Ending the Independent Contractor DebateIt’s time for state and federal lawmakers to embrace a portable benefits model, which will both preserve the flexibility of gig work and protect individual workers
Over the past decade or more, in conjunction with the rise of the gig economy, a growing debate has arisen about how to classify American workers. Specifically, sectors that have traditionally operated under independent contractor arrangements have come under increasing scrutiny from progressive policymakers who argue that workers in these industries should be reclassified as employees and therefore be eligible for benefits such as health insurance. A recent move by the Trump administration is sure to jump-start the debate once again, so it’s time for lawmakers to step in and update American labor policy for the 21st century. The debate first started in the wake of California’s now-infamous 2018 Dynamex state supreme court decision, which ushered in the adoption of a more stringent test for classifying workers as contractors rather than employees. The equally infamous A.B. 5 law was then passed in California, instituting what became known as the “ABC test” for worker classification. The upshot was that, to be classified as an independent contractor under the law, a worker needed to meet certain criteria, such as performing work “outside the usual course” of the hiring entity’s business. This standard was essentially impossible to meet for nearly all gig economy workers, as well as for many other roles that traditionally operated under independent contracting arrangements, including real estate agents, financial advisers and emergency room doctors. As a result, many of these workers found it harder to get jobs, since employers couldn’t afford (or didn’t want) to pay the additional costs of hiring more employees instead of contractors. The blowback against A.B. 5—which, in addition to gig workers, ensnared everyone from freelance writers to theater actors—was swift. In 2020, Golden State voters passed Proposition 22, which exempted app-based delivery and transportation drivers from A.B. 5’s reach. Since then, a significant body of research has emerged to demonstrate the immense cost and impact of A.B. 5 in California. For instance, a study from the Mercatus Center found that self-employment decreased by more than 10% in affected occupations in the wake of A.B. 5, while overall employment fell by more than 4% in affected occupations. Despite the negative outcomes associated with the law, progressive policymakers haven’t stopped pushing for the adoption of stringent ABC-style worker classification rules in other jurisdictions across the country. Blue states such as Illinois, New Jersey, New York, Oregon and Washington have actively considered implementing or strengthening ABC tests for independent workers, while a version of the ABC test also appeared in the PRO Act, a primarily Democrat-sponsored bill introduced in Congress in recent years. Meanwhile, outside the halls of Congress, the executive branch has engaged in a game of policy ping pong between anti- and pro-contractor postures. In 2015, the Obama administration issued guidance that, while stopping short of a wholesale adoption of the ABC test, sought to clamp down on the number of workers who could classify as independent contractors. In 2017, the first Trump administration reversed course and withdrew the Obama guidance before implementing a formal rule that was more favorable toward contractors. Once the Biden administration took the helm, it reinstituted the Obama-era regime by passing its own rulemaking that overruled the first Trump administration’s policy. Now, the second Trump administration has issued guidance stating that it will not enforce the Biden-era rule as it seeks to once again implement a (presumably more pro-contractor) rulemaking of its own. This every-4-years policy seesaw continues to roil American labor markets, as vast swaths of the economy face perpetual unpredictability as to how workers within their sectors will be classified. It doesn’t have to be this way. Instead of this zero-sum political debate, policymakers should update labor policy for the 21st century around an agenda of worker flexibility. More than anything else, the modern American worker prizes flexibility and autonomy, with over 60% reporting that they value flexibility over considerations like salary or benefits when it comes to a job. Given this context, it’s unsurprising that independent contracting—such as gig economy work—appeals to many Americans since such arrangements allow them to have substantial control over their work hours and schedule. At the same time, one of the most-cited drawbacks of contracting work is the lack of benefits and workplace protections. Independent contractors rarely have access to unemployment insurance, health insurance or paid sick leave, to give just a few examples. While this dearth of benefits is the impetus behind the political left’s push to reclassify these workers as full-scale employees, protecting contractor status and providing more worker benefits do not need to be incompatible policy priorities. Instead, lawmakers could couple the protection of independent contractor status with the establishment of a portable benefits model. This model could take different forms, but the broad concept would be to establish a system by which these contractors could utilize SEP-IRA style accounts that could be used toward things like paid sick leave or health insurance. Because contractors and gig workers often hop from job to job or platform to platform, the benefits would be portable and would follow the worker, rather than being attached to a discrete employer. (I laid out a version of what such a model could look like in the Winter 2024 issue of National Affairs.) The portable benefits concept has percolated in think tank circles for several years, but now it seems that legislators may finally be starting to pay attention—and there’s also evidence that the interest could be bipartisan. In 2024, Pennsylvania’s Democratic governor, Josh Shapiro, partnered with DoorDash to launch a portable benefits pilot program, which has met with initial success. Recently, it was announced that Democratic Gov. Wes Moore of Maryland was following suit. At the same time, several Republican-led states, such as Georgia, Tennessee and Utah, have either passed portable benefits legislation or instituted pilot programs. At the federal level, Democrats like Sen. Mark Warner (D-Va.) have been proponents of portable benefits models, while Republican Sen. Bill Cassidy (R-La.) recently released a white paper calling for portable benefits for independent workers. It was also Cassidy who asked Trump’s Secretary of Labor, Lori Chavez-DeRemer—who, ironically, was one of the few Republicans who sponsored the aforementioned PRO Act and its inclusion of the ABC test—during her confirmation hearings if she’d work with Congress on crafting portable benefits legislation. Chavez-DeRemer assented, which suggests that the pieces could be in place for lawmakers finally to pursue portable benefits legislation at the federal level. It’s a long-held axiom that uncertainty hurts businesses. It also hurts workers, who have ended up becoming bystanders to a worker classification debate that seemingly does an about-face every four years at the federal level. An off-ramp from this back-and-forth is needed, and for maybe the first time, one just might be appearing on the horizon. C. Jarrett Dieterle is a nonresident senior fellow at the R Street Institute and a legal policy fellow for the Manhattan Institute. You’re currently a free subscriber to Discourse . |