The Dark Side of Independent Contracting

Classifying workers as independent contractors has become a popular business strategy. Instead of hiring someone, a business contracts with an individual who provides a service.

The business benefits because they only have to pay the contractor for services rendered. They do not have to pay for benefits such as health insurance, time off, or retirement programs. The business does not have to pay the employer share of FICA taxes (social security and medicare) nor do they pay into state and federal unemployment funds. Business are also not required to carry disability or workers’ compensation insurance for contractors. The downside for a business is that contractors are temporary. The business has limited control over their work, and when the contract concludes, the contractor takes any experience and knowledge with them. Historically, businesses have used contractors for non-essential jobs and those jobs that were temporary in nature.

The individual benefits because they can set their own hours, set their pay rate, and be their own boss. The downside is that the individual is only paid for time worked, and unless otherwise negotiated, the contract amount and hours to be worked are not guaranteed. Another downside for the individual is that they are responsible for all of their own benefits, which includes health insurance, vacation/time off, and disability. They are responsible for paying the full 15.3% for social security and medicare programs. They are also not covered by state or federal unemployment programs.

While each state can set its own rules regarding independent contractors, the IRS provides a set of guidelines. It covers three areas that a business and individual need to consider to determine the nature of their relationship:

  1. Behavioral Control – does the business have the right to direct and control the work performed by the worker, even if that right is not exercised?
  2. Financial Control – does the business have the right to direct or control the financial and business aspects of the worker’s job?
  3. Relationship – how does the business and worker perceive their interaction with one another? More specifically, does the business provide benefits to the worker, is the relationship permanent, or are the services provided a key aspect of the business?

For the relationship to be consider one of an independent contractor, it must pass all three tests. The tests exist as a means to prevent businesses from avoiding paying employment taxes and from exploiting workers.

Whether it is in the form of the “gig economy” espoused by the like of Uber, Lyft, DoorDash, Instacart, and others, or just creative outsourcing of jobs as noted in this ProPublica investigation around the exploitation of customer service agents, businesses seem to be getting more and more creative at stretching these definitions. They’re effectively using creative employment law and questionable ethics to enable previously unsustainable business models or to artificially boost profits.

It leads me to two conclusions about the current state of “independent contracting”:

  1. Just because you can doesn’t make it right
    I’ve written in the past about what’s bad for the hive is bad for the bee. Exploiting middle and low income workers is not good for business. It’s a sign of poor business ethics, and it won’t end well for anyone.
  2. The transfer of wealth is enormous
    What we’re witnessing through labor law exploitation is a massive transfer of wealth from the public domain to already wealthy, powerful individuals who own and back these companies. Since companies do not provide benefits to independent contractors, the contractors have to rely on the publicly funded social safety net when they are injured, hurt on the job, or require time off. In other words, instead of companies taking care of the workers who are building value in their businesses, the owners are pocketing the cost savings. The tax paying public is left paying the costs for their workers benefits.

It’s unfortunate and disappointing to see some companies using these tactics to build their business and profits. I’m not a fan of government intervention in business. I prefer to let the free market work, which it usually does. However, when a few bad actors exploit the system to maximize their benefit at the expense of the public and less empowered workers, then the government needs to step in, for everyone’s sake.