– September 13, 2019
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The difference between contractors and employees is important. A “contractor,” from the Latin verb to draw together different things, is someone who brings their own tools and skills, and does a (relatively) brief stint of work in a defined task. An “employee,” from the Latin verb to be entangled, associated, or connected, is someone who predictably works at one job, often using the tools or equipment of the employer, over an indefinite and possibly quite long period.

That essential contrast cashes out as a difference in the legal context, tax law, and regulations that govern the relationship. For some kinds of jobs, the “cashing out” is literal, as the difference matters for the way insurance and benefits are regulated. Companies, workers, and legislators are arguing about how to think about the very nature of work. And it’s only going to get worse.

As I recounted in my recent book, Tomorrow 3.0, the problem is that apps, smartphones, and 4G connections have made it possible to reduce the costs of what economists call “peer to peer” transactions. If I’m driving around in my car, but have a few extra minutes, and you are nearby and need a ride, it is likely we could negotiate an agreement that would benefit us both. The companies that run these apps, such as Bla-Bla Car and AirBnB, are helping individuals turn excess capacity into commodities.

In many ways, that’s great. Instead of paying for a car and then paying to park it at the airport, for example, an app such as Turo saves the cost of paying for parking and also brings in some money when someone rents from me instead of Hertz or Avis. We have more than enough stuff; if we can just use it more efficiently by sharing instead of paying to lock it up and store it, we can save money and use all those parking spaces, garages, and closets for living our lives and moving around.

Still, some kinds of sharing raise questions. When I call an Uber, that driver probably owns that car, and has her own driving skills, to get me where I want to go. From the perspective of the rider, the Uber driver is not an employee. But what about the relationship between the driver and Uber, the app provider? True, the driver supplies her own car, and driving skills. But there is much more “entangled” connection, as Uber supplies information, reputation ratings, and insurance, takes the payment from the rider, and then pays the driver on a regular weekly schedule. (Uber “weeks” end at 3:59 a.m. every Monday, and the driver is paid a single total sum at 4:00 a.m.)

California recently passed legislation, AB #5, that tries to clarify the situation. A lot has been said about this law. I want to provide the actual words of the legislation, which are important. The justification is given at the outset.

THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

SECTION 1. The Legislature finds and declares all of the following:

(a) On April 30, 2018, the California Supreme Court issued a unanimous decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 (Dynamex).

(b) In its decision, the Court cited the harm to misclassified workers who lose significant workplace protections, the unfairness to employers who must compete with companies that misclassify, and the loss to the state of needed revenue from companies that use misclassification to avoid obligations such as payment of payroll taxes, payment of premiums for workers’ compensation, Social Security, unemployment, and disability insurance.

(c) The misclassification of workers as independent contractors has been a significant factor in the erosion of the middle class and the rise in income inequality.

….

(g) Nothing in this act is intended to diminish the flexibility of employees to work part-time or intermittent schedules or to work for multiple employers.

The key working parts of the law go like this:

2750.3. (a) (1) For purposes of the provisions of this code and the Unemployment Insurance Code, and for the wage orders of the Industrial Welfare Commission, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:

(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

That is, there is a “three-part test” for whether a worker is an employee or a contractor. That’s bad enough, since the very premise of the “sharing economy” is that it enables peer-to-peer transactions in highly specialized areas that commodify excess capacity. But the real slap in the kneecap here is that the law creates a strong presumption in favor of “employee” over contractor. If you want to work with someone, there will be a process where you will be forced to hire consultants and attorneys and “demonstrate” that the person is a contractor.

This law is classic leftist dogma, and it’s a real problem for the future of work. Many people think that the Left doesn’t believe in capitalism, but that’s wrong: the Left thinks that capitalism is indestructible. The Marxist notion of the “surplus” to be divided is obvious in the logic of the law itself. The workers are being denied their share of that surplus. But there is no surplus; Uber (for example) has been losing money trying to gain market share.

The real comparison is not between the current situation of exploited contractors and “good jobs with benefits”; the real comparison is the current situation of an effective and highly flexible system for making more efficient use of excess capacity through commodification via app-based business, and no jobs at all.

The notion that the job is going to be there no matter how it is regulated, and the only issue is how to redistribute the surplus so the worker gets more, simply misunderstands the fragility of markets and entrepreneurial energy. You can kill the process of innovation, and harm the very workers you think you are trying to help. California has made a terrible mistake.

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Michael Munger

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Michael Munger is Professor of Economics at Duke University and Senior Fellow of the American Institute for Economic Research. His degrees are from Davidson College, Washingon University in St. Louis, and Washington University. 

Munger is the author of Is Capitalism Sustainable? (AIER, 2019)
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