A New Social Contract: Do We Need a New ‘Dependent Contractor’ Class of Worker in the U.S.?

This is the first of an ongoing series of posts on A New Social Contract, exploring the changing relationship between employees, management, and the extended workforce of part-timers, freelancers, and independent and dependent contractors.

Several trends are starting to emerge from the technological edge of the new economy, and may coalesce into a significant shift in the postnormal work contract. Consider these recent stories:

Hiroko Tabuchi, Abercrombie & Fitch to End On-Call Shifts for Workers — The clothing retailer has said that it will phase out the ‘on-call shifts’ practice, where work can be cancelled with next to no notice. But this is not driven by starry-eyed idealism: the company is being investigated for the practice by NY State attorney general, Eric T. Schneiderman, who is also investigating Gap, Target, J. C. Penney and Victoria’s Secret. Victoria’s Secret will cease the practice, while others deny they have ‘call-in’ shifts. New York labor laws require paying employees that report for work for at least four hours of work even when sent home, and call-in shifts — where workers call in prior to reporting to work, and may be told not to report — are intended to decrease costs at the expenses of workers.

Ravi Somaiya, Vice Media Staff Latest to Choose Unionizing — Vice is the most recent of new media companies to turn to old-school unionization as a means of moderating the shallow worker protections of the freelance, gig economy of new media. In recent months, writers at Salon, Gawker Media and the American contingent of The Guardian voted to unionize, as well. The need for collective bargaining has moved to the foreground in discussions about media employment, and the work contract.

Megan Rose Dickey, On-Demand Food Startup Sprig To Start Classifying Its Contractors As Employees — Sprig has announced it will be reclassifying its workers as employees, moving the 1099 freelancers to W-2 staff. In recent months, Instacart, Shyp and Luxe have done the same thing (see Handicapping On-Demand Market Sectors). Homejoy, a home cleaning service, recently shut down operations after legal challenges to its practice of classifying workers as independent contractors (see Homejoy calls it quits, Google scoops tech team), and Uber lost a court case (with just a single worker) that requires the company to reimburse the worker, Barbara Ann Berwick, for expenses that she incurred working for the company. Uber claimed she was an independent contract, but the court said she was misclassified. If this trend accelerates, the bottom may fall out of many of the ‘Uber for X’ marketplaces, and the astronomical valuations for such companies could come crashing back to earth.

The bottom line is that the courts, labor boards, and state and federal officials are starting to poke at the premises underlying economics of the no-holds-barred, on-demand work markets surrounding the uber economy.The bottom line is that the courts, labor boards, and state and federal officials are starting to poke at the premises underlying economics of the no-holds-barred, on-demand work markets surrounding the uber economy. And, as these cases demonstrate, the workers that deliver the actual value for these companies are confronting their bosses with the demand to get the protections that employees have a right to, such as collective bargaining, expense reimbursement, and insurance (like workers compensation, and social security).
It might seem that the issue is this: what obligations do companies have to those that work for them? But there is actually a larger and different question lurking in the background, since we have already moved into a world increasingly populated with — perhaps involuntary — freelancers, part-timers, and subcontractors: often referred to as the precariat. Today, our tax, economic, and legal systems are based on two sorts of workers: full-time employees, and everybody else. And the full-time employees are granted a certain legal status intended to protect them from the vagaries of the economy and the imbalance of power between employees and business owners. However, those outside the security — such as it is — of full-time employment lack basic protections and benefits, such as employer contributions to social security, overtime pay, and many others.
Unionization — as the Vice and Guardian workers have chosen to pursue — provides a well-understood form of protection for skilled workers. Many labor laws detail who is — and who is not — an independent contractor. But in the middle ground are those that are neither unionized, skilled workers or truly independent contractors. These are living and working in the most precarious fashion.
One idea that is gaining currency in the national discourse about the on-demand economy is that perhaps there should be a third legal category of worker, one that borrows features of full-time employment but some of the characteristics of independent contractors.One idea that is gaining currency in the national discourse about the on-demand economy is that perhaps there should be a third legal category of worker, one that borrows features of full-time employment but some of the characteristics of independent contractors. One of the investors in Sprig, Simon Rothman, a partner at Greylock, said in June

I think it’s not 1099 versus W-2. I think the right answer is a third class of worker. People are now becoming one-person companies, and they’re not even working for one entity.

It turns out that Germany and Canada already have a third class of worker, known as dependent contractors:

“Some people are clearly independent contractors and some are clearly employees, but a third category becomes necessary when you have people who are borderline” and economically dependent on one employer, says Wilma Liebman, a former chairwoman of the National Labor Relations Board and an adjunct professor at New York University School of Law.
She suggested the dependent contractor classification in a dissenting opinion she wrote in 2005 in a case about newspaper carriers. In that opinion, she noted that Canada and Germany have statutes protecting such workers.

Adding the class of dependent contractor will require rethinking aa great deal of labor law, and reorganizing the patchwork quilt of regulations surrounding employment, like antidiscrimination laws, OSHA regulations, and labor statutes.
Former Senator Mark Warner has been making political arguments for the third class of worker, with special focus on the notion of an hour bank:

Carmel DeAmicis: What does a third classification of employee look like?
Mark Warner: I don’t have a prescriptive answer today. I do think there are models, maybe public-private, maybe an hour bank. I want to sit down with entrepreneurs and figure out what works.
(DeAmicis’ note: Public-private partnership occurs when private businesses team up with the government to complete a project or offer benefits. The government provides tax breaks or funding for the private company’s work. The Affordable Care Act is one such example, with the government subsidizing people’s purchase of private health insurance.)
Carmel DeAmicis: Wouldn’t a third classification of employee be a form of socialism? After all, if the employer isn’t paying for the benefits, the government is the only other entity that can.
Mark Warner: Does it have to be the government? Could it be a third private party? The hour bank idea goes back to the 1940s in the building trade union. If you were a carpenter with ten different jobs over the year, [you] didn’t have the government, but [you] had the union which would collect money from the contractor and the employer, money jointly managed by a third party.
I could imagine platforms created that might be tax advantaged that aren’t necessarily run through the government. Characterizing this as an only public model or only private is a 20th century mindset to a 21st century problem.

It’s helpful to look more closely at the examples of Germany and other countries, to see what is meant by ‘dependent contractors’, as characterized in ‘Economically dependent workers’, employment law and industrial relations by EurWork:

The concept of ‘economically dependent workers’ refers to those workers who do not correspond to the traditional definition of ’employee’- essentially because they do not have an employment contract as a dependent employee – but who are economically dependent on a single employer for their source of income. The debate focuses on emerging employment arrangements which are ‘midway’ between self-employment and dependent employment. ‘Economically dependent workers’ have some characteristics of both in that:

  1. they are formally self-employed (they usually have a sort of ‘service contract’ with the employer); and
  2. they depend on a single employer for their income (or large part of it).

In some cases, economically dependent workers may also be similar to employees from other points of view:

  • lack of a clear organisational separation – ie they work on the employer’s premises and/or use the employer’s equipment;
  • no clear distinction of task – ie they perform the same tasks as some of the existing employees, or tasks which were formerly carried out by employees and later contracted out to ‘collaborators’; and
  • the ‘service’ they sell individually to employers falls outside the traditional scope of ‘professional services’- ie the tasks are simple, do not require specific skills and no professional knowledge or competence is needed.

I think we need to extend the German model of dependent contractor to include those that work for multiple employers — for example, drivers working for both Uber and Lyft, or part-timers working for the Gap and Chipotle — not just those dependent on a single employer. In such a blended model of dependence, the several employers an individual works for would contribute a fair proportion of social security, worker’s compensation, and other ‘benefits’. This is the hours bank that Warner mentioned in his interview.
I agree with Warner that this response to today’s shifting economics is likely to become the law of the land, as a direct response to the policy vacuum we have here in the U.S. Hopefully we could see bipartisan agreement on new regulations that balance the dynamics of the on demand economy with the need for a new model of societal security for dependent workers, and to clarify and to align the status and interests of all workers. It’s certainly time for that.

Interested in sponsoring this series? Please contact the author.

Homejoy calls it quits, Google scoops tech team

Deep pockets may be an essential element for competing effectively in the exploding on-demand economy. Today, the on-demand cleaning services company Homejoy announced it was closing shop on 31 July, after encountering stiff headwinds in the one-two punch of legal challenges to the labor status of its cleaning contractors, and the impact on funding that four pending lawsuits was causing.
Homejoy has been confronted by a growing list of court cases, and does not have the deep pockets that other on-demand players like Uber and Handy have. Or for that matter, Google and Amazon have.
As I explore in greater depth in a new research note, Handicapping On-Demand Market Sectors, this sector of thee on-demand economy may be a place where only the strongest survive. In that report, I characterize the slew of Uber-ish companies as on-demand displacers:

Services like Uber, HomeJoy, and Handy are operating in marketplaces where there established companies use a blend of contractors and employees to provide conventional services, like home cleaning or limo/taxi driving. These newcomers are polarizing the debate — and winding up in court — by attempting to maximally displace liabilities, expenses, insurance, regulatory fees, and taxes onto workers (and local governments) while maximizing their control on the way the work is done. These companies want everything to benefit them, for maximum control and profits. This group is going to face many legal challenges, and these on-demand disruptors are drawing the attention of presidential candidates.

Google has confirmed it will be hiring around 20 of Homejoy’s product development team, as it gears up to make a massive push into the home services space. However, it may be employing a very different business model — acting as a broker for truly independent contractors, and not an Uberish umbrella corporation, trying to have it both ways.
And obviously, there is going to be a lot of tectonic change in the foundations of work because of these forces.

Push the unemployed into the sharing economy, UK review suggests

The government review, led by a sharing-economy CEO, also called for sharing-economy platforms to be able to avoid the regulatory burdens that employers must put up with, and for a new online ID scheme for government services to be extended to the private sector.

Work is rapidly becoming nonroutine

Some researchers at the Federal Reserve Bank of New York wondered if something structural is going on in the US workforce, in particular, if some underlying change in the nature of work was keeping unemployment high. And they sliced the census data in a different way, trying to find if work is becoming less routine. And it is.

Stefania Albanesi, Victoria Gregory, Christina Patterson, and Ayşegül Şahin, Is Job Polarization Holding Back the Labor Market?
To study job polarization, it’s useful to put occupations into different task groups, with each occupation categorized as either routine or nonroutine. An occupation is routine if its main tasks require following explicit instructions and obeying well-defined rules. These tend to be middle-skilled jobs. If the job involves flexibility, problem solving, or creativity, it’s considered nonroutine. Job polarization occurs when employment moves to nonroutine occupations, a category that contains the highest- and lowest-skilled jobs. The chart below shows the employment share of routine and nonroutine jobs in the United States starting from 1976. The share of routine occupations declined from 60 percent in 1976 to 40 percent in 2012, resulting in job polarization.
It’s useful to further classify occupations into cognitive and manual categories based on the amount of mental or physical activity required of the job: cognitive jobs require mostly mental activity; manual jobs, mostly physical.
For instance, nonroutine cognitive jobs are generally high-skilled and include management, technical, and healthcare workers, such as doctors and engineers. Manual nonroutine occupations are generally low-skilled and include service and protection workers, such as waiters and security guards. Cognitive-routine jobs include sales and office workers, such as sales agents and office assistants. Manual routine occupations include construction workers, mechanics, and machine assemblers.
As the chart below shows, the share of routine jobs has been steadily decreasing for the cognitive and manual categories since the 1980s, and the decline accelerated during the 1981-82 and 2007-09 recessions. Most of the rise in the employment share of nonroutine jobs reflects the increase in cognitive nonroutine occupations.
cognitive v manual

These are large transitions: a 20% increase — from 40% to 60% — in the number of jobs involving non-routine work in the 40 years since 1975. It’s fairly linear, so we could extrapolate, I guess, that by 2025 an additional 10% of jobs will swing toward non-routine.
The researchers found, however, that the ongoing unemployment in the US is not being caused by this ‘job polarization’. Both nonroutine and routine occupations are having difficulties finding work. So, while this trend is important, the difference in cognitive skills among the routine occupations is not the root cause of unemployment: it is not a structural issue, since even the unemployed in non-routine occupations are having difficulties finding work.
Still, the authors don’t touch on a related issue. In a better economy of the near future, where the demand for non-routine work would be increasing above the available levels, we might see a structural issue, and that would be solved by retraining those currently working in routine occupations so they could move into the more cognitive and less manual jobs. Less construction workers and more waiters, for example.
The larger questions are the shift to different styles of work as more work is unprogrammed, and no longer following the orthodoxies of tightly scripted business processes. I’m addressing some of that in an upcoming report on the shift away from business processes based on the adoption of social network-based cooperative work patterns.