A slice of bread is good, but a whole loaf is better. In the spring, Senator Mike Braun of Indiana introduced the Helping Gig Economy Workers Act to shield digital companies from lawsuits on worker classification when providing protective equipment during the coronavirus pandemic. This legal “safe harbor” for such digital companies could find its way into the Republican stimulus package under consideration in Congress.
But independent workers around the country, including freelancers and sole proprietors, need much more than protective equipment. They need access to a universal baseline level of benefits, paid for by the companies they work with, without losing the work flexibility they value. They need a new regulatory framework that is suited for the 21st century labor market rather than the 20th century labor market. Reaching these goals requires legislation, but it is very different from what Braun is proposing.
First, it is important to realize that while independent contractors receive tax deductions with expenses like vehicle miles, the tax system penalizes independent workers who provide their own benefits. Most independent workers must pay Social Security and Medicare taxes on the money they contribute to their retirement accounts. By contrast, the contribution of employers to their employee retirement accounts is exempt from these taxes, subject to certain rules. Indeed, this tax exemption can be worth thousands of dollars for middle income workers. Similar problems also arise with health insurance coverage for independent workers.
Second, the companies that do business with independent workers are not able to provide benefits because then the Internal Revenue Service would classify the workers as employees, leading to the loss of flexibility and control over their hours and who they can work for. Such a shift with status would likely reduce the number of available jobs. Those remaining workers would have fixed schedules, capped hours, and inability to work with more than one company. It is obvious that these tax and regulatory barriers weaken the labor market position of independent workers since benefits are more expensive and difficult for them to receive.
There are two solutions to this problem. One is to double down over the historical dichotomy between employees and independent workers and make the distinction even more rigid. This “procrustean bed” solution is best exemplified by a California bill that imposes a rigid test on who can be classified as an independent contractor. Basically, it attempts to force companies to turn many of their independent contractors into traditional employees, an outcome which the vast majority of these workers do not want for the reasons described already. There is a better answer. We can level the playing field for independent workers with these steps.
First, we need legislation on the tax treatment of benefits so independent workers can have the same advantages as employees. Second, we require a new universal baseline level of benefits and protections for independent workers, fully funded by those companies they work with, including a plan with a menu of options for workers to choose those benefits that make the most sense for them. These benefits would be portable. Third, we set the uniform national standard for determining who is an independent worker. Independent workers would have control over their hours of work and no agreements preventing them from working for other companies.
Companies would opt into this regulatory framework since independent workers are so diverse that it is not true that “one size fits all.” Our plan is different from the market contractor laws passed in states such as Florida, which merely specify that certain on demand workers are to be treated as independent contractors. But they do not fix the federal laws that unfairly penalize these benefits for independent workers. They also do not require companies to pay for baseline levels of benefits and protections.
We believe strongly in the importance of regulation for a strong economy. Yet we also advocate to improve regulation as essential for growth and job creation. It is time to improve regulation of the labor market to benefit the independent workers rather than the companies they work for.
Michael Mandel is chief economic strategist and Alec Stapp is director of technology policy at the Progressive Policy Institute based in Washington.