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Distinguishing contractors from employees

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The California legislature passed a bill last week that distinguishes between contractors and employees. The difference seems technical, but it affects the way we think of jobs. 

A “contractor” brings her own tools and skills, and does a (relatively) brief stint of work in a defined task. An “employee” predictably works indefinitely at one job, often using the equipment of the employer, possibly over quite a long period. This difference matters in the regulations that govern the relationship, including insurance and benefits. At its core, companies, workers and legislators are arguing about how to think about the very nature of work. 

In my research I have described how apps, smart phones and 4G connections have enabled what economists call peer-to-peer transactions. If I’m in my car, but have a few extra minutes, and you are nearby and need a ride, it’s likely we could negotiate an agreement that would benefit us both. But it’s risky and inconvenient to find and trust each other.  The app-run companies, such as BlaBlaCar and AirBnB, help individuals turn excess capacity into commodities

In many ways, that’s great. Still, some kinds of sharing raise questions.  When I call an Uber, that driver probably owns the car to get me where I want to go. From the perspective of the rider, the Uber driver is not an employee. But what about the relationship between the driver and Uber, the app provider? True, the driver supplies her own car, and driving skills. But there is a much more “entangled” connection, as Uber supplies information, reputation ratings, insurance, takes the payment from the rider, and then pays the driver on a regular weekly schedule. 

California’s Legislature recently passed AB #5 that tries to clarify the situation. The law states if someone works for pay from a single entity, then there is a legal presumption that person is an employee, not a contractor. The law does not apply to the worker who is not controlled by the company, does things outside the company’s normal business and is working in an independently established trade or business. 

Many app-based businesses that pay people to do tasks, such as Uber, would find themselves regulated by laws that require benefits and that control working conditions. Others, such as AirBnB, where the transaction is mostly about the physical space, not the work, might not.

This issue is complex, and it’s hard to know which side has this right. Interestingly, California is already a world leader in a hybrid kind of employment, the “gig economy,” which might illustrate what’s likely to happen in the future.  

Hollywood films, for example, were once made by the major “studios” such as MGM or 20th Century Fox. These “studios” now are distributors, and movies are made by “gig” workers, hired for the duration of the shooting of the film. But in almost all cases, they are contractors, not employees.

Here’s how it works:

There are about 150 different disciplines involved in making a movie, all those job titles you see at the end of the credits. If you make a movie, you go to Linked-In and choose each of these disciplinary workers. On the first day of shooting, the team works well together because the refinements of division of labor in the industry are clear and well organized. After the film is completed, the gig is over.

Because their work is temporary, and their specialty is narrow compared to the scope of work of the employer, these workers would likely fall outside the new requirements for classification as employees.

The real problem is this: We may end up having to choose between two unpalatable options. One would be to accept that the gig economy extends even to companies such as Uber, with all the consequent problems for drivers, or decide we’d be better off regulating app-based firms out of existence by requiring them to pay benefits and accept working condition regulations.  

Uber and Lyft are likely to pull out of California, or at least cut back sharply on their operations. Given how popular and widely used ride-sharing has become, it will be interesting to see if the backlash among riders overwhelms the political resolve of the California political establishment.

Michael C. Munger is a political science professor at Duke University and author of “Tomorrow 3.0.”


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