Freedom and Fairness in the Gig Economy

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The regulatory fight over gig worker classification enters a new phase.

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What do businesses in the gig economy owe the workers they rely on? Next month, the U.S. Department of Labor may provide a new rule addressing this question, but the “right” answer is a subject of intense disagreement.

In 2021, the Trump Administration issued a new rule restricting who qualifies as an employee. Although the Labor Department attempted to rescind those rules after President Joe R. Biden took office, a federal court allowed the changes to take effect. Last year, the Labor Department proposed a new rule that would broaden who qualifies as an employee. Some commentators expect the rule to be finalized next month.

Under U.S. employment law as it currently stands, workers are generally classified as either employees or independent contractors. This distinction gained relevancy during the New Deal era when legislation such as the National Labor Relations Act (NLRA) and the Fair Labor Standards Act (FLSA) established workers’ rights to minimum wages, benefits, and collective bargaining. At that time, statutory benefits mandates were based on employment status because few independent contractors existed. Congress later excluded independent contractors from the NLRA’s collective bargaining guarantee, putting contractors who engage in union organizing at risk of violating antitrust law. And under the rules implemented by the Trump Administration, most independent contractors still do not receive wage and hour protections under the FLSA.

Since then, the number of gig workers—workers not classified as “employees”—has grown substantially. One study found that in 2018, around one-third of all American workers performed at least some gig work each year. Two-thirds of major companies now report using freelance contract workers, and the number of workers reporting non-employment income related to gig work tripled between 2017 and 2021.

Commentators are divided on how well the gig economy serves workers. Proponents of classifying gig workers as independent contractors claim that doing so benefits workers and employers by increasing work flexibility and saving money on labor costs. These commentators also support the view that most gig workers simply want to supplement their primary income. For example, the CATO Institute reports that the average gig worker in a recent survey earned $52,000 per year and had both primary and secondary incomes.

Critics respond that averaging wages among gig workers can conceal substantial differences when such averages encompass professional athletes, medical professionals, and Uber drivers. For example, the same CATO study mentioned above found that one-third of gig workers earn less than $10,000 annually. ADP Research Institute agrees that there are “two worlds” of gig workers, divided largely along lines of educational attainment. Others have found that half of independent contractors consider their gig work important to their financial well-being.

Observers who support classifying gig workers as employees argue that the current paradigm deprives some workers of control over their work lives. Some evidence shows that the current arrangement also discourages the growth of gig economy companies such as Uber and TaskRabbit. As an alternative, some scholars have called for establishing new categories of employment. Others suggest that regulators should look to foreign jurisdictions for guidance.

In this week’s Saturday Seminar, scholars discuss the complexity of gig workers’ employment classification and its economic implications.

  • In a San Diego Law Review article, Orly Lobel of the University of San Diego School of Law argues that certain employment and labor protections should extend to all workers classified as “non-employees,” such as gig workers and freelancers. Lobel contends that the United States’ social welfare system should not be so linked to employment, noting that the COVID-19 pandemic exposed the irrationalities of a rigid employment classification system. She observes that the question of employee status has been litigated for decades, resulting in a patchwork of classification laws across states. Lobel proposes systemic reforms, such as delinking social welfare from work and expanding employment rights beyond the classification system to “anyone who provides their labor.”
  • In a recent article in the University of Missouri School of Law’s Journal of Dispute Resolution, practitioners Joshua Javits and Matthew L. Luby argue that the sports and entertainment industries offer a potential hybrid employment model for workers in the gig economy. Javits and Luby explain that professional athletes and Hollywood entertainers are typically independent contractors who work under contracts negotiated by intermediaries. These contracts usually provide minimum benefits but leave other provisions open for further negotiation by workers with distinct needs or talents. Javits and Luby argue that gig workers should receive similar exemptions to negotiate beneficial arrangements.
  • In an article for the Cornell Law Review Online, Open Markets Institute researchers Brian Callaci and Sandeep Vaheesan urge the Federal Trade Commission to limit the use of vertical restraints—contracts that companies use to control the business decisions of their trading partners. Callaci and Vaheesan contend that vertical restraints enable companies to misclassify their de facto employees as independent contractors while subjecting them to employer-level control. Callaci and Vaheesan argue that vertical restraints also allow employers to benefit from control over employees with few accompanying employment law obligations. Both arrangements create fissured workplaces, which Callaci and Vaheesan claim permit companies to control workers’ wages and conditions without providing benefits or taking legal responsibility as employers.
  • In an article for The Brookings Institution, David Kiron of the MIT Sloan Management Review, Elizabeth J. Altman of the University of Massachusetts Lowell, and Christoph Riedl of Northeastern University argue that artificial intelligence is impacting the development of corporate governance structures in both beneficial and problematic ways. Kiron, Altman, and Riedl suggest that artificial intelligence has enabled the emergence of workforce ecosystems, which they define as structures including employees and an extended workforce—including gig workers—serving the organization’s goals. They contend that this shift contributes to the growing wealth gap between employees and independent contractors. Accordingly, Kiron, Altman, and Riedl argue that decision-makers should develop policies that permit innovation while also protecting workers’ rights.
  • Veena Dubal of University of California College of Law San Francisco argues that data collection and automated decision-making systems have produced algorithmic wage discrimination in on-demand work. In a recent paper, Dubal explains that companies such as Uber use data on location, driver behavior, demand, and other factors to personalize wages and allocate work. Dubal points out that, because workers lack access to information that determines their hourly rates, they have little recourse to remedy pay discrepancies. The author also cites a study coauthored by Uber’s former chief economist finding that women driving for Uber earn less than men. In this way, Dubal claims that wage opacity and variability lead drivers to earn less than they expect.
  • Despite talk of economic liberty, gig workers are increasingly subject to a new form of forced labor, argues Rebecca E. Zietlow of the University of Toledo College of Law, in a recent article in the Wake Forest Law Review. Zietlow contends that without realistic options to leave or alter their working conditions, undocumented workers and low-wage workers—including those in the gig economy—are forced into a kind of involuntary labor. In response, she calls on lawmakers to protect workers’ rights by enforcing laws against economic coercion, reclassifying independent contractors, and expanding social safety nets.

The Saturday Seminar is a weekly feature that aims to put into written form the kind of content that would be conveyed in a live seminar involving regulatory experts. Each week, The Regulatory Review publishes a brief overview of a selected regulatory topic and then distills recent research and scholarly writing on that topic.