Are Uber drivers and HourlyNerd consultants independent contractors or employees? Interesting question, but the wrong one.
Better to ask: Are we stifling innovation across the digital economy by forcing a simplistic choice, contractor vs. employee? The short answer is yes. Worse, we’re also undercutting an era of new opportunity for American workers that I call Work 3.0.
Work 1.0 existed through roughly the first half of the twentieth century. Almost any worker who wasn’t self-employed was a company’s employee. Work 2.0, our present stage, emerged as state and federal tax laws created a new category of worker, the independent contractor. While rules vary by state, with the IRS providing its own guidelines as well, the key factor distinguishing employees from independent contractors is the company’s level of control over where, when, and how workers labor.
“Although most workers today are still employees, the contractor option gives a company flexibility in building its workforce”
Although most workers today are still employees, the contractor option gives a company flexibility in building its workforce. At the same time, the legal distinctions between the categories protect against a company’s having extensive control over its workforce without paying for employee benefits and social security taxes. Until recently, Work 2.0 worked.
Now the Work 3.0 era has dawned, prompted by the rapid rise of marketplaces-for-services. These companies—Uber and HourlyNerd as well as Lyft, Postmates, Upwork, TaskRabbit, and scores of others like them—connect large numbers of independent contractors providing services with customers seeking those services.
The companies profit by taking a cut of the revenue for playing matchmaker and facilitating the ongoing worker/customer relationship. With operations primarily online, their major expenses are technology and advertising. Labor costs are miniscule, because the workers who create revenue are independent contractors.
In contrast, traditionally structured service companies like Infosys, McKinsey, or UPS have employees. This affords them greater control over service quality and customer experience, in return for which they accept the added costs of being employers.
The decision by some marketplaces-for-services to treat their workers as independent contractors has stirred a hornet’s nest of public debate and lawsuits—the cases against Uber being just the most visible. As the law stands, state officials deciding these cases face a purely binary choice: workers are either employees or independent contractors, with no in-between.
That’s a big problem for our economy, because the in-between is where innovation lives.
The legal distinction between the two categories is based on which party has more control over the work relationship. But how is control measured? Where, exactly, is the line between employee and independent contractor?
It is nearly impossible to answer these questions consistently across multiple industries. There are at least five kinds of control that could belong to either company or worker, depending on the business model:
- Price charged to the customer.
- Equipment used by the worker,
- Method of service delivery.
- Ways of advertising the service.
- The worker’s schedule.
Complicating things further, some of these five allow a range of options—from full control by the firm (vehicles for traditional taxi companies, for example) to minimum requirements by the firm (car age and maintenance for Uber drivers, for instance) to full control by the worker (such as the vehicles used by Postmates couriers).
Each marketplace-for-services company develops its own combination of these dimensions of control, with many possible permutations. While the right combination—the model creating the most value for company and worker—may sit at one of the extremes of the full-control-to-no-control spectrum, it’s more likely to fall in the ill-defined middle, where company and worker could split control factors many different ways.
Trouble is, our legal system can’t be expected to pass judgment on each intermediate combination. But having only two categories forces creators of service-marketplaces to guess where their new models fall. Faced with this uncertainty, most entrepreneurs will settle for clarity, and innovation will suffer accordingly as novel middle-ground models are abandoned. That certainly doesn’t do our working men and women any favors.
A new way to work
For millions of workers, service-marketplace companies offer attractive opportunities. People of all ages are finding new options for earning a living and new ways for balancing commitments to career, family, and community. At this point in time, when many Americans remain underemployed and most workers feel time crunched, the last thing we want to do is squander labor market opportunity and flexibility. Yet that’s what could happen if new companies are forced to build workforces based on dated assumptions about employees and independent contractors.
We need a new, flexible approach. Work 3.0 must retain the principles underlying the employee/contractor dichotomy, guaranteeing employer flexibility and worker protections while permitting a spectrum of options: “employee” at one end, “independent contractor” at the other, and lots of novel ideas in the middle.
We are on the cusp of a sea change in how we view employment. If we manage this shift well, we’ll be creating an engine for economic growth. Mess it up and we’ll stifle a major driver of innovation, business creation, and jobs.
This article was written by Andrei Hagiu from Harvard Business School Working Knowledge and was legally licensed through the NewsCred publisher network.