The Rise of the 1099 Economy: Who Really Benefits from Contract Work?

Published apr. 24, 2017
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Businesses have many reasons to hire contract workers over employees—namely reduced costs in hiring, training, and benefits, and overall limited liability. Businesses usually hire contractors for a limited scope of work in a finite timeframe, as opposed to the more expansive and ongoing nature of an employment relationship.

But this lighter-weight arrangement comes with caveats. A contractor cannot be compelled to work a certain schedule, and must complete their contractually defined work independently—in other words, the business hiring the contractor has a limited ability to dictate how/when/where work is conducted. This hinders oversight of the work and may impair quality control for the business.

Many businesses are not familiar with these regulations, which often leads to the misclassification of employees as contractors (this may partly account for the increase of contract workers noted above). Despite these caveats, the incentive for businesses is to hire contractors over employees wherever they can.

For workers, there are also benefits: a flexible schedule, independence in how your work is completed, ability to increase or decrease hours based on your needs, and the freedom to work for and move between different businesses as you choose. Having a flexible schedule makes it easier for workers to attend training that can lead to better jobs and better pay, for example.

But there are concerning downsides. First, contract workers usually don’t receive benefits like health insurance and paid time off like full-time employees typically do. Second, they are responsible for paying a self-employment tax in addition to income tax to cover their Medicare and Social Security taxes (which are normally divided between employer and employee as a FICA tax). Many independent contractors aren’t prepared to pay these additional taxes, let alone pay them quarterly as independent contractors are responsible for doing. Finally, independent contractors are responsible for all of their own work-related costs. For an Uber driver, for example, that means covering their own gas, car payments, car insurance, repairs, etc.

Unfortunately, it gets worse still for some independent contractors. In a recent article, the New York Times documented Uber and other platform workforce companies’ use of psychological tactics to maximize benefit to the company at the expense of the driver. Because Uber drivers are independent contractors, not employees, they don’t have the same protections under the law. Unless more protections are put in place, this means more potential for exploitation of contract workers. All of these problems for independent contractors are likely to be even worse for low-income and low-skill workers.

At JFF, we feel growing urgency to develop solutions for independent contractors as their numbers grow and protections languish behind technology's steady march. It is likely that this trend will continue into the future, perhaps at an escalating rate. One intervention is to adapt our education and workforce systems to better prepare workers both through education (e.g., the concerns over benefits and taxes they will face) by encouraging skills that will serve them across many short-term contracts, and examining how opportunities for lifelong learning opportunities are created in the absence of traditional employer/employee relationships. Building strong entrepreneurial skills will help them network, market their services, line up multiple gigs, budget for costs and taxes, and establish and nurture client/partner relationships.

Another possible solution is through policy changes that give more rights and opportunity to 1099 workers. Seattle was successful in passing legislation that allows “transportation network company drivers” to unionize and a local union is now working on unionizing drivers there (lawsuits have been filed however and the law has been temporarily blocked by the courts).  Other cities are examining how to better serve 1099 workers through the public workforce system despite the lack of performance incentives in the Workforce Innovation and Opportunity Act.

We need to find ways to make contract work better for workers and put them on more even footing with the businesses who hire contractors. If we don’t, many of the problems with contract work noted here could add to income inequality, lack of benefits, and exacerbate other issues low-income workers face. We encourage you to join us in this important conversation and be part of developing solutions now before the problem grows.

This is the third post of the Future of Work blog series.