Outdated labor policies hurt economic growth

The delayed October jobs report by the Bureau of Labor Statistics was expected to show once again that U.S. unemployment is only slightly improving, if at all. Yet one segment of the economy is steadily growing despite workplace policies that are increasingly irrelevant to an economy undergoing a fundamental shift from traditional employment to a new and growing force of independent workers.

Laws that govern the U.S. worker-employer relationship, like the Fair Labor Standards Act, were established during the New Deal era to protect workers against unfair and abusive labor practices. These laws are not easily applicable or appropriate for the new independent worker mode, which is fueled by technological change and the global economy. The Internet, laptop computers, tablets, cell phones and cloud communication make it possible for work to take place anywhere in the world. More and more production is taking place in small, networked organizations.

While this tendency toward independent work is picking up momentum, government and some labor unions have not figured out how to operate in this new environment.  A case in point: the regulations governing independent contracting. Laws that could actively support independent contractors have not been established. Our research demonstrated that navigating the rules on contracting in the U.S. is unbelievably complicated.

The rules on permissible independent contracting vary across states, courts, and regulatory agencies. A multitude of employee labor, benefit and tax laws and separate agencies' interpretations govern employee and independent contractor classifications -- no single test applies to all relevant federal and state laws.

The inconsistent rules across states, courts and regulatory agencies – as well as new rules redefining independent contracting – have created an uncertain legal environment for independent contractors and the businesses they serve. The contractors and businesses are finding it harder to structure their work arrangements without facing risk of government challenges or prosecution. Even a business seeking to comply with the rules find those rules difficult to understand.

Why is that important? Small businesses, including independent contractors who provide services to larger companies, are the most-important drivers of job growth in America. It’s been that way for decades. Over the past 30 years, large, established companies have shrunk or barely maintained their employee numbers. At the same time, small businesses and individuals with alternative work arrangements have been responsible for creating virtually all new jobs.

Alternative workers account for approximately $626 billion in personal income, with $473 billion of that going to independent contractors. Overall, businesses without employees account for more than 70 percent of the nation’s 27 million firms.

This trend toward independent contracting will continue, despite the regulatory challenges, because alternative work arrangements are vital to economic growth and to keeping America competitive in a global economy. The benefits to all parties clearly outweigh the disadvantages in most cases.

While there are legitimate concerns about reported abuses in worker classification, there is clearly a need for better policies to address the challenges to independent contracting. Even so, there are a number of best practices and actions that businesses can undertake to minimize their risk of audit and misclassification. These activities can be done with minimal resources and have significant payoff, enabling companies to continue or expand their use of contractors.

Lawmakers should be careful about making it more difficult for law-abiding businesses and independent contractors to work together. As the economy continues to rebound, it would be unwise to trample on one of the only segments of the economy that is putting Americans back to work.

Cohen and Eimicke are professors in the Practice of Public Affairs at Columbia University’s School of International Affairs and authors of “Independent Contracting: Policy and Management Analysis.”