Don’t ‘Reclassify’ Contractors as Employees

C. Jarrett Dieterle

‘Is this worker an employee, or just a contractor?”

It’s a seemingly simple question, but it has stark ramifications under American labor law — and some claim that the so-called gig economy is making it harder to answer in many cases. Many on the left are pushing to classify more workers as employees, but the better solution is to create a new, more flexible category.

Last year, the California supreme court made headlines by changing the test that determines workers’ categories under state law. With the stroke of a pen, the court overturned decades of labor law by announcing that workers would be presumed to be employees unless a firm could prove that the worker: A) was outside the firm’s control while performing his job; B) was performing a task outside the firm’s normal scope of business; and C) had made a definitive decision to go into business for himself.

This “ABC Test” would make it nearly impossible for many businesses to hire contractors in the manner that is presently the norm. California’s legislature is now attempting to codify the test into state law, and other state legislatures have started considering similar legislation. Most recently, a large group of Democratic lawmakers at the federal level have inserted the ABC Test into a pro-labor bill called the Protecting the Right to Organize Act of 2019 (PRO Act).

While the ABC Test is catching on in left-leaning circles, it is a bad idea for a whole host of reasons. Real-estate agents, construction workers, gig-economy workers, and freelance journalists are all examples of workers who have traditionally operated as independent contractors yet would fail the ABC test. Classifying them as employees would create immense costs for both the workers and the firms that engage their services.

Proponents of reclassification are quick to invoke the image of a recent rise in the number of downtrodden workers trying to juggle three or four gig-economy or contracting jobs at one time just to make ends meet. These workers need protection, the argument goes, and if they were reclassified, they would suddenly become eligible for overtime pay and a host of other benefits that normally attach to full-scale employees.

The problem is that this theory is not borne out by the facts; instead, it fundamentally misreads the shape of the modern American work force. In fact, contract work is not on the rise, and many contractors prefer their current worker status.

Data from the Bureau of Labor Statistics have consistently shown that part-time and contingent work arrangements are in line with historical averages. Contracting roles have actually decreased since 2005. Furthermore, surveys have reported that 79 percent of contract workers prefer their present work arrangement to more restrictive setups.

Given that flexibility is vital to many of these workers — combined with the fact that they do not want to enter into the more formal structure of an employer–employee relationship — these reports are unsurprising. Think of the prototypical college student working for a few hours as an Uber or Lyft driver in between classes to earn some extra cash. This kind of flexibility would be nearly impossible if such workers were full-scale employees, since employers would be forced to transition to complex shift-scheduling systems to avoid running into overtime rules and other laws.

Despite these realities, lawmakers refuse to give up on the idea of reclassification. The PRO Act is particularly concerning since it would apply to the whole country. To put it in perspective, implementing the ABC Test in California alone could cost up to $6.5 billion in additional payroll expenses for businesses, not to mention the costs to workers who prefer contracting relationships. Needless to say, expanding the ABC Test to all 50 states would be far costlier.

Perhaps the most frustrating part of the current debate is that lawmakers continue to overlook more nimble policy solutions that could achieve the trifecta of maintaining worker flexibility, containing costs, and providing workers with more benefits. For instance, a “third way” status for flexible workers — which would create a new legal category in between full-scale employees and independent contractors — could be coupled with worker-controlled benefits exchanges that provide offerings such as worker’s-comp insurance, paid leave, and even health insurance.

Lawmakers should scrap the ABC script and start over.

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