Are you an employee or a contractor? This isn’t simply a matter of what you call yourself, or how you think about your relationship to those who pay you to perform services. Because formal employment is the subject of so many local, state, and federal rules, its definition is spelled out in law – and penalties for violating it can be severe.
In my role as a foundation president, I serve on many nonprofit boards. Some years ago I joined the board of an organization that had improperly classified its personnel as independent contractors rather than employees. Whatever the motive may have been, this error created major tax liabilities that threatened to capsize the small nonprofit. Fortunately we were able to work things out with the relevant agencies, but it was a close-run thing.
As a practical matter, I concede governments need to be able to distinguish between employees and independent contractors. But the current legal tests are too rigid. Indeed, North Carolina ought to clarify that one of them doesn’t apply in our state: the presumption that if companies help set up and fund non-wage benefits for workers, those workers are unlikely to be contractors.
The market for health insurance is heavily skewed by the different ways governments treat money spent on premiums by employers (largely untaxed) and by households (largely taxed). I think it ought to be easier for gig workers and other contractors to access tax-advantaged group health insurance without losing their independence.
I’m not alone. Liya Palagashvili, a senior research fellow at the Mercatus Center, urges states to remove participation in group health plans as one of the tests of whether someone is an employee or a contractor. She further recommends that state and federal policymakers make it easier to build flexibility and portability into health insurance, so that workers don’t have to drop plans and re-enroll every time they switch their employment arrangements.
“Flexible forms of work are beneficial and are desirable opportunities for a large set of working Americans,” she wrote in a recent study. Unfortunately, our current system “prioritizes the immobility of benefits” despite the fact that “worker preferences have shifted and more value is placed on choice and portability.”
You may be thinking this is much ado about nothing, that relatively few workers are either independent contractors or would like to be. Well, official Bureau of Labor Statistics data show that only about 7 percent of the workforce earn most of their income as independent contractors.
But the BLS survey is flawed, as a just-released National Bureau of Economic Research paper demonstrates. The authors devised a lengthy set of survey questions to probe whether all the respondents who told the BLS they were employees were describing their work arrangements accurately.
They weren’t. Young workers, less-educated workers, non-white workers, multiple-job holders and those with low hours are more likely to be miscoded in the BLS survey. “Taking these workers into account substantively changes the demographic profile of the independent contractor workforce,” the authors concluded.
According to the NBER study, the real share is about 15 percent of all workers, and that’s just the share who mostly work independently. More than a third of U.S. workers earn at least some income from freelancing or side gigs, according to a separate survey overseen by economist Adam Ozimek. Nearly three-quarters of freelancers said that having “flexibility in my schedule” was a key motivation. Others included the ability to live where they choose and to do work they see as “meaningful.”
Would many more of these part-time contractors convert to full time if they could access group health insurance and other benefits? That strikes me as likely. In this post-COVID era, people are exhibiting a greater desire to match their jobs with their preferred lifestyles – to work more from home if possible, or to adjust their hours and responsibilities to accommodate their children’s needs.
One way to do that is to go independent. North Carolina should make it easier to do.
John Hood is a John Locke Foundation board member. His latest books, Mountain Folk and Forest Folk, combine epic fantasy with early American history (FolkloreCycle.com).
