within the working arrangement. This test consists of the following: behavioral control, financial control, and type of relationship.
Behavioral control refers to the company’s right to direct how the worker does an assignment. Instructions and training that the worker receives are used to determine the degree of behavioral control. In contrast, financial control is an analysis of the pay structure, investment, and freedom for the worker to pursue other business opportunities. The last factor, type of relationship, describes the permanency and importance of the working arrangement for the company.
Prior to the three-pronged test, the IRS used a twenty-factor common law test to determine worker classification.
The Future of the Gig Economy
The gig economy is functionally dependent upon its temporary workforce. For example, in Uber’s early days, the company’s business model was considered innovative because it was a ride-hailing company without cars. Uber was and continues to be a platform that facilitates safe and effective communication between drivers and riders. This working arrangement bears no resemblance to taxis and the medallion system, which are inherently restrictive and prohibitive to market entry.
Uber is not a taxi company, and nor is Airbnb a hotel chain. Uber, Airbnb, and other gig economy companies are not selling car rides or temporary accommodation; they’re selling reductions in transaction costs. This model has proven popular, and it is not feasible using traditional employer designations.
The independent contractor status enables app-based companies like Uber to offer flexibility, autonomy, and choice to their workers. Drivers can accept other gigs from different companies— even competing companies such as Lyft— and define their own work schedule. In contrast, traditional employment models define wages and hours for the employee. Gig work is an alternative to the traditional employment model and ought to be seen as an entirely separate, distinct working arrangement.
In a 2020 poll commissioned by Lyft, eight-two percent of independent contractors surveyed did not want to be employees, preferring their current worker classification instead. Ninety percent stated that their worker classification is a “good arrangement” in their current lifestyle.
Gig workers do not necessarily need to be considered independent contractors, but the employee designation is inappropriate. Employment classification systems developed in the previous century are ripe for change. Foremost, the gig economy suffers from a lack of clarity. There is no universal definition for gig work and unclear classification methodologies vary on the state and federal levels. These inconsistencies need to be resolved to clarify gig work within the law. However, such change should not conflate disparate working arrangements, affect the nature of gig work, or impede the gig economy business model. Regulation that results in inaccurate or inconsistent classification will inevitably limit opportunities for millions of Americans working in the gig economy. In addition, poorly crafted regulations could stifle competition in the gig economy, with powerful market incumbents being better placed than start-ups to comply with a new and complicated regulatory regime.
AB 5 and the ABC test fundamentally disrupted the gig economy’s employment model and introduced extremely prohibitive, if not insurmountable, barriers for operation. The narrow view that gig workers should be employees by default, or that they are misclassified or exploited, leads to counterintuitive policy proposals. There will be no more gig workers to protect if policymakers continue to pursue greater compensation, benefits, and other employee standards without due consideration for economic and social costs.
Matthew Feeney is the director of the Project on Emerging Technologies at the Cato Institute, where he works on issues concerning the intersection of new technologies and civil liberties. Before coming to Cato, Matthew worked at Reason magazine as assistant editor of Reason.com. He has also worked at The American Conservative, the Liberal Democrats, and the Institute of Economic Affairs. Matthew received both his B.A and M.A in philosophy from the University of Reading.