We Need A New Social Contract Between Workers, Companies, And Society: Here Are Some Ideas

The way we work today would be unrecognizable to the labor and corporate leaders of the past. When the United Auto Workers and General Motors signed the “Treaty of Detroit” in 1950—the most influential labor contract of the 20th century—a job was something you did full-time for your whole life for a single company, and the arrangement came with generous health, unemployment, and pension benefits (not to mention guaranteed wage increases). Workers had to give up their independence and turn up at the same place every day at the same hours, but they were rewarded with a ticket to middle-class comfort.

Now such jobs are growing scarcer. Through Ray Kroc’s hamburger franchises, the growth of temp agencies like Kelly Girl (now Kelly Services), and particularly the outsourcing boom of the 1980s and 1990s, companies have found numerous ways to take “non-core” workers off their books and reduce their costs. More than 15% of the workforce is now made up of agency workers, on-call workers, contract workers, independent contractors, and freelancers, according to a recent estimate by economists Lawrence Katz and Alan Krueger. More than 40% of workers don’t receive a full range of employer-contributed benefits, government figures show (for example, those who work less than 30 hours a week and don’t get health coverage under the Affordable Care Act).

True, there may be advantages to working more flexibly. Freelancers set their own time and make their own rules, as any Uber driver will tell you. But then one person’s flexibility is another person’s insecurity. And, across the economy as a whole, we might say the shift to “contingent” work hasn’t been completely beneficial. In the years that companies have been cutting their payrolls, there’s been a rise in income volatility, income inequality, and wage stagnation at the middle-bottom of the scale. In effect, economists argue, companies have managed to shift costs from their balance sheets to individuals and the taxpayer.

“Because that [portion of workers] has no social insurance, when bad things happen, they fall back on public assistance,” says Senator Mark Warner of Virginia. “Whether it’s a failure of the employer or employee to contribute, you have a free-rider problem on an already bankrupt entitlement system. Many companies outsourced their cafeteria workers, their janitorial services, and a portion of their supply chain to avoid [paying benefits].” Indeed, 50% of fast-food workers, the grandchildren of Kroc’s franchise innovation, are now subsidized through public assistance, according to one study.

Warner has been leading an effort with the Aspen Institute, called the Future of Work Initiative (FOWI), to “identify concrete ways to strengthen the social contract in the midst of sweeping changes in the 21st century.” When he started last year, he says he imagined this meant the gig economy and the question of how to protect Uber drivers and workers on TaskRabbit. But he’s since realized the issue is wider than that. It’s not just that technology is enabling new, looser forms of work. It’s that companies are taking the logic of “core competency”—the management concept that says they should focus only on essential activities—to the limit. These days, millions of workers complete mainstream tasks for a company, wear the corporate uniform, and yet are paid as subcontractors (Fedex drivers, to give one very visible example). On-demand firms like Uber, on the other hand, currently provide work for only 0.5% of the workforce, Katz and Krueger estimate.

But the growth of the sharing economy has helped put the issue of job insecurity on the map (Warner calls Uber “the tip of the spear”). Journalists now write stories about the plight of Mechanical Turkers. And unions, think-tank analysts and some platform companies are interested in coming up with new ways to protect workers in the new age.

These ideas include creating portable benefit schemes where contributions to health, retirement, and wage insurance attach to individuals wherever they work and that aren’t dependent on the old-school employer-employee relationship. They’d also like to create a new legal category of worker (or even two) beyond the full-time (W2) and independent contractor (1099) classification, to more accurately reflect the way people make a living today. And finally, it’s vital to stop the misclassification of an estimated 3.4 million employees currently identified as independent contractors who should be reported as W2 employees.

Portable Benefits

In a paper written for the FOWI, David Rolf, Shelby Clark, and Corrie Watterson Bryant outline how portable benefits systems could help independent workers. In effect, these would eliminate the distinction between full-time and contingent work by prorating contributions based on hours put in. So, if you drive two hours for Uber, you might get $2 (say) from the company delivered to a universal account, with the possibility of employees themselves contributing part of their earnings as well.

There’s plenty of precedent for such ideas. Regional construction companies pay into “multi-employer” plans, allowing workers to move easily between building sites and still get benefits. About 33,000 black car drivers in New York receive workers compensation coverage via the Black Car Fund, which is financed through a 2.5% surcharge on customer bills. In Denmark, Finland, Iceland, Sweden, and Belgium, the “Ghent System” provides portable, publicly subsidized unemployment insurance tied to union membership. And, starting in 2017, Illinois is setting up the Secure Choice Benefit—a portable retirement scheme for employees without pensions (paid from a 3% payroll deduction, but managed by employers).

Combinations of these concepts, either managed by unions, employers, or other entities, could offer a better safety net for contingent workers than they have now, the authors believe. But there’s one big problem. Under existing labor law, if a company pays benefits to its workers, it’s said to meet one of 20 legal tests making it a W2 employer. In other words, if Uber starts paying into a portable benefits scheme for its drivers, it could find itself sued for misclassification (though it’s being sued a lot for that as it is).

Though many gig companies are keen to start offering portable benefits in theory, in practice they’re wary of doing so in case they run into legal trouble. “Unfortunately, you have this disincentive for companies to provide benefits to workers,” says Shelby Clark, CEO of Peers, the sharing economy trade group. “For that to happen, we will need to see some laws changed to enable companies to support their workers better.”

Uber declined an interview request, except to say in a statement that it is “experimenting with new ways to maintain drivers’ flexibility while also giving them an additional voice.” That includes the creation of an Independent Drivers Guild in New York, and two other associations in California and Massachusetts. The Guild hopes to set up a benefits fund, though, crucially, drivers will remain independent contractors and won’t enjoy rights like a minimum wage or overtime. The Black Car Fund is a potential model because it pays benefits from user fees, rather than direct company contributions, thus absolving companies from misclassification issues.

Meanwhile, several cities are keen to experiment with portable benefit schemes as a way of boosting their low and moderate income workers, Warner says. But companies like Uber are apparently reluctant to cooperate unless they get a comprehensive legal waiver. “Some of the on-demand companies have been unwilling to take chances,” Warner says. “They’ve come to me and said, ‘We want to provide benefits but we want a fully fledged safe harbor before we take risks.’ I don’t find that a very satisfying answer. It means they’re prepared to take risks in disrupting [an industry], but they’re not prepared to take risks for their workforce.”

Conor McKay, director of the FOWI, stresses that misclassification is about more than paying benefits. “The companies have been saying, ‘Hey, stop suing us for misclassification, and if you do, we’ll promise to provide a modicum of benefits.’ That’s pushing it a little too far. We can protect the companies in some ways, but it’s also about the ability to unionize and organize, and negotiate fair conditions.”

A New category of worker

As things stand today, there’s a growing gulf between the worlds of workers who get a W2 and those who get a 1099. The former get a guarantee of a minimum wage, overtime, unemployment benefits, workers’ compensation, the right to organize, and so on, while the latter often get none of those things. Moreover, because the benefits enjoyed by the first group are fairly costly, there’s an incentive for companies to minimize their fully employed workforces and to contest the ambiguity of the law. A solution might be 1) to rewrite various laws so there’s less uncertainty, and 2) to create new categories of worker that accord more easily with modern working practices.

Last year, Krueger and Cornell economist Seth Harris proposed creating an “independent worker” category that would fall in between W2 and 1099. On the one hand, such workers would be able to organize, bargain collectively, and pool benefits like disability insurance, retirement accounts, and liability insurance; and employers would pay some Social Security and Medicare payroll taxes. On the other, they wouldn’t get minimum wages, overtime, or workers’ compensation in the event of workplace injuries. This would “protect and extend the hard-earned social compact that has protected workers and improved living standards over the past century, reduce uncertainty, and enhance the efficient operation of the labor market,” they write.

But others question whether the on-demand economy really rises to a level that requires across-the-board changes, especially as reforming anything in Washington is difficult these days. The legislative process is sure to take a long time, and it might reward companies that really should have been paying and protecting W2 employees all along. In helping Uber get on solider legal ground, we might do damage to the social contract that falls around other types of work.

The question of whether Uber deserves exceptional treatment is at the center of an antitrust suit facing the company this November. The suit alleges that CEO Travis Kalanick is trying to fix prices in the cab market through the “surge pricing” mechanism—an argument that could have merit. But, under Krueger and Harris’s proposal, such criticisms would be moot: They would create an antitrust exemption in the case of independent workers.

“The gig economy is saying it has this new technology, that it’s very efficient in matching services to customers, and that all of these traditional emoluments for workers just get in the way and put too much of a burden on the company,” says Marshall Steinbaum, an economist who’s written on the case. “The question is whether Uber is stupendous because of the app that it invented, or because it’s operating on a different playing field where it doesn’t have to do the things its competitors do.”

Better enforcement

Meanwhile, a report from the Century Foundation and the New America Foundation lays out other ideas for protecting and enabling contingent workers. That includes fostering new types of independent worker groups, like the Freelancers Union; encouraging new business models in the on-demand economy that do more for workers (like Loconomics, a cooperative alternative to TaskRabbit); and simply enforcing the law, so fewer flout the 1099 code (misclassification is most common in construction, day labor, janitorial and building services, home health care, child care, agriculture, poultry and meat processing, trucking, and home-based work, it says). But at the same time we might also have to accept that contingent work is here to stay and that we need to come up with new ways to facilitate it the best we can.

That starts by reducing the role that companies play in providing social insurance in this country. (In other countries, workers are protected just for being citizens. Here, they receive social insurance when they’re employed). The Detroit Consensus placed huge responsibilities on companies that no longer make sense. Today, even union leaders say we shouldn’t expect single corporations to cover us for health, disability, and old age.

“We ought to lengthen the social benefit list and shorten the employment benefit list. The American choice to privatize delivery of social contract benefits, primarily through the funded relationship, is in 20/20 hindsight, a mistake,” says David Rolf, a Seattle-based vice president at the Service Employees International Union.

Portable benefits, in particular, would help end the so-called Labor Lock that stops people moving between jobs and starting their own businesses. And the idea may have appeal on left and right, according to Warner. “You have Democrats who advocate for social insurance. You have Republicans who like individual flexibility and hence all the benefits systems don’t need to be run by governmental entities. There is a sweet spot where we might get something done,” he says.

More to the point, a universal basic income might achieve the same sort of result. If we paid everyone a living wage, it would reduce the burden on companies and allow more people to do micro jobs without the threat of insecurity attached. It’s time to start considering this and other such ideas.

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