New Restrictions on Independent Contractors Could Destroy Gig Work

The gig economy has become a crucial part of our nation’s economic infrastructure. Beyond platforms like Uber and Lyft, independent contract workers are also vital to many other sectors of our economy, from healthcare to the arts. In fact, gig work provides at least part-time income to one in three American workers, totaling $1.2 trillion to the U.S. economy in annual earnings.

But a new rule just issued by the Biden Administration will essentially ban independent contractor status for gig workers under the Fair Labor Standards Act. It will threaten a crucial source of livelihood for millions by putting these jobs at risk. For example, a recent study projected that this sort of policy would result in more than 73,000 lost app-based jobs in Massachusetts alone.

In the wake of successful wage negotiations by the United Auto Workers and other unions, the Biden Administration thinks these workers would be better off if they are converted to full-time employees who are eligible for union membership and traditional employee benefits. But that would destroy the flexibility and independence these workers value most.

A far better solution would be to allow companies to extend benefits to gig workers without making them employees and taking away their autonomy.

Workers in the gig economy have the freedom to set their own schedules and decide when and where they work. This flexibility is not just a perk; it’s a fundamental factor that contributes to high job satisfaction in this field. The Bureau of Labor Statistics found that 79% of independent workers prefer their current arrangements over traditional employment, which can take away their flexibility.

The new rule from the Department of Labor seems better suited for the economy of 1923 than 2023. Rather than going to the same shift every day, many independent workers complete tasks at odd hours they can squeeze in between parenting and other family obligations or as part-time work to supplement their regular income.

California’s recent failed attempt at this policy should also serve as a cautionary tale. The state’s law aimed to classify gig workers as traditional employees, but it led to job losses across the state. Small businesses like theaters and music venues were particularly hard hit. The ensuing bipartisan backlash led the state to later exempt 110 professions from the regulations.

It’s clear that a one-size-fits-all approach doesn’t work. However, there’s no doubt that the existing regulatory structures for work in the U.S. need to be overhauled to meet modern economic and labor requirements.

Under current regulations, companies are not allowed to provide standard employment-based benefits such as paid time off, healthcare, and retirement plans to independent workers. If a company wants to provide benefits, they would have to convert them to regular employees. The workers would lose their independence and flexibility, forcing many to quit.

Instead of banning independent contractors outright, we should give workers the choice to remain independent while giving companies the option to extend benefits if they want to do so.

The easiest way to accomplish this would be to establish benefit savings accounts that would let companies extend special benefit bonuses to their contractors. Workers would then use these bonuses to pay for their own benefits on a tax-free basis. This would create a parallel structure that already lets companies pay for employee benefits without paying taxes on those expenses. And the plan lets contractors prioritize the benefits they want most.

Creating benefit savings accounts aligns with the interests of both gig workers and companies. For gig workers, it preserves their flexibility while offering a safety net of benefits. For companies, it allows them to attract and retain talent, promote worker loyalty, and contribute to the overall well-being of their workforce.

About 80% of gig workers say they want access to benefits like health insurance, and companies such as Uber are eager to provide them.

At least nine states have already introduced legislation to reform laws that prohibit companies from giving benefits to non-employees. Utah has been a leader on this issue, passing a law earlier this year to allow companies to provide benefits to independent contractors.

While this progress at the state level shows great potential, creating benefit savings accounts will require the federal government to make reforms too, so workers can use their benefit dollars without paying federal taxes.

By preserving flexibility and allowing benefits, we can uphold the core independence that fueled the growth of the gig economy while adapting to the evolving needs of its workforce in the 21st century. The Biden administration should reconsider its approach and work toward a more balanced solution that respects the choices and needs of millions of gig workers – and the businesses and consumers that rely on their services.

This article was originally published by RealClearPolitics and made available via RealClearWire.