Sep 01, 2015

Employee vs. Contractor

The employee versus contractor debate is more in the media’s eye now than ever before. Recently, a California court ruled that an Uber driver was entitled to benefits as an employee rather than a contractor. Since then, Uber has appealed the ruling. But this case and a few others related to peer-to-peer services have again given prominence to the debate about worker status.

While some believe that workers in the sharing economy require the protection that traditional full-time employment offers such as overtime pay and benefits, there are others who contest this idea. A survey of Uber’s drivers found that 87 percent chose Uber because they wanted to “be their own boss”, and 85 percent wanted better work-life balance. According to some, the issue is not the debate about which bucket to place a worker in, but about American employment law which is not up to date with the changing realities of work today.

Focusing on Quality of Work

In today’s market, there are many options when it comes to how one works which extend beyond traditional full-time employment. According to the Harvard Business Review (HBR), we should not be questioning whether a worker should be categorized as an employee or a contractor, but rather ask if full-time employment is the only way to deliver lucrative skills and high compensation. By limiting the debate to independent contractor versus full-time employee, we are also limiting the options and conversation about countless different types of work arrangements. As per the HRB, it would be more valuable to reframe the discussion regarding the quality of work as opposed to the quality of the job. While many think that those engaged in contract work are exploited and would prefer work with higher wages or more job security, some global studies have shown otherwise. A survey by IBM of 33,000 employees across 26 countries found that independent workers are more satisfied, innovative, and engaged with their clients than regular full-time employees.

Focusing on quality of work also allows us to focus on the value of independent work for workers, companies, and for society. Recent research by McKinsey & Company estimates that alternative work platforms may unlock trillions of dollars in future economic value by using them to better source, match, and place workers. These work platforms allow workers to have careers that are boundary-less, do work that is more transparent, and enjoy more choice and control over their environment and work conditions. Many platforms such as TaskRabbit and Tongal are already allowing highly skilled workers to work as freelancers, taking on the projects they want on their own schedule.

Some Examples Already in Play

Many leading companies are already embracing more creative work arrangements that focus on quality of work, rather than the type of employment contract. These companies are innovating their workforce management and talent acquisition in ways that allow even regular full-time employees to work in new ways. Google, IBM, Apple, and Visa all regularly form alliances that allow them to borrow workers from partner companies, rather than competing with these companies to hire them. IBM has an internal system where employees can seek out volunteer projects within the company to help them expand their experience and visibility beyond their regular job.

This debate is also influencing public policy discussion and employment law. Senator Mark R. Warner of Virginia recently suggested an “hour bank” that accrues work hours and benefits, regardless of employer. Simon Rothman at venture capital firm Greylock Partners says a key to helping this sector thrive, while still protecting workers, is to unbundle benefits such as healthcare, insurance, and retirement from the workplace. Many people have discussed the need of a third category of employment that is a hybrid between an independent contractor and full-time employee. The report by McKinsey & Company forecasts that new intermediaries may emerge that serve to address the need for insurance and retirement plans for freelancers.

The Current Legal Status of the Debate

In July 2015, the Department of Labor (DOL) issued a detailed discussion of the Fair Labor Standards Act, which explains how it decides whether a worker is an employee or a contractor. The DOL’s interpretation is intended to increase protections for many workers who are currently misclassified. According to an analysis of the guidelines by international law firm Sullivan & Cromwell, the DOL through its “economic realities” test would consider very few workers to be classified as independent contractors.

The DOL has six economic realties factors it uses when determining the classification of a worker. All of these factors should be considered in each case, and no one factor is determinative. The DOL Guidance details each of the six factors of the economic realities test:

  1. Is the work an integral part of the employer’s business?
  2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
  3. How do the relative investments of the employer and the worker compare?
  4. Does the work performed require special skill or initiative?
  5. Is the worker/employer relationship permanent or indefinite?
  6. What is the nature and degree of the employer’s control?

This new guidance differs significantly from much legal precedent, and it remains to be seen how this interpretation will affect court rulings in worker misclassification cases.

"These firms have ignored the issue because they view themselves as a marketplace, not as an employer, and now it is biting them in the back.” ~Gene Zaino, Founder and CEO at MBO Partners