I Taught the Law
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I Taught the Law

Why ‘Worker Classification’ Has Become a $200M+ Legal War

It all stems from a flawed legal assumption made in 1838

Photo by Massachusetts is Not for Sale (Tweet)

In 2019, 18% of the US workforce (28M workers) qualified as self-employed in their tax return, stealthily sneaking up from 10% in 1981. Many analysts expect more and more people to qualify as independent contractors as the digital economy and freelancing expand.

At the same time, a contentious policy war over their future is being waged. Uber, Doordash, and other gig companies have spent millions lobbying to keep its workers classified as independent contractors and not employees: $200M in support of Proposition 22 in California back in 2020, and nearly $20M (so far) for a potential Massachusetts Proposition in late 2022. The record-breaking spending is unlikely to stop. Prop 22 was eventually ruled unconstitutional by the state Supreme Court, and gig companies are refusing to give up, funding an appeal of the decision. And in March 2022, a new lobbyist organization, called Flex, was created by those firms with an undisclosed amount of funding to campaign against worker reclassification at the national level.

Why is so much money being spent on lobbying? There is a surface-level answer that considers the current gig companies’ economic interests. However, there is also a deeper answer that accounts for a legal precedent that was set in the 1800s, and that continues to impact contemporary labor law today. We’ll dive into both. We’ll also uncover a solution on how to deal with the modern worker safety net, offered by modern economic theory.

Tired: Gig Companies Are Protecting Their Economic Interests

Screen grab from a new lobbying group formed by gig companies, called Flex, which runs public ads advocating to protect independent contractor status for gig workers.

On the surface, there is a huge economic incentives for these gig companies to keep their workers as independent contractors:

  • Accumulated back taxes. If their workers became employees, Uber alone could owe more than $413M to California’s unemployment insurance fund. The company has owed New Jersey $650M in taxes since 2019. This staggering figures don’t even account for any of the other gig companies, other states, or federal back taxes.
  • Lost business due to higher input costs. Hiring an employee is an estimated 30% more expensive than hiring a contractor. With those higher costs, companies like Uber would either need to pass on those costs to consumers in the form of higher prices, or would need to reduce their own profit margin to maintain prices. Either way, the business will take a hit.

To the gig companies’ credit, the legislation they are proposing will also give workers some employee-like benefits, like a healthcare stipend for workers who hit 15 or more hours a week (the case in in Prop 22) or worker’s compensation if they get injured (the case in Washington state’s HB 2076) [1]. The companies also claim that keeping contractor status maintains flexibility for those who only work part time, who compose the majority of workers (even though the majority of work is done by full-time workers). If they were employees, the argument goes, the companies would need to do things like impose shift schedules and mandate uniforms — eliminating all flexibility [2].

Economic self-interest and a claim that workers will tradeoff security for flexibility are the ostensible reasons that gig companies are spending hundreds of millions of dollars on these campaigns. In some ways, though, the legal battles are a bit of a destraction. To get at the root cause of these conflicts, we must understand some of the historical reasons the law makes a distinction between employees and contractors.

Wired: The Law Has Long Assumed that Worker Safety is Purely a Private Responsibility

For this, we must go back in time. Early legal precedent (dating back to a 1838 court ruling) established that, if a independent worker injured someone else, they were liable for the harm; but if an employee harmed someone else, then their employer was liable [3]. This was justified on the basis that the employer effectively had the right to control the employee’s work, whereas an independent contractor was, well, independent.

This legal precedent of respondeat superior, Latin for “let the master answer,” had its critics. Nonetheless it would be reaffirmed by judges during the rest of the 19th and early 20th century, shielding employees from liability but giving independent workers exclusive liability. Eventually the principle would be enshrined in national laws starting in the 1930s. The National Labor Relations Act (1935), for example, granted the right to organize for collective bargaining purposes only to employees [4]. The unemployment insurance provision of the Social Security Act (1935) covered employees, but not contractors.

“Respondeat Superior” from the NY Bar Picture Book (CC BY-NC-ND)

Respondeat superior seems to have created the conditions for the severe difference between benefits for employees and those for independent contractors. It has effectively raised the stakes for worker classification lawsuits, because re-classification drastically changes employer liability. And as a result, we are in a situation where on one hand, gig companies are spending hundreds of millions to keep their workers classed as independent contractors; and on the other hand, some states are updating their labor laws so that more workers qualify as employees.

Respondeat superior was always a shaky legal principle. Luckily, a better alternative for thinking about worker benefits exists.

Inspired: Treating Worker Protection as a Merit Good

With the benefit of hindsight, we now know that respondeat superior — accepted more or less as fact starting in 1838 is a flawed principle, contradicting what we know from contemporary economic theory. It ignores the fact that shielding workers from catastrophic harm (just like protecting the environment from pollution) has positive spillover effects for the rest of society. If any worker is spared from injury or death on the job, the economic benefits accrue to:

  • Their spouse, children, or other economic dependents, who the worker can still provide for
  • Anyone they sell goods or services to (including their employer or anyone they contract for), who the worker can still sell to
  • Anyone they buy goods or services from (including anyone they themselves employ or contract from), who the worker can still buy from

These positive externalities form a chain reaction and protect the welfare of society as a whole.

In spite of the fact that investing in worker protections could benefit greater society, there are several reasons workers may not make that private investment in practice. First of all, they may not be able to afford an upfront investment in insurance. 22% of Americans today have skipped out on some sort of medical care due to costs. Even if they could afford it, they may have imperfect information of how their actions benefit their community — it may be difficult to measure these externalities. Part of that benefit calculation requires the worker to estimate the risk of a catastrophic event of injury or bankruptcy, but people have many cognitive biases that cause them to under-prepare for catastrophe [5]. Finally, even if the cost and information barriers can be overcome, people tend to act in their own self interest. They may value their own welfare more than the welfare of others (recall the last time you polluted).

“I know you’re bored, but just remember that education is an example of a merit good and therefore has positive externalities for society!!” Photo by Tony Tran on Unsplash

Economist Richard Musgrave in 1957 put a name to these types of services that are socially valuable but under-consumed by people: “merit goods.” To address the apparent market failure, he proposed governments should incentivize private consumption or even fully provide merit goods — things like health insurance or education— to people [6]. This marks a significant departure from the way the worker social safety net operates today. Not only does this economic theory argue that all workers should receive some safety net protections (not just employees), it also argues the government — not employers — should contribute to those benefits.

The idea isn’t as far-fetched as it might seem. Universal, portable worker benefits have been advocated for by a variety of groups. These benefits can funded by a combination of private but also public sources, acknowledging the public benefits of providing a worker safety net. Portable benefits are tied to the worker and carried from job to job, rather than being tied to a single employer. These offer an avenue to a more dynamic economy: workers don’t feel tied down to one employer just because others provide little to no benefits.

Conclusion

In the fight to expand coverage for worker protections, it is certainly tempting to stake it all on the fight to reclassify independent contractors as employees. While these legal battles are worthwhile in the short term, we need to consider some of the root causes that have caused differential treatment of employees and contractors. By expanding more protections to everyone, we can make the employee-contractor distinction less precarious for vulnerable workers. Companies can more freely determine if employees or contractors are best for their business model, and not have to worry as much about protracted, costly legal battles. And public investment in merit goods like universal social insurance for workers can pay off in dividends for society.

Footnotes

[1] These concessions, of course, still stop short of delivering many of the employee rights to contractors. For example, the right to organize or unemployment insurance wouldn’t be covered by gig companies’ proposals. The latter stands in contrast to US taxpayers effectively subsidizing Uber by paying for gig worker unemployment benefits during the pandemic.

[2] Many people, however, disagree that employee benefits and flexibility are mutually exclusive.

[3] Some claim that this legal concept of respondeat superior may also harken back to ancient Roman times, when masters were held liable for the crimes of their slaves (and, over time, this was extended to any members of the master’s household).

[4] The original text of the NLRA in 1935 mentioned, unhelpfully that “The term ‘employee’ shall include any employee,” failing to provide any specific definition of that class of worker. The ambiguity allowed a temporary period from 1944–47 where “employee” was interpreted broadly and included many workers who would be considered independent contractors under common law. But by 1947, Congress passed the Taft-Hartley Act, amending the NLRA and explicitly excluding independent contractors from its provisions.

[5] Look no further than the prolonged and uncoordinated response to the global coronavirus pandemic, or any natural disaster in recent memory.

[6] These merit goods stand in contrast to “demerit goods” (things like drugs/alcohol, prostitution, or gambling) which the government may desire to disincentivize — the US government does!

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Lawyers, law professors, students, and other legal professionals bring you the untold stories of the rules, institutions, and people that govern our lives (without too much legalese).

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Nilesh Kavthekar

Nilesh Kavthekar

learning about the future of work, automation, and how policy can foster a more equitable + dynamic society.

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