How to Reform Labor Law for the Gig Economy: Adapt it, Fix it, or Suspend it

More than one in six American workers today are neither full-time, year-round employees of a single company nor truly independent contractors who serve multiple clients, according to a recent study. Yet U.S. labor law insists on cramming all of us into one of two rigid categories—you are either a regular employee or independent contractor.

This distinction is a relic of age-old common law that was originally intended to cover only liability for accidents, and it has become an untenably poor fit for millions of people and companies in today’s rapidly evolving gig economy.

The sudden emergence of Uber, Thumbtack, TaskRabbit, and other Internet-based market platforms that facilitate myriad new ways of working has shined a bright spotlight on the nature of the problem. People who make all or part of their living with these gig-enabling apps still represent only a small fraction of the broader “nontraditional” workforce, but it is easy to see how they and the companies behind them fall well outside either of the two common-law categories for employers and employees.

So how do federal and state statutes apply when it comes to things like wages, workplace safety, collective bargaining, family and medical leave, job discrimination, employee benefits, and taxes?

The answer is not nearly as well as they should. It is time to reform U.S. labor law for the gig economy, and as a new report from the Information Technology and Innovation Foundation shows, there are three possible paths forward: We can fix it, adapt it, or suspend it.

The ideal approach would be to fix it. This would entail amending each major labor statute—from the Occupational Health and Safety Act to the Family Medical Leave Act—to ensure that it clearly defines its scope of coverage, based on both the originally intended purpose of the law and the realities of modern labor markets.

The application of one law should not automatically imply that other laws apply, too. For instance, why should the protection of anti-discrimination laws depend on whether a worker is an employee? Perhaps tax withholding should be determined by the annual income a worker earns and the size of the firm, not the details of the work arrangement. Similarly, workplace safety rules should be governed by who has control over the workspace and tools a worker uses.

A second alternative that some have advocated would be for Congress to adapt existing labor law to today’s increasingly fluid and diverse labor market by creating a third category for “independent workers” who rely on third-party intermediaries to match them with potential customers. Alongside the existing categories of regular employees and independent contractors, this narrow third definition would exclude most alternative work arrangements, however.

Even if it was broadened, Congress would still face the task of deciding which labor laws should apply to this class, and would have to rewrite some of them in the process. Congress also would have to define clear boundaries between the three categories. Most other alternative work arrangements would still be stuck with the uncertainty of common law.

Either of these approaches—fixing existing labor law or adapting it—might take a lot of time, however.  So Congress should pursue the third path in the short run—simply suspend it—by giving Internet platforms that create a market for personal services a temporary exemption from most labor laws. In order to qualify, the platforms should serve the general public and give workers a fair amount of freedom about when to work and what jobs to take.

The platform would be allowed to handle payments, set prices, keep ratings of both parties, and remove bad workers and users, because these activities increase the total value of the transaction. Lawmakers could then see whether gig platform providers voluntarily provide their workers with a range of helpful services such as training, business advice, tax preparation, and affordable insurance. If they do, then this experience could guide Congress in modernizing labor law to reflect the far greater number of workers in alternative arrangements. If they don’t, then Congress could let the exemption expire with little harm. 

Alternative work arrangements can benefit all parties. Companies are able to concentrate on their core competencies and reduce their risk profiles by turning some of their payroll from a fixed expense into a variable expense, available only when needed. Workers gain extra flexibility over their working hours and control over their career paths. Because the companies they work for or through no longer have to pay for fixed overhead, they can often earn more than if they were employees.

Those using Internet platforms have a more efficient way of finding customers for the goods and services they sell. Consumers meanwhile benefit from having greater access to both goods and services without either the high cost that comes from extra capacity or the long lines that come from supply shortages. 

Some observers think that the growth of the gig economy represents a threat to workers. However, polling data from gig workers themselves shows that most welcome the opportunities that it offers. Others argue that existing labor laws are adequate to handle gig platforms. But they often assume that applying the full set of laws can only help workers, because, after all, that is what they are meant to do.

The truth is there is strong evidence that applying the employee model to these platforms would destroy the flexibility that so many workers value and that fear of this eventuality is deterring platforms from providing more support to their workers. Technology that reduces transaction costs and increases flexibility should be welcomed, even if we have to change the law to accommodate it.

Joe Kennedy is a senior fellow at the Information Technology and Innovation Foundation, a think tank focusing on the intersection of technological innovation and public policy.