How Contract Work Is Depriving Employees
Do you know someone like this:
Jackie is a 40-year-old divorcee with a preteen daughter. She was laid off from her mid-level client services career last year. The job offered health and retirement benefits. To make ends meet, she took up contract driving for Uber. At night, she cleans houses. Her third job is with a grocery chain, slicing deli meat and preparing food on the weekends. None of these roles offer benefits, so she’s taking advantage of the government subsidy through the Affordable Care Act to cover their insurance.
The New Middle Class
Jackie has become part of the “sharing economy,” sometimes called the “1099 economy” due to the tax form these workers fill out.
The 1099 economy is made up of:
- Downsized middle-aged professionals
- Millennials with college debt but no job
- And baby boomers facing an unexpected career cut
This “gig economy” makes up about one-third of the U.S. workforce today, or 53 million Americans, and it’s growing. Most of these independent contractors, like Jackie, have two or more part-time or 1099 roles. They use a variety of platforms to monetize services, from FlexJobs to Airbnb, TaskRabbit to Thumbtack.
1099 Versus Part-Time
It’s important to note the distinction between part-time and a 1099 worker. For tax purposes, there are differences in how you file. As a part-time, or W-2, employee, payroll taxes are automatically deducted from your paycheck and paid to the government by your employer. But 1099 contractors must calculate their own payroll taxes and then submit these to the government quarterly. In 2013, the IRS went after small businesses that misfiled employees as independent as a way to avoid payroll taxes. The feds ended up netting about $9.5 million as a result.
The 1099 Reality: Lose Those Rose-Colored Glasses
1099 contractors are facing challenges beyond saving up to pay their quarterly taxes. The 2015 Economy Workforce Report shared some of the high hurdles these workers leap, including unreliable income, insufficient pay, lack of benefits, and additional costs required to complete the work.
The reasons given for taking on-demand work included a flexible schedule and the ability to work for several companies. While it may sound appealing to remain untethered to a traditional job, the reality is a little harsher. The 2015 Economy Workforce Report showed:
- One-fifth of 1099 contractors worked more than 40 hours a week
- 39% of on-demand workers are signed up for more than one role
- Almost 50% reported that finding enough work was a problem
- 43% said insufficient pay led to quitting a 1099 gig
So despite the flexible schedule, not everything’s rainbows and butterflies.
Downfall of 1099
The average pay for these workers is about $18 per hour. This may sound like a decent rate. It certainly sounds appealing when compared to minimum wage. Using the Uber example, when you deduct gasoline, wear and tear on the vehicle, car (and health) insurance, and payroll taxes, that $18 per hour gets whittled down pretty quickly.
Also, there’s no safety net for these workers. If they get sick, they can’t work. If they can’t work, they don’t get paid. It’s a dangerous position to be in. The Workforce Report found that almost 25% of these contract workers ages 25 and older don’t have health insurance.
Stephen Hill in the Boston Review pointed out that the 1099 worker is increasingly attractive to corporate America as part of a new business cost-cutting and profit-raising model. They have no obligation to these employees. In some ways, 1099 workers are like scabs crossing the picket lines; they’re a cheap way to get the job done. The sad truth is that today, employers actually have incentive to fire their employed workforce and replace them with 1099ers.
Hill summed it up, “The accelerated use by employees of the independent contractor loophole is causing a rapid erosion of the safety net for workers and families, one that was forged over many decades.”
Uber’s Day in Court
This year, the California Labor Commissioner’s Office ruled that an Uber driver in San Francisco should legally be an employee, not a contractor. Uber is appealing. In California, any work over eight hours is legally considered overtime. But Uber and other sharing economy businesses don’t have to pay overtime to 1099 employees.
This ruling is creating ripples across the sharing economy, creating legal precedence for other 1099 employees who put in the hours but don’t get the benefits. Citing the ruling as creating a hostile environment for fundraising (among other issues), start-up cleaning service Homejoy is shutting its doors on July 31st.
The Labor Department recently weighed in, releasing a 15-page guide that suggests most workers should be considered employees due to their level of financial dependence on the employer.
New Safety Net for the Sharing Economy
The concept of establishing a safety net for contract workers has been adopted successfully by the construction industry, whose workers are hired on a per-job basis. Employers set aside payroll deductions into a fund governed by a labor management board to pay for benefits. This process is worked into a union labor contract, which costs businesses about $3 or $4 hourly per employee.
Tech companies in Silicon Valley are considering a similar model, where contingent tech workers have an agency that acts as a centralized benefits administrator. Each employer pays a little more each paycheck that goes into an “Individual Security Account” that pays Social Security, Medicare, unemployment insurance, and workers’ compensation.
In July 2015, Instacart gave contract workers in Atlanta, Miami, and Washington, D.C., the chance to become part-timers, joining Boston and Chicago in this paradigm shift. It’s going to cost Instacart: more than 75% of eligible workers are expected to apply. However, Instacart suggests this will improve customer care and the morale of employees, thereby bettering their brand. Still considered a start-up, the company has raised $275 million and is valued at $2 billion.
Four states have passed paid sick leave laws for 1099 employees, and there appears to be some momentum around expanding the policy nationally. Supporters say creating a universal standard of treatment for 1099 employees would remove the incentives for employers to hire these workers as a way of avoiding benefits and taxes.
The entrepreneurial lifestyle of 1099 contracting will continue to appeal to some workers. You can still work as little or as much as you like, and if it’s not a good fit, you can leave. But too often today, the sharing economy isn’t a lifestyle choice — it’s about survival in a tight job market. These employees need a basic level of security that will translate into economic growth for all of us.