5 Reasons Why Preemption May be Necessary to Protect American Independent Contractors

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Posted by Pavle Djokic on Wednesday, June 10th, 2020, 11:53 AM PERMALINK

In recent days, stock markets have slowly begun to recover from the economic shutdowns brought about by Covid-19 across the country. These shutdowns resulted in more than 40 million Americans filing for unemployment benefits, indicating a slight disconnect between long term market optimism and immediate recovery progress. At the national level, the Trump administration has taken hundreds of deregulatory actions aimed at reducing government barriers to a V-shaped recovery. Unfortunately, Democrats are pushing for policies that will hinder the ability for many Americans to find work in a time they need it the most.

Among the more striking examples of the Democrat war against an economic recovery are their efforts to crack down on independent contractors. These flexible work agreements often allow individuals to retain autonomy on questions like working hours and the length and/or specific scope of work for one company. In July of 2017, the Internal Revenue Service reported that there were over 13.8 million such Americans working as independent contractors.

The most recent notable state change to the nature of these agreements began in California in 2019. Assembly Bill 5 (AB 5) instituted a stricter than ever three-stage worker classification test to prove that a worker is an independent contractor and not an employee. AB 5’s work restriction is known as the “ABC” test and goes beyond federal guidelines on independent contractor classifications.

Under the three-step ABC test, businesses must prove that a contractor is doing duties “outside the usual course of work of the hiring entity” and that “the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.” This significantly limits the ability of businesses to retain contractors who may operate within the scope of work sometimes performed by employees in similar circumstances. It’s an unnecessary distinction that prohibits most businesses from working with independent contractors.

More than 90 percent of California independent contractors opposed the ABC test reclassification before it was signed into law by Governor Gavin Newsom (D-Calif.).

In response to the Covid-19 pandemic, over 150 Ph.D. economists and political scientists have signed a letter calling Newsom to suspend the bill, stating “AB 5 is doing substantial, and avoidable, harm to the very people who now have the fewest resources and worst alternatives available to them.”

Meanwhile, Democrat plans to expand the ABC test as a nationwide entrepreneurial limitation is no secret. House Speaker Nancy Pelosi (D-Calif.) and presumptive Democrat nominee for President Joe Biden have been advocating for the Protecting the Right to Organize (PRO) Act. While the PRO Act finds itself dead at Senate Majority Leader Mitch McConnell’s desk, provisions in it include the adoption of California’s ABC test, invalidating state Right-To-Work laws, and removing the secret ballot from union elections.

These growing state and federal threats to worker freedom may warrant legislative preemption aimed at protecting small businesses and the millions of independent contractors who rely on workplace flexibility and mobility across the country.

Here are the top 5 reasons Congress should consider protecting independent contractors at the federal level:

1. Independent Contractors Exist Across All Industries and Professions

Advocates of limitations on independent contracting have argued that forcing more people into traditional employment agreements only negatively impacts select companies like Uber or Doordash. While destroying America’s gig economy has massive implications of its own, the reality is that millions of independent contractors outside of the gig economy will be directly affected by laws like California’s AB 5 or the PRO Act in Congress.

Hundreds of industries that utilize independent contractors in California have been forced to terminate the contracts because of stringent requirements imposed by AB 5. Among those impacted are healthcare professionals, janitors & housekeepers, health aids, language interpreters, tutors, freelance writers & photographers, truck drivers, and campaign workers.

Individuals working as traditional salaried employees seeking to monetize some of their in-demand labor skills or assets have been long been permitted to take on side-work to increase their income. Nearly 9 million such Americans in 2016 reported income from independent contracting in addition to their W-2 as reported by the IRS.

2. Independent Contracting Growth Has Largely Benefited Women

Since 2001, the number of workers with independent contracting income has grown by 22% and their work now represents over 8.5% of America’s GDP. Part of this rise can be attributed to independent contracting work appealing to Americans who need greater flexibility hours and autonomy of work which being a regular part- or full-time employee prohibits.

Over 50 percent of the independent contracting growth is attributed to women partaking in independent contracting work. From 2001-2016, the number of female independent contractors increased by 68 percent, compared to a 37 percent increase for men.

Much of this growth may be attributed to technological strides that make it easier for mothers who care for children at home to take on freelance work remotely. The available data shows that female independent contractors are more likely to have children than traditional employees. Flexibility in remote and independent contracting work has the additional benefit of removing the need to pay for expensive childcare or babysitters while caregivers generate household income.

The benefits of independent contractor flexibility aren’t limited to women who are currently raising children, however. In California, Monica, a 61-year-old cancer survivor, was one of many that lost her income due to AB 5. While she was previously able to work as an over-the-phone language interpreter, new classifications meant that she could no longer work without being hired as an employee. In Monica’s case, however, it was impossible to find a business willing and able to hire her without imposing limits on the necessary freedoms she needed to manage her medical condition.  

3. The Economic Costs of Upending Independent Contractors Could Kill Millions of Jobs and the American Covid-19 Recovery

As of 2016, there were 13.8 million Americans who reported earnings from independent contracting to the IRS. The appeal of independent contracting is not limited to workers but extends to business who can reduce labor costs by up to 20%. More importantly, businesses can pay workers to meet the on-demand needs of a changing social economy without burdening their ledgers without fixed and permanent costs.

Studies done by the American Action Forum reveal that if the ABC test was as a national standard, there would be an annual $3.6 to $12.1 billion in upwards cost pressure on employers. Businesses with four or fewer workers currently utilize the most independent contractors at 6.7 per employer on average. Any limits on the ability of firms to hire independent contractors will disproportionally harm small businesses who need to be able to adapt to changing business needs and economic conditions.

Upon the passing of AB 5, New York-based sports media network SB Nation made headlines with their decision to discontinue their use of more than 200 California freelancers and instead hire a much smaller team of full-time employees for sports coverage in the Golden State. As the media industry faces challenges with an estimated 7,200 workers losing their jobs in 2019 alone, forcing papers that employ contractors to write just a single column a week to hire writers as employees is simply unfeasible.

In the months since the passing of AB 5, many other industries have voiced their concerns for the impact of the bill. The California Trucking association has stated 70,000 owner-operator truckers will be put out of work and have filed a lawsuit against the state. The thriving California music industry has also spoken out, with an open letter written by representatives of the Music Artists’ Coalition, the Recording Industry Association of America, and the American Association of Independent Music calling for an exemption for the thousands of musicians, producers, engineers, and other workers in the industry.

The result of the inconsistent exemptions in AB 5 are clear, with numerous legal challenges levied against the state and nearly three dozen bills being introduced to the California Assembly to amend, repeal, or replace the law. As different industries fight for equal treatment and consistent exemptions under the law, workers are left to bear the brunt of stalled hiring and potential terminations in the effected industries.

The transient nature of many types of independent contracting further highlights the need for a federal standard on employment classification. Contradictory classifications of workers and contractors will limit the ability of individuals to seek income-generating opportunities across state lines.  More than making money, however, this can present significant problems in times such as now, with mitigation efforts still underway to stop the spread of Covid-19. Restrictions that were removed to allow health care professionals to cross state lines have been used with great success to treat Covid-19 patients and ensure hospitals were not overrun with cases in hot spot areas like New York.

Greater flexibility for employment opportunities will be more important going forwards than ever before. As the health risks of Covid-19 subside, the economic opportunities for current workers and future contractors will be more remote, mobile, and flexible. Across a diverse range of industries from truckers who deliver to different markets, I.T. professionals who operate remotely for on demand services, and landscape companies that offer their services to clients across the country, state-specific worker classification tests would be devastating for their opportunities.

As the country faces a pandemic that has left millions of Americans out of a job, it is the time to ensure that the barriers for worker and employer fluidity are kept at a minimum.

4. Federal Regulators Already Have Established A National Worker Classification

The idea that the federal government has a say in determining the status of worker classification is not new. Under the Trump administration, the National Labor Relations Board and Department of Labor have both taken the stance that independent contractors working for ride-sharing services are not employees. These rulings were based on federal guidelines determined by the Department of Treasury through various Supreme Court precedents on employment classification.  

However, for the millions of independent contractors in America, shifts in political appointments at various agencies and departments should not dictate the status of one’s income-generating opportunities. With the federal government having already established cohesive guidelines on classification, codifying the guidelines as law would not be akin to a new federal power.

If elected, Joe Biden has already signaled that his administration’s stance on the matter will be different than Donald Trump’s. In order to provide workforce stability and continuity, Congress should consider passing legislation protecting the right for people to seek flexible work, including independent contracting.

Federal preemption is currently in use across a wide range of industries. Federal Communications Commission regulations prevent individual states from regulating the internet. The Environmental Protection Agency and Department of Transportation set the federal standard on auto emissions and prevent state standards for cars. These clear and consistent standards allow for firms to operate across the country without having to deal with a patchwork of politically motivated regulations that would further burden entrepreneurship and private investment.

Arbitrary employee standard tests and guidelines for worker classification differ in almost every state of the country, with different implications for various professions. While in some states they simply serve the purpose of outlining qualifications for worker’s compensation and unemployment insurance, others go as far as wage and hour entitlements and withholding taxes. Federal legislation could permit states to define how state benefits are allocated while limiting the ability of businesses to hire employees or contractors based on arbitrary definitions that vary from jurisdiction to jurisdiction.

5. Independent Contracting Industries Are Crucial in Swing States

Not only is independent contracting a thriving sector of America’s economy, its growth has dominated in several crucial battleground states.

Looking forward to the 2020 election, three of the nation’s fourteen swing states were also the top three states that saw the most independent contractor growth from 2001-2016. Florida, Arizona, and Nevada all saw their share of workers as independent contractors increase by over 70%.

IRS data from 2016 reveals of the number of independent contractors in Florida at nearly 1.2 million people who enjoy the flexibility of contract work in the Sunshine State. Similarly, in 2016 there were 300,000 Arizonan and 130,000 Nevadan independent contractors. State or national efforts to reclassify the majority of independent contractors into employees could cost millions of jobs and billions in lost revenues to just these three states alone.

Adhering to federal guidelines on worker classifications have been a large factor in driving this growth and attracting both populations and revenue to their states. Protecting these states’ rights to maintain their current employment laws can prove to be a big political winner going forwards.

Photo Credit: US Department of State

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