Covid-19 Shows Why Wrongly Labeling Workers As 'Contractors' Must Stop
Banner Photo by Matias Campa.
By Lina Moe
The Covid-19 outbreak and the massive economic dislocations it has induced have brought renewed attention to the lack of benefits, including employment-based health insurance coverage, typically experienced by workers classified as independent contractors.
In fact, well-justified concern about a broad range of labor conditions faced by app-based workers and other independent contractors has been steadily mounting. Over the past year, a number of state governments – most notably California – have begun to act on this concern by addressing a longstanding problem of employee misclassification that has caused many workers to be denied the rights and benefits extended to employees.
Employers have strong financial incentives to classify workers as independent contractors rather than employees. It frees them from paying unemployment insurance, workers' compensation, or Social Security and other payroll taxes. Employers also avoid minimum wage and overtime pay laws, as well as the costs associated with the enforcement of safety and discrimination laws that protect standard employees. But misclassification of workers as independent contractors results in substantial losses in tax revenue and funding for both Federal and State social insurance programs. The state of California estimates that lost tax revenue due to misclassification may amount to $7 billion annually.
In his State of the State speech, New York Governor Andrew Cuomo pledged to create a task force to “address conditions of employment and classification,” decrying the practice of deliberate misclassification as “exploitive” and “abusive.” So far Cuomo’s focus has been on online platform workers. Yet as a recent Center for New York City Affairs report shows, they are merely part of a much larger group of misclassified workers who are pervasive in nearly all industries in New York State.
“The Magnitude of Low-Paid Gig and Independent Contractor Work in New York State,” the recent study I co-authored with James Parrott and Jason Rochford, estimates that there are some 150,000 gig or app-based workers and 850,000 independent contractors in low-paid industries statewide in which median earnings are less than $20,000 per year. Gig workers likely make up only 17.5% of all low-paid independent contractors in New York State.
We focused on workers in low-paid industries because they typically have the least bargaining power and are consequently most likely to be subject to misclassification. Moreover, low-paid industries, such as personal services and transportation, have seen the fastest growth in independent contract work, while alternative employment in higher-paid industries has generally declined.
Demographically, low-paid independent contractors are roughly similar to standard employees in low-paying industries. But there are some important differences. Independent contractors in New York State are more likely to be male, older (55+), less educated, and foreign born. There is also considerable variability across industries. Transportation and construction, for instance, are heavily male, while personal services (including maids and housekeepers) and social assistance are heavily female industries. In New York City, fully two-thirds of individuals who report low-paid independent contracting as their primary job are persons of color, compared to 44 percent statewide.
Wherever one looks, however, low-paid independent contractors have taken a hit in earnings over the past decade, when their median inflation-adjusted earnings fell 11 percent. Moreover, they have missed out on New York’s historic minimum wage increases. From 2013 to 2018, median earnings for standard payroll workers in construction, retail trade, and personal services rose by more than 20 percent. This dwarfed the earnings increases that independent contractors saw in these industries. In fact, the bottom quarter of independent contractors in the personal services industry saw earnings fall by four percent while payroll workers (also at the 25th percentile) saw a 25 percent increase. Bottom line: independent contractors will continue to miss out on the benefits of laws aimed at low-wage workers as long as they remain misclassified.
Source: ACS-IPUMS, persons working in New York State, three-year sample, 2015-17.
Low-paid independent contractors also fare badly in health care coverage. Their earnings are so low that over a quarter are covered by Medicaid (twice the rate for all New York workers), while 20 percent do not have any health insurance (compared to eight percent of all New York State workers). In transportation, one of the fastest-growing industries, 46 percent of contractors have Medicaid and 19 percent do not have any health insurance coverage. The precariousness of their health coverage puts at serious risks workers left vulnerable to ordinary illnesses as well as to public health threats like Covid-19.
Responsible policymakers should never let a crisis go to waste, and the Covid-19 pandemic is no exception. It provides a compelling justification for extending to misclassified employees, in New York State and across the nation, the rights and protections to which all workers are entitled – including, given the massive layoffs and small business closings brought on by the pandemic, unemployment insurance coverage. Long-overdue recognition of the precariousness of independent contract work may finally be dawning in Washington, D.C. The latest (and third) Federal stimulus bill being worked on by Congress reportedly is prepared to extend unemployment insurance benefits to independent contractors losing work as a result of the pandemic.